Foreign citizens who were born in the U.S. and only lived there briefly take a variety of approaches to their obligation to file an American tax return.
The names of several people in this story have been changed for their privacy.
THE HAGUE, Netherlands (CN) – An extension to the U.S. tax filing deadline because of the Covid-19 outbreak doesn’t mean much to so-called accidental Americans, whose U.S. citizenship has caused them to lose businesses, homes and a lot of their sanity.
“The fact that I was born in the U.S. was a funny detail,” said Thomas Lambert, until he tried to open a bank account when he moved to Hungary in 2014.
Lambert, a Belgian national, was told by the bank that he couldn’t become a customer because he was born in the United States. The 47-year old is the son of a Belgian air force officer who was briefly stationed in Texas, where both he and his sister were born, as part of a NATO exchange. Both siblings left the U.S. as children and have never returned.
The U.S. is one of only two countries in the world that have citizenship-based taxation, as opposed to residency-based. The other is the East African country of Eritrea.
The requirement that American citizens living abroad pay taxes dates back to a nearly century-old U.S. Supreme Court ruling. In 1924, in Cook v. Tait, the high court found that “government by its very nature benefits the citizen and his property wherever found” and ordered Cook, an American who had been operating a business in Mexico for 22 years, to pay $1,193.38 in back taxes.
The citizenship-based taxation requirement and another feature of American government, birthright citizenship, have resulted in so-called accidental Americans.
More common, birthright citizenship automatically confers citizenship to anyone born within that country’s borders. Some 30 countries around the world have it, including Argentina and Pakistan. Most other nations require that citizenship be passed down from a parent.
Lambert and thousands of others were surprised to learn that not only are they American citizens, but they must file U.S. tax returns every year.
“I just retired. It was easier,” said Charles Weber, 67. He had lived most of his life without having any complications from his U.S. citizenship, received when his mother gave birth prematurely while on a vacation in New York.
Following the 2008 financial crisis, the U.S. passed the Foreign Account Tax Compliance Act, or FATCA, aimed at cracking down on Americans hiding assets abroad. Enacted in 2010, it required that international financial institutions report information on the holdings of U.S. citizens to the IRS.
This was how Weber’s three restaurants near Berlin came under the scrutiny of the IRS.
“Since I’m American, my company is American,” he said. He owed tens of thousands of dollars in back taxes and ultimately paid a U.S. accountant $13,400 to get him into compliance. “It was hell,” he added.
To submit the required tax information, banks need the accountholder’s Social Security number. Most parents apply for their children to get one at birth, but many accidental Americans, their parents unaware their children were even American citizens, do not have them.
A 2014 European Union directive guaranteeing all EU citizens, as well as legal residents and foreign students, the right to a bank account should protect Lambert and his fellow accidental Americans but banks have argued that they can’t afford the huge financial penalties imposed by the U.S. government if they don’t comply with FATCA.
Under FATCA, any financial institution that isn’t in compliance is subject to a 30% tax on any payment processed through a U.S. financial institution.
If an accidental American wants to surrender their citizenship, the application fee is $2,350. They must first obtain a Social Security number, a process that can take years.
“Many of our members don’t even speak English,” said Fabien Lehagre, head of the France-based Association of Accidental Americans and himself an accidental American.
Then they must file five years of tax returns, pay any associated back taxes and fees and file a final dual-national return. But even under a new streamlined procedure announced by the IRS in September 2019, you have to file even if you don’t owe any money, according to Katelynn Minott of Bright Tax, an accounting firm specializing in the tax needs of overseas Americans.
“That means you have to hire an accountant or attempt to navigate a foreign tax system in a language you don’t speak,” she said.
“The sharing of this information contradicts EU data protection law,” said Régis Bismuth, professor of public law at Sciences Po Law School in Paris.
As he is only a citizen of France, Bismuth was unaware of the plight of his dual-national compatriots until he was contacted by the Association of Accidental Americans, which wanted to know EU law prevented their personal information from being shared. The professor thinks the requirement to file U.S. taxes also violates EU discrimination rules because people are being denied a bank account based on nationality.
Last year, a French court refused to refer a case concerning the data protection question to the European Court of Justice, the EU’s highest court. Bismuth thinks this was mostly for political reasons.
Billions of dollars of transactions are processed electronically in the U.S. every year for foreign financial institutions, even those who have no presence there. This provides tremendous leverage for the American government to pressure European countries into complying with FATCA.
Accidental Americans take a variety of approaches to their predicament.
Marie Bisset, a French woman in her early 50s, says she spent a total of 43,000 euros ($47,000) to surrender her citizenship, a process that took over two years. Others have opted to maintain their citizenship and file a tax return every year, including Ana Curro D’Souza, who now pays an accountant in Atlanta $1,500 per year to file her tax return. “My financial situation is very simple, so it seemed cheaper to be compliant than to get rid of my citizenship,” she said.
Others have gotten more creative. Lambert went to another Hungarian bank and lied on his application, telling the institution he was no longer a citizen. His sister took a different approach. After being denied a home loan, she transferred all of her assets to her children, who are not U.S. citizens.
“Ironically, by trying to make us tax compliant in the U.S., we’ve been forced to evade the rules in our own countries,” Lambert said.
Dragan Starkov, an accidental American who holds dual Bulgarian and Polish citizenship, said he didn’t have an issue until he moved to the Netherlands.
“In Bulgaria, it’s more common for people to pay in cash and not have a bank account,” he said.
Starkov moved with his now-wife, who isn’t a U.S. citizen, so he just uses her account.
“I really hope we don’t split up,” he said.