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Under the United States (“U.S.” hereafter) Citizenship law, children born within the U.S. are automatically U.S. citizens. An “Accidental American” is defined as an individual who is a U.S. citizen but is not aware of his/her U.S. citizenship. This situation may arise because of many reasons, most commonly:
Please review Part H – Children of U.S. Citizens of Citizenship and Naturalization policy manual on the website of US Citizenship and Immigration Services for detailed information on U.S. Citizenship at birth.
An Accidental American will almost always be a U.S. citizen until s/he informs the U.S. Department of state of the intent to relinquish his/her U.S. citizenship and receives a Certificate of Loss of Nationality (CLN).
If any of above situations apply to you or you are unsure if you are a U.S. citizen please contact a U.S. Immigration Lawyer to determine your status.
An Accidental American is entitled to enjoy the same privileges, rights and responsibilities as all other U.S. citizens and can apply for a U.S. passport, U.S. Social Security Number, U.S. Medicare, live and/or work freely anywhere in the U.S. with no visa, cast a vote in elections for public officials and run for federal- or state-elected office in the U.S.
As a U.S. citizen, an Accidental American is legally required to fulfill all the normal responsibilities of the U.S. citizenry. One of those responsibilities is to “pay income and other taxes honestly, and on time, to federal, state, and local authorities” (U.S. Citizenship Rights and Responsbilities – US Department of Homeland Security, 2019).
Pursuant to the Internal Revenue Code I.R.C § 61(a), a U.S. citizen is required to file a U.S. personal income tax return with the IRS office in Austin, Texas in the U.S. and report their worldwide income regardless of where they live.
Most U.S. citizens living in Canada pay no or low U.S. tax, as they receive foreign tax credits for taxes paid in Canada at personal tax rates higher than those in the United States.
A U.S. Social Security Number (SSN#) is required to file a U.S. 1040 personal income tax return. If an Accidental American was never issued a U.S. SSN#, s/he should obtain one to facilitate the filing of their U.S. tax return. U.S. citizens living in Canada, depending upon their province/territory of residence and postal code, should visit the nearest Social Security Administration Office in the U.S.
In addition to a U.S. 1040 personal income tax return, an Accidental American may also be required to file a Form FinCen 114 – Report of Foreign Bank and Financial Accounts (FBAR) – with the U.S. Department of Treasury under the Foreign Account Tax Compliance Act (FATCA). Penalties for late filing of this information form may be USD$10,000 or more per year.
Depending upon the individual tax situation, a U.S. citizen may also be required to file some annual information returns such as Form 5471, Form 8621 and Forms 3520/3520-A etc. along with U.S. 1040 personal income tax return. Penalties for late or not filing of these information returns may be exorbitant.
Due to the implementation of the FATCA agreement between the United States and many countries including Canada, it has become easy for the IRS to find a delinquent U.S. citizens – including Accidental Americans – and assess penalties for non-compliance with their U.S. tax obligations. Please read the article “Can the Internal Revenue Service (IRS) Find Me AS A Delinquent US Taxpayer” for more details. Under the FATCA, foreign financial institutions such as banks and investment/brokerage companies, including ones in Canada, are required to identify all the U.S. account holders and remit their information to the IRS via the Canada Revenue Agency. To comply with the FATCA, these financial institutions are able to freeze or close the financial accounts of delinquent U.S. citizens.
The IRS recognizes many U.S. citizens living abroad, including Accidental Americans, may not be aware of U.S. tax obligations. To assist U.S. citizens in bringing their taxes into compliance, the IRS offers an amnesty program called the “Streamlined Foreign Offshore Procedures” for U.S. citizens including Accidental Americans. Under this program, U.S. citizens living in Canada or any foreign country may file late U.S. personal income tax returns without incurring any penalties as long as they did not willfully neglect their U.S. tax obligations.
U.S. citizens, including Accidental Americans, have the right to renounce their U.S. citizenship. Renunciation of U.S. citizenship must be done for both U.S. Immigration and U.S. tax purposes.
