Introduction

As a US citizen, born in the United States, you are obligated to file a tax return every year, even if you have never set foot in the USA. However, the situation can be significantly more complicated for those who were born abroad to one US parent or who have acquired US citizenship through a complicated process.

Complexities of US Taxation for Born-Abroad Citizens

The US tax laws can be particularly challenging for citizens residing abroad. These laws extend beyond simple tax obligations and can impose stringent reporting requirements. For instance, a British citizen born in the UK and never having visited the USA may still be subject to US tax laws. This arises from the unique aspects of US citizenship acquired by birth or through the process of granting citizenship to a minor abroad.

This is not an uncommon scenario. Many individuals travel to the USA for work or education, and return to their home countries with newborns. These “accidentals,” as they are often referred to, are citizens by virtue of their birth or by their parent(s) having US citizenship. However, these individuals often have no real connection to the USA besides their citizenship status. This can lead to significant complications and potential punitive tax scenarios.

Navigating FATCA and IRS Reporting Obligations

One of the primary challenges faced by these born-abroad US citizens is the Foreign Account Tax Compliance Act (FATCA). FATCA requires financial institutions to report the financial details of US citizens and residents abroad to the IRS. This places a heavy burden on individuals who must manage multiple tax systems and provide extensive financial documentation.

The IRS demands detailed tax filings from US citizens living abroad. However, the actual enforcement of these demands can be much less stringent. In practice, the IRS often does not receive reports of income or tax information from abroad. Therefore, unless a person voluntarily provides this information through their tax filings, the IRS has no basis to pursue them.

Furthermore, the IRS's collection efforts are generally reserved for individuals who have substantial tax debts. It is often more efficient for the IRS to avoid dealing with the most complex tax filings if no significant tax is owed. Hence, for many individuals, the best course of action is to avoid filing altogether.

Protection and Strategies

While it may seem daunting, there are strategies and protections available. Many people who acquire US citizenship through birth or as accidentals are already dual citizens, which adds another layer of defense. Even if there is a mutual collection arrangement between the IRS and the individual's home country, they will not pursue a resident citizen who was resident at the time the debt is claimed to have arisen.

Avoiding filing can also minimize the risk of being audited or pursued for taxes. By not filing, the question of collection will never arise, and the IRS will not have the basis to initiate action against you.

Conclusion

For born-abroad US citizens, navigating the intersection of US tax laws and international regulations can be complex and often overwhelming. However, understanding the practical realities of IRS enforcement and the protections afforded by dual citizenship can empower individuals to manage their tax obligations more effectively while minimizing the risks and burdens associated with US taxation.