Accidental American. The term itself sounds a little comical, conjuring up images of slipping on a banana skin and somehow waking up wearing a Stetson and cowboy boots. The reality, however, is that millions of people around the world fall into this category as US-connected individuals for tax purposes and some estimates suggest as many as 50% of them might not even be aware of the fact.
Even more concerning is that a vast number of ‘accidental Americans’ are unaware that their connection to the IRS could be exposing them to unnecessarily high tax rates or even potential prosecution for tax evasion.
So how do you know if you are US-connected? Before we go into this, it’s important to note that the term has different interpretations between immigration law and financial law. When it comes to your investments and tax status, the definition is quite broad and could mean that you have a responsibility to report your assets and income to the IRS. This could also have a knock-on effect on the kinds of investments and accounts you can own or control.
- By birth. The first example of a US-connected person might seem obvious, but it has still caught out some high-profile individuals in recent times. If you are born in the States, you automatically become an American citizen. Regardless of where you are resident after that or other nationalities that you might hold, this means that you are obliged to report to the IRS every year for the rest of your life unless you officially renounce your citizenship. Even if you choose to do this, you will normally need to pay a fee and continue to pay US taxes for the following 7 years.
- By residency. Again, this might seem self-evident, but many international professionals fall foul of the rules governing how many consecutive days or how many days in total spent in the United States per year are permitted before it is necessary to file taxes as a resident. The ‘substantial presence test’ determines whether you are liable for taxes in the USA. If you spend 183 days in the US over a three-year period or 31 days in any given year then you could be required to file with the IRS. Bear in mind that if you become a resident under these criteria, it may affect your direct family as in ‘4’ below.
- Green Card holder (even if expired). Here’s where it starts to be a bit tricky. If you currently have a green card, whether working in the States or not, it stands to reason that you should be reporting for US taxes. However, the responsibility to file your taxes with the IRS each year continues until such time as your green card is either revoked or ‘properly surrendered.’ Many non-citizens are unaware that they should still be filing (and paying) taxes because their green card has expired or was returned and they failed to notify the Department of Homeland Security.
- By relation (family). If your spouse, legally registered partner, child or at least one of your parents is American or a tax resident of the USA, you are an accidental American. This does not necessarily mean that you will have to pay additional taxes, but you will almost certainly need to file with the IRS and your assets, income and investments may be taken into consideration for the tax treatment of the American citizen in your life. Furthermore, being US-connected because of a family member will influence the types of investment and banking accounts you can access. If there is any possibility that your international holdings are benefiting an American and not being declared the penalties can be severe. If your assets are being declared but are not compliant with US rules regarding overseas investments, you may be suffering a much higher tax rate than if your portfolio was correctly structured.
- By relation (business). In some cases, you may be required to file with the IRS if your business partner or co-owner is an American citizen or resident. In a similar way to the family relationship test, it will come down to whether a US taxpayer could conceivably benefit from your assets and investments.
In short, if you have a connection to the USA, no matter how tenuous it may seem, it is a good idea to discuss this with your accountant and consult a professional financial adviser to prevent any unwelcome surprises and unnecessary expenses.