To renounce for the U.S. Immigration purposes, an Accidental American is required to make an appointment with the U.S. Consulate and apply for a Certificate of Loss of Nationality (CLN) along with a payment of a fee of USD$2,350, attend an interview with a U.S. Consulate official and sign immigration forms. Loss of the U.S. citizenship would occur immediately for U.S. Immigration purposes. Assistance from a U.S. Immigration Lawyer may also be pursued for this procedure.
To renounce for the U.S. tax purposes, a U.S. citizen is first required to be compliant with his/her U.S. tax obligations and must file Form 8854 – Initial Annual Expatriation Statement – along with U.S. Dual Status personal Income tax returns for that year in order to no longer be a U.S. taxpayer in the eyes of the IRS.
The IRS offers “Relief Procedures for Certain Former Citizens” who have either given up their U.S. citizenship after March 18, 2010 or intend to relinquish it soon. Accidental Americans who wish to give up their U.S. citizenship may quality under these relief procedures if all the criteria are met. The IRS is offering these procedures without a specific termination date. The IRS will make an announcement prior to terminating these procedures.
If eligible under the new Relief Procedure, an Accidental American is required to file U.S. tax returns for six years (five prior years plus the year of renunciation for Immigration purposes) along with Form 8854 and the last six years of FinCen 114 (FBAR) forms.
Under this procedure, Accidental Americans (U.S. citizens who do not have a U.S. Social Security Number) are no longer required to obtain that number if they have never filed a U.S. income tax returns in the past. They can simply file their U.S. tax returns without a SSN to comply with U.S. tax requirements for renunciation of U.S. citizenship.
Like many other countries, including Canada, the U.S. imposes an exit tax on U.S. citizens in the year they renounce their U.S. citizenship, pursuant to Internal Revenue Code (I.R.C.) §877A based on a test of net-worth and net tax liability. Tax consequences can be very harsh if the renouncing U.S. citizen is considered as a Covered Expatriate under IRC code 877A. If one or more of the following criteria is met for renouncing U.S. citizen, s/he is a Covered Expatriate:
There are few exceptions to §877A Exit Tax Regime available for certain U.S. citizens who are considered as Covered Expatriates and for U.S. citzens eligible under “Relief Procedures for Certain Former Citizens“.
Proactive and meticulous planning may be required for U.S. citizens who would like to renounce to avoid triggering U.S. tax issues.
According to the U.S. law, if it is assessed a U.S. citizen has renounced his/her U.S. citizenship only to avoid fulfilling the responsibility of compliance with the U.S. tax obligations, s/he may be banned from future entry to United States. Although officials of the U.S. Department of Homeland Security have the authority to do so, at present there has been no official news of the banning of any renounced U.S. citizen.
Renunciation of U.S. citizenship is not always a solution but does present as an option for any U.S. citizen, including Accidental Americans. Advice from a U.S. Immigration Lawyer and/or a U.S. Cross-border Tax Specialist may be prudent to avoid any issues.
If you are an Accidental American who has never filed a U.S. 1040 personal income tax return, you may reinstate your tax-compliant status by opting to file your U.S. tax returns for previous years without late penalties and interest under the Streamlined Filing Compliance Procedures and/or Relief Procedures for Certain Former Citizens if you meet the eligibility criteria.
Please feel free to contact me via phone: (250)381-2400 or email: raj@hutcheson.ca at your convenience to determine if you are eligible under the above procedures.
Disclaimer: The above publication has been prepared for general informational or broad guidance purposes only. The publication cannot be relied upon to cover specific situations and/or as specific professional advice. Please contact Hutcheson & Co. LLP CPA to discuss these matters in the context of your particular circumstances. Hutcheson & Co. LLP, its partners and employees do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
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The information contained in this article is for general use only and should not be viewed as professional advice. Accounting and tax rules and regulations regularly change and individuals should contact a competent professional to obtain accounting and tax advice based on their specific situation.
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