The American government is stepping up their game when it comes to finding Americans with undeclared foreign assets. In 2014 Boris Johnson learnt that he was a US citizen after being chased for taxes after selling his home. This situation is far more common than you might think.
How you could be one of the accidental Americans
You were born there
It doesn’t matter that you may never have lived, or worked in the US. If you haven’t renounced your nationality, the US regards you as American with a US tax liability.
To make matters more complicated those born before 1986 were never allocated a tax identification or social security number. Many are completely unaware that they are liable for US taxes for the rest of their lives.
If one of your parents is American
Regardless of where you were born, or the passport you hold, if one of your parents are, or were, American, then you could be considered an American Citizen and, therefore, liable to US tax.
You are a green card holder
If you hold an American ‘Green Card’ you are considered a US connected person. You may have US tax liabilities no matter where you live, even if your green card has expired.
Many green card holders let their green cards expire believing that, by doing so, they have no further US tax obligations. However, a green card holder’s tax obligations only expire after filing a formal administrative or judicial determination of abandonment of U.S. residence with the US Citizenship and Immigration Services.
One estimate mentioned in the European Parliament last year, there are between 300,000 and 500,000 accidental Americans in the EU.
What are the risks?
They can be pretty high. For example, tens of thousands of people living across Europe and in the UK risk having their bank accounts frozen because they are considered Americans.
Accidental Americans find themselves faced with a difficult situation. If they are unable to provide their bank with a US social security number or ITIN (Individual Taxpayer Identification Number) because they don’t have one, as they didn’t realise they needed one, they then face losing their bank accounts. If they then obtain a US social security number, they’ll need to start filing US tax returns. Citizenship Renunciation is an option, but this involves catching up with US tax filing first and then paying a renunciation fee.
The biggest risk, though, is not understanding what you should, or should not, do. Trying to unravel the whole tangle of ever-changing legislation surrounding the ‘Accidental American’ issue is challenging. Doing this on your own can be extraordinarily risky. We therefore recommend asking a US Tax expert for help.
What has FATCA changed?
Pressure for UK banks to report their American clients has increased significantly as the grace period given by the US government expires at the end of 2019. FATCA stands for the Foreign Account Tax Compliance Act and became law in 2010. American’s have always been required to pay tax on their worldwide income. The change is that FATCA gave the IRS access to information on expat earnings. In much the same way that the Common Reporting Standard has changed declarations globally as information became accessible and transparent.
Foreign Financial Institutions, FFIs for short, are required to report the accounts of U.S. connected persons and entities substantially owned by U.S. connected persons to the IRS.
Generally, they must report the U.S. connected person’s name, Taxpayer Identification Number, account number, year-end account balance, and the gross receipts and gross withdrawals or payments from the account.
The demands of the IRS for reporting without the account holder’s permission is currently being challenged through the courts. In the UK specifically, it’s being challenged on the basis that HMRO submitting confidential client information to the IRS without the individuals’ knowledge or permission is in direct conflict with GDPR legislation.
How might this impact you?
Banks, fund managers, brokers and many more have decided that they do not want to hold assets of U.S. connected persons. This has made it hard for you to invest while living outside the U.S. and further complicated by:
• U.S. brokerage accounts being closed for those living overseas
• Bans on investing in U.S. mutual funds and U.S. ETFs for those living overseas
It is important to verify whether you are considered a US connected person, or not. Once you are 100% certain of your status you can work with a financial planner. They will help to find an investment structure suited to your future plans and current situation.