Updated: Oct 5, 2022
The United States is one of only two countries on the planet that tax on citizenship - the other one is Eritrea.
This means that if you are a US person, no matter where you live in the world, you remain subject to the US tax system and are required to report your worldwide income on annual income tax returns plus other disclosures as may be applicable.
You can be deemed to be a US person if you are any of the following:
Born in the United States
Born outside the United States – if one or both parents are US citizens
Naturalized US citizens
Green card holders – even if the green card has expired!
Tax resident due to time spent in the US
In effect you can be born outside the United States, you may never have even been there on holidays but you can still be caught by the US tax system. The IRS does not care if you have other citizenships as well.
The IRS is actively looking for you
The IRS has always known there are delinquent US filers living around the world but it did not have an effective way of finding them until the Foreign Account Tax Compliance Act (FATCA) came into force. Now the IRS is actively using the information gained under this legislation to find taxpayers who are non-compliant including those who:
Have never filed US tax returns
Are not fully up to date with their tax filings
Do not report their worldwide income
Do not fully report their non US financial assets
What is FATCA?
The FATCA came fully into force in March 2014 and obliges non-US banks and other foreign financial institutions to report to the IRS the details of all of their US clients as well as the bank accounts and investments held by them.
What can I do if I am living outside the United States and am not US tax compliant?
The IRS has specifically designed the Streamlined Foreign Offshore Procedure which is a voluntary program which allows qualifying taxpayers living outside the United States to get up to date with their US tax filings and avoid incurring any penalties - which can be huge.
One of the qualifying criteria is to be non-willful, so anyone who is non-compliant due to ignorance of their filing obligations may well be able to make use this procedure.
Can I give up my US citizenship or green card?
Yes you can but the rules are complicated and you could potentially end up with a large and unpleasant/unnecessary “exit tax” and associated interest and penalties if you do not get up to date with your US tax filings prior to renouncing.
What if I do not get US tax compliant?
Since FATCA came into force, it is no longer a matter of IF the IRS will find you but WHEN. Even if you do not have a US social security number your bank will report this and it will be obvious you have never filed. You may have noticed banks are now also asking for your social security number or ITIN.
If the IRS finds you first you will be exposed to the full wrath of the US tax system with little or no opportunity for mitigation.
If you have an accountant or financial adviser – any tax planning you put into place that does not take the US tax system into account could seriously expose you to unnecessary US tax reporting, tax charges and associated penalties and interest.
Contact us to have a chat about your tax situation and how we can help.
This is what we do, we are here to help you to get up to date with your tax filings and work with you and your other advisors to plan for a tax efficient future.
We look forward to hearing from you.