An Accidental American is someone whom US law deems to be an American citizen, but who has only a tenuous connection with that country. American nationality law provides that anyone born on US territory is a US citizen, including those who leave as infants or young children, even if neither parent is a US citizen. US law also ascribes American citizenship to some children born abroad to a US citizen parent, even if those children never enter the United States. Since the early 2000s, the term “Accidental American” has been adopted by several activist groups to protest tax treaties and Inter-Governmental Agreements which treat such people as American citizens who are therefore potentially subject to tax and financial reporting (e.g. FATCA and FBAR) requirements – requirements which few other countries impose on their nonresident citizens. Accidental Americans may be unaware of these requirements.

Awareness of US Citizenship.

Accidental Americans may become aware in various ways that the U.S. considers them to be its citizens.

First, accidental Americans born in the United States may encounter difficulties when attempting to enter the U.S. on a non-U.S. passport, as U.S. law requires all U.S. citizens to use U.S. passports when entering in the US.

Furthermore, FATCA also resulted in the closure of US bank accounts belonging to people identified as U.S. citizens living abroad. In Spain, you must report annually your US status to your Spanish banks, with a W9, only for US Persons, or with W8BEN for non-resident aliens. Failure to present a W9 could result in the automatic blocking of all your Spanish bank accounts.

There are only two countries in the world which impose taxation and reporting requirements on the income to its citizens, the rest of the world tax only its residents.

Despite their lack of personal or business ties to the United States, accidental Americans have the same U.S. tax filing and payment obligations as do self-identifying Americans Expats who are aware of their U.S. citizenship status and are subject to the same fines for failure to file. The result, as tax attorney Gavin Leckie put it, is that “people who have no sense of being American find themselves caught up in a maze of rules really aimed at the U.S. resident citizen seeking to defer or evade U.S. taxes by holding assets offshore”.

Green Card holders may also face similar tax issues as accidental Americans, combined with similar unawareness of their status. They are also considered by the IRS “US Persons” having the same U.S. tax filing obligations as U.S. citizens, regardless of their actual residence. Many green card holders later emigrated from the U.S. and let their green cards expire, believing that since they were no longer entitled under immigration law to live in the U.S., they also correspondingly had no further tax obligations. However, the US Law provides that a green card holder’s tax obligations do not end until a formal administrative or judicial determination of abandonment of U.S. residence; this generally requires the green card holder not just to move out of the United States, but to file Form I-407 with United States Citizenship and Immigration Services. About eighteen thousand people per year file this form, but it is likely that many more green card holders moving out of the U.S. are unaware that this procedure is required.

Renouncing American Nationality

A U.S. citizen who voluntarily want to renounce to the U.S. Nationality may declare to a U.S. consulate that they intended to relinquish U.S. citizenship through that act and obtain a Certificate of Loss of Nationality (pictured) documenting that fact.

Accidental Americans who become aware of their U.S. citizenship status have the option of looking into ways of renouncing or relinquishing it. Although it is possible for children to acquire U.S. citizenship “accidentally” without any voluntary action on their part, under current law they cannot lose that citizenship status accidentally or automatically as adults; instead, they must take voluntary action to give it up.

Form 8854 Expatriation statement and tax

The Internal Revenue Code imposes an Exit Tax on people giving up U.S. citizenship.

During the Consulate interview, you will be asked to be updated with your tax obligations. Accidental Americans normally full fill that obligation with the Foreign Offshore Streamlined Procedure. The streamlined filing compliance procedure (“streamlined procedures”) are available to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part.

If your average annual net income tax liability for the 5 tax years ending before the date of expatriation is more than $190,000; or your net worth was $2 million or more on the date of your expatriation; or you fail to certify on Form 8854 that you have complied with all federal tax obligations for the 5 tax years preceding the date of your expatriation, the IRS will consider you a “covered expatriate”

IRC 877A imposes a mark-to-market regime, which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date.  Any gain arising from the deemed sale is taken into account for the tax year of the deemed sale notwithstanding any other provisions of the Code.

The amount that would otherwise be includible in gross income by reason of the deemed sale rule is reduced by $821,000 in 2023.

Please do not hesitate to call us if you need an estimated of the exit tax that you would be paying after expatriation: info@ustaxconsultants.pt Phone: +351 211 380 833