Accidental Americans: Tax Obligations, IRS Amnesty and the Streamlining Process Explained

What is an Accidental American?

An Accidental American is a person who doesn’t realise they have US citizenship and are therefore subject to US taxes. While you may not live or intend to live in the USA, you could still be counted in the eyes of the American government as an American citizen which in term will have an impact on the amount of tax you have to pay to the IRS.

While there are schemes in place to assist accidental Americans to minimise their tax bill, once you recognise your US citizenship status, the clock will be ticking to ensure you are compliant with US tax laws or risk facing penalties.

It is therefore vital that you understand the IRS Tax Expat Amnesty Program, also known as "the streamlining process", to help bring you into line with the US tax system.

This article explains what an Accidental American is and how the streamlining process works. As with any complex tax matters it is essential that you seek professional, expert advice before making any decisions. If you need assistance, request an introduction via our free US tax specialist introduction service.

Let's start with a quick checklist, with each area explained in throughout this article.

Checklist: What to do if believe you’re an Accidental American?

Confirm your status

• Check whether you automatically gained U.S. citizenship by birth in the U.S. or through a U.S. parent.
• Seek confirmation from a specialist before taking further steps.

Understand your obligations

• U.S. citizens must file annual tax returns and report foreign accounts if thresholds are met.
• Penalties apply for non-compliance, even if no tax is due.

Gather your records

• Collect at least the last three years of income and financial information.
• Collect at least the last six years of bank account records (for FBAR reporting).

Check Streamlining eligibility

• You have lived outside the U.S. for at least 330 days in one of the past three years.
• Your failure to file was non-wilful.
• You are not under IRS audit or investigation.

Prepare your filings

• Three years of U.S. tax returns (Form 1040).
• Six years of FBARs (FinCEN Form 114).
• Certification of non-wilful conduct (Form 14653).

Submit under the Streamlined procedure

• File the required documents as part of the Streamlined Filing Compliance Procedure.
• Keep copies of everything submitted.

Plan for the future

• Continue filing U.S. tax returns and FBARs annually.
• Explore tax reliefs (Foreign Tax Credit, Foreign Earned Income Exclusion, treaty benefits).
• Decide whether you wish to maintain or renounce U.S. citizenship once compliant.

Identifying whether you might be an Accidental American

The key question for anybody with connections to the US is: how do you know if you’re an accidental American?

In America, specifically, there’s only one thing that matters: whether or not you were born in the United States. If you were, and if you have a birth certificate that was given to you by a U.S. hospital, you are generally considered a U.S. citizen (that is, if you aren’t also the child of diplomats or other restricted foreign officials).

One quite famous accidental American, a woman born in the U.S. to Canadian parents, became an American citizen under U.S. law, even though her family was from Canada, and Canada was where they intended to live.

The geographical location of your birth isn’t the only thing that could impact your citizenship. Your parents’ nationalities can also affect things, under the following circumstances: if you were born to a U.S. citizen parent with either a previous residence in the U.S. or who was in the U.S. for at least a year prior to your birth, or physically present in the U.S. for at least five years and then at least two years after age 14, you’ll be counted as a U.S. citizen. Even if your parentage is unknown, but you were resident in the U.S. before the age of 5, you could be counted as a U.S. citizen.

So, even if you weren’t born there, or have never actually lived there, and even if you don’t have any plans to live there in the future, you might still find yourself required to file taxes under U.S. law.

Why FATCA matters for Accidental Americans

You also might have to consider being compliant with FATCA (Foreign Account Tax Compliance Act).

Under FATCA, financial institutions outside of the U.S. have to report on potential U.S. citizens. If these potential U.S. citizens do actually have significant ties to the United States or are found to be citizens, then these foreign financial institutions (FFIs) are required to report this to the IRS. FATCA isn’t strictly enforced in all countries, but it’s worth noting that it is in the UK.

Accidental American tax obligations

You will not necessarily owe taxes, even if it turns out you are an accidental American. Under Section 911, U.S. citizens can exclude up to $112,000 in 2022 and $120,000 in 2023 (which should be adjusted for inflation) in foreign income every year. For any income that falls outside of this, you can get a tax credit paid to local tax authorities.

Laws like these basically mean that over 80% of accidental Americans actually owe no tax to the U.S. government. However, even if you don’t have an amount you have to pay, you’ll still need to file, and this can be a lengthy process.

Among the things that non-resident citizens may have to file are:

• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner
• Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
• Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.
• Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations

Then there’s the option of terminating your citizenship, an extreme but viable route to go down if you’re serious about not being an American in the eyes of the government. Even for people who genuinely have no ties to the U.S. and never plan to use their American citizenship, it’s not a widely exercised option.

