Are you an American?

And why you might not want to read this blog if you think you may be.

Holding a US passport means enjoying the benefits of unhindered travel to and from the US and many people, who are rightly proud of their US heritage and connections, wish to retain it. As far as tax is concerned though, with US citizenship comes responsibility; you belong to a ‘privileged’ group of taxpayers who are required to file annual tax returns and informational reporting forms to the IRS. Living outside the US does not absolve you of this responsibility and the same is also true for those who do not even know that they are a US person.

Many US citizens and Green Card holders will be aware of their obligations and will file the required returns annually, along with tax returns of their resident country. However, there are a large number of US citizens and Green Card holders who are wholly unaware that they need to file. Sometimes called ‘Accidental Americans’, these taxpayers may not have been resident in the US since childhood and some will not have made it over to the US at all.

As IRS enrolled agents and tax preparers, we are regularly asked to assist individuals with their US tax positions when they become aware of their responsibilities. The high profile capital gains issue faced by Boris Johnson (see our previous article The American Magazine) has led to a surge of enquiries from individuals asking us to asses whether they meet the filing thresholds and then to help them regularise their tax affairs. One recent case requires us to file around 50 separate tax returns for the adult children of a UK father and US mother, who had no idea they were regarded as US Persons. Mother and father have lived in the UK since they married and none of the children has ever lived in the US, yet still they meet the criteria and have a responsibility to file.

The question of your US citizenship can also place a burden on other professional institutions who may have an obligation to assess your status and appraise the IRS of such. For example, many banks are now under an obligation to not only ask their clients if they are US citizens but also ensure that certain obligations and withholding requirements are met for those individuals. This can in turn prompt the individuals concerned, to ask why they are being assessed and what the implications are.

If you have never filed a US return but you have previously lived or worked in the US or you are related to someone who is or was a US citizen, you should actively consider your own status and take advice on your obligations. Assuming you are then considered to be what is known as a ‘delinquent’ filer, the next question is how you get your affairs up-to-date.

These days the IRS are keen to encourage non-filers to regularise their tax affairs rather subject them to harsh penalties. They have realised that the threat of penalties in and of itself, can be a key reason why delinquent filers feel reluctant to approach the IRS first. The introduction of several disclosure programmes has paved the way for a more attractive introduction to the US tax system and all delinquent taxpayers should explore how these programmes work and the benefits of being accepted.

Most commonly, US citizens living in the UK will want to consider the Streamlined Foreign Offshore Procedure aimed at taxpayers who were ‘non-wilful’ in their failure to file and who haven’t spent time in the US recently. If accepted onto the programme you would be required to furnish the US tax authorities with several past years’ returns but late-filing and other penalties will not be assessed.

You will generally be accepted onto the programme if you can sign, a statement confirming that you were non-wilful in your non-filing. No substantive guidance has been provided but the IRS has confirmed that this can include negligence, inadvertence, mistake or a good faith misunderstanding of your legal requirements. Experience shows us that most delinquent filers will fall within this description simply because they were unaware of their obligations but advice should always be sought.

This raises a practical question about when you become wilful. Once you read this article and become aware that you might be required to file are you immediately wilful in your continued non-compliance?

Of course, this extreme example wouldn’t lead to a conclusion of wilfulness but a persistent failure to correct your filings or even inaction over time, could lead to an individual being considered wilful, which could potentially jeopardise your acceptance in to a programme in the future.

We are always pleased to discuss specific circumstances and eligibility for these programmes with concerned individuals, on the basis of a free initial consultation. In any case where there is doubt, it is vital that you consider your circumstances and bring your affairs up to date as soon as possible, as the next phase in this IRS carrot and stick programme may not be so user friendly.