Born in the U.S. but Raised Abroad and Never Filed: What an "Accidental American" Should Do

Why the United States taxes them

The United States taxes its citizens on worldwide income regardless of where they live. A U.S. citizen whose gross income exceeds the filing threshold for their filing status is required to file a U.S. income tax return, even if the income is entirely foreign and even if no tax is due. Separate reporting requirements, such as the FBAR and Form 8938, apply to foreign accounts and assets above certain thresholds. Citizenship, not residence, is the trigger.

Is there actually tax due?

For many accidental Americans, the answer is little or none. Income earned abroad can often be excluded under the foreign earned income exclusion, and foreign income taxes paid can generally be credited against U.S. tax on the same income. Situations that commonly produce U.S. tax despite these tools include investment income taxed lightly or not at all locally, gains on the sale of a home that exceed the U.S. exclusion, foreign mutual funds subject to the PFIC rules, and income from a foreign company the person controls.

The first practical step: a Social Security number

A U.S. citizen is not eligible for an ITIN and must obtain a Social Security number to file. For someone born in the United States, this generally requires a U.S. birth certificate and proof of identity, and the application is made through a U.S. embassy or consulate or the Social Security Administration. Because this can take time, it is often the first thing to begin.

Catching up without penalties

Most accidental Americans qualify for the Streamlined Foreign Offshore Procedures, which require three years of U.S. income tax returns, six years of FBARs where required, payment of any tax and interest, and a certification that the failure to file was non-willful. No miscellaneous offshore penalty is imposed under the foreign version of the procedures. For someone who genuinely did not know they had U.S. obligations, the non-willful standard usually fits well, but the certification must still be completed carefully and truthfully.

Renouncing U.S. citizenship

Some accidental Americans ultimately decide to renounce. Renunciation is done through the State Department at a U.S. embassy or consulate. For tax purposes, the individual files a final return for the year of expatriation and Form 8854, certifying compliance with U.S. tax obligations for the preceding five years. An individual who does not certify, or who meets the net worth or average tax liability tests, is a covered expatriate and may owe an exit tax. Certain dual citizens from birth have a specific exception from covered expatriate status if they meet its conditions.

Relief procedures for certain former citizens

The IRS has offered relief procedures for individuals who relinquished citizenship and who did not file returns, where their net worth is below $2 million and their aggregate tax liability for the relevant years is $25,000 or less, among other conditions. These procedures allow compliance to be completed without paying back taxes and interest in qualifying cases. Eligibility should be confirmed against the current IRS guidance.

Common concerns

• Bank account closures: foreign banks may restrict accounts for customers who cannot provide a U.S. taxpayer identification number
• Children: children who are U.S. citizens also have filing obligations once their income exceeds the threshold
• Spouses: a non-U.S. spouse is not a U.S. taxpayer unless an election is made, but the choice of filing status affects the result
• Business ownership: owning a foreign company can require Form 5471 and bring in controlled foreign corporation rules

Sources and official references

• IRS — U.S. citizens and resident aliens abroad
• IRS — Streamlined Filing Compliance Procedures
• IRS — Relief procedures for certain former citizens
• IRS — Instructions for Form 8854
• U.S. Department of State — Renunciation of U.S. nationality abroad