Accident Americans & Why to 'Streamline' Them

Being US tax advisers based in Europe, we have seen our fair share of individuals who are ‘accidental’ Americans. Many of them were born in the US because their parents were working in the US for a few years, or, maybe they were born outside the US to a US citizen parent who was resident outside the US. One way or the other these accidental Americans are still US tax residents no matter where they live, and they therefore have a US tax filing obligation.

For decades these accidental Americans never bothered with filing their annual US tax returns. The author heard of situations where accidental Americans called the US consulate and the accidental American was told that they did not have to file or to simply not worry about it because "no one filed". Even non-US banks would not want to ask uncomfortable questions as to whether the accidental American was filing US taxes, or asked the accidental American to show them another passport and forget they saw the US one.

For years, this was the standard course of things, but then two things happened.

1. Starting in 2008, the US Department of Justice (DOJ) began their pursuit of Swiss banks with the culmination of the 2013 DOJ/Swiss Bank Program. The DOJ brought down the ‘offshore’ banking jurisdictions starting with Switzerland. This DOJ action had an instant effect in the offshore banking centers in Asia (Singapore and Hong Kong), Luxembourg, the Channel Islands, the UK, and the Caribbean so that they saw any US connected individuals (‘green card’ holders, US citizens, et al) as an immediate problem and started 'hunting' them.
2. In 2010, the US passed the Foreign Account Tax Compliance Act (FATCA) in 2010, which became effective in mid-2014. The timing coincided nicely with the DOJ program mentioned above. FATCA forced non-US banks to push hard to locate ‘US persons’ with accounts at these banks, and then to report the existence of the account automatically to the US. This was a game changer because it made the non-US banks (and trustees, insurance companies, or any financial intermediaries) into de facto Internal Revenue Service (IRS) agents.

Both of these events happened years ago and one would imagine that all accidental Americans would be 100% compliant at this point. That is clearly not the case as we have many new clients in 2019 who are based in the Middle East, Africa, and even many still in Europe. The question then becomes for the accidental American: how do I fix this problem of non-compliance with the US tax rules.

The Solution for Most Accident Americans: the IRS ‘Streamlined’ Foreign Offshore Procedure, which has been a reliable, published IRS program since June 2014. For most accidental Americans who have not filed their US tax returns this is a perfect solution. Even for many Americans who have filed US tax returns, but failed to comply with all the US tax rules, the Streamlined procedure is still a viable option (but not in all situations).

The Streamlined procedure requires the accidental American to certify that their non-compliance was due to non-willful conduct. Non-willful is not the easiest thing to define, and the best synonyms for non-willful is ‘negligent’ or ‘careless’, or ‘sloppy’. When considering this non-willful standard, it is best to ask a US tax adviser to be sure.

The Streamlined procedure does offer the accidental American peace of mind, once you get past the sticky non-willful question, and the basics are that the look-back period is only three years. So, an accidental American who wants to get back into the fold with the IRS only has to file three years of past tax returns and pay whatever tax and interest is due for those three years. The IRS is your 'friend' again. It is not a bad deal as no penalty is applied for a previous failure to file. By contrast, in other European countries, the authorities often want ten years for a look-back period, which is far more painful because ten years of back taxes is a hard number to swallow for most.

There is of course always more than one way to approach the IRS. One of those options is what those in the know call a ‘Quiet’ Disclosure. This is where an accidental American files three to six years of past tax returns with the IRS Service Center to regularize past non-compliance, by either amending previous US tax returns or filing original tax returns for the first time. This is a timeworn strategy that may be appropriate in some situations.

After an accidental American goes through the IRS process, the most common question from accidental Americans is: "how can I escape all this IRS fun?" or "do you think this will soon change?" The only way to be sure on this point is to renounce their US citizenship, which brings its own pitfalls for the unwary.

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