What is the IRS Streamlining Filing process?

Because of the six million Americans on average who find themselves in this situation, the IRS has introduced a few different amnesty programs. One of which is the Streamlined Procedures, where expats can get all penalties completely waived.

You just need to file three years of previous tax returns and six years of Form 114s (formerly known as FBAR), which (in 2022) would cover the years 2019-2021 for your tax returns and 2016-2021 for your Form 114s.

It doesn’t matter what your income level is or how long you haven’t filed for, under this program you can start fresh, safe in the knowledge you have complete amnesty from any penalties. This program has meant that many more can come into tax compliance without fear of fines or punishments.

As well as these tax return forms, you might also have to file foreign bank reports. If you’ve got more than $10,000 in aggregate, then these forms are required every year. For non-US bank accounts, this can happen at any point during the year. If you do have to complete these, and you’re operating under the Streamlined Procedures, you’ll need to submit late forms that cover the last 6 years.

What happens after you have gone through the streamlining process?

Completing the Streamlined Filing Compliance Procedure brings your past filings up to date and clears the risk of heavy IRS penalties for previous non-compliance. However, it is not the end of your U.S. tax obligations. Once accepted into the program:

• You are considered compliant going forward – past issues are resolved, and the IRS will treat you as having met your filing responsibilities.
• You must continue to file annually – every year you will need to submit a U.S. tax return, along with FBARs or other disclosures if your foreign assets exceed the relevant thresholds.
• You can use available reliefs – such as the Foreign Earned Income Exclusion, Foreign Tax Credits, or treaty provisions to minimise or eliminate double taxation.
• You should maintain good records – keeping financial and banking documentation will make annual reporting easier and protect you if the IRS raises questions later.
• You may still consider citizenship renunciation – if you no longer wish to keep U.S. citizenship, Streamlining makes it easier to renounce cleanly without additional penalties.

The Streamlined process is designed to give people a fresh start. The key to staying compliant is treating U.S. filing as a routine annual task, supported by professional advice where needed.

Renouncing your US citizenship as an Accidental American

This is an uncommonly used alternative, but can be suited to some. You can give up your U.S. citizenship status through the following routes:

• Pledging allegiance to a foreign country or becoming a citizen of a foreign country (and/or then working for government of that country)
• Serving in the army of a country that’s in a hostile relationship with the U.S.
• Formally renouncing your citizenship in front of a diplomatic or consular officer of the U.S.
• Providing a written statement of renunciation, while the U.S. is in a state of war and the Attorney General finds that you renouncing your citizenship is not a risk to national security
• Committing an ‘act of treason’ against the U.S. (nor advised)

Some of these actions might sound pretty extreme, especially if you’re just trying to sort out your taxes, but depending on your situation, it’s good to know your options.

The U.S. is one of only two countries that impose tax based on citizenship, rather than residency. What this means is that no matter where you are, or live, or intend to live, if you’re American - even accidentally - you’re going to have to file taxes accordingly and the most sensible and cost effective option is to enter the streamlining process.

Related articles you may find helpful

If you are trying to make sense of your U.S. tax position from abroad, these guides may also be useful:

Understanding FATCA – why foreign banks report account details to the IRS and how this affects U.S. citizens overseas.

U.S. Tax Guidance for Dual Citizens -  what happens if you hold both U.S. and another citizenship, and the extra reporting that may apply.

What to Know Before Renouncing U.S. Citizenship-  the process, potential exit tax, and long-term consequences of giving up your passport.

US Tax Obligations for Americans in the UK - when you must report overseas accounts and what penalties apply if you don’t.

Investment options for Americans in the UK -  Americans have to be careful when investing in the UK as tax efficient UK investments may be treated differently by the IRS

Each of these articles expands on specific areas touched on here and can help you build a clearer picture of your responsibilities and options.

When to seek expert advice

If you think you may be an Accidental American, it is important to act before problems arise. The U.S. tax system is complex, and small mistakes can lead to unnecessary costs or penalties. Professional advice is strongly recommended if:

• You have recently discovered that you may be a U.S. citizen.
• You have not filed U.S. tax returns or FBARs in the past.
• You are unsure whether you qualify for the Streamlining procedure.
• You want to know your investment options as a U.S. connected person
• You are considering renouncing U.S. citizenship.

Speaking to a specialist will help confirm your status, outline your filing options, and ensure you meet all legal requirements with the least disruption to your life abroad.