Accidental Americans trading in their US passports have been offered a lenient tax deal.
The Internal Revenue Service (IRS) has agreed to wipe the tax slate clean for thousands of expats, providing they can meet some strict criteria.
The IRS wants to treat non-US taxpayers more fairly if they were unaware that they might owe taxes in the States.
Many of these Accidental Americans either face hefty US tax bills or cannot afford to pay the exit fees to rip up their passports to escape the long arm of the IRS.
Who are Accidental Americans?
Accidental Americans are expats who were born or lived in the USA for a short time as a child and now live permanently outside the country. Under US law, they must make tax filings and pay any liability to the IRS.
Thousands are unaware of the law and their obligations which have only recently been highlighted under the controversial Foreign Account Tax Compliance Act (FATCA). FATCA demands any foreign financial institutions with accounts controlled by Accidental Americans must report their personal and financial details to the IRS.
The IRS then checks their tax filings to make sure any bills are paid in full.
If the tax filings are not up-to-date, the IRS can impose fines and other strict penalties.
Now, after storms of protest around the world and pending legal challenges against FATCA in the UK and France, the IRS has softened their approach. Many US expats complain banks are closing or freezing their money if the FATCA checks are not completed and that many foreign financial institutions are asking their American customers to take their business elsewhere.
FATCA escape route
Now Accidental Americans wanting to give up their US passports can have the tax they owe wiped out if:
- They have a reasonable excuse for not filing US taxes in the past
- They owe less than $25,000 in tax for the five years including the current tax year when they want to renounce their citizenship
- They have less than $2 million in assets
- They have filed all tax returns and associated documents for the five years prior to renunciation
“This procedure, while limited in application, is an extremely favourable way for non-compliant US citizen expatriates to come into compliance, thereby eliminating not only “covered expatriate” status but also potentially detrimental and costly taxes, interest and penalties for past non-compliance,” said a spokesman for US tax lawyers Holland & Knight.