QUESTION: I was born in the United States when my parents briefly lived there but have been living in Northern Ireland since I was a one year old. I was bragging to a mate that I could travel to the US without a visa because I am entitled to a US passport because of my birth. Rather than being sufficiently jealous he asked me was it worth paying US income tax for a holiday every couple of years. Was he right that I need to pay US income tax?
ANSWER: Unfortunately, I think your mate is on to something, but first it must be clarified whether you are considered a US citizen. Generally, an individual will be a US citizen if they were either born in the United States, or they are born outside of the United States and one parent is a US citizen who has lived in the US for a specified period. Note, those born in US territories may also be considered US citizens, but the rules around this are complex.
Individuals who are US citizens are subject to the income tax laws of the United States regardless of where they happen to live and/or work in the world. This includes the requirement to file an annual income tax return (assuming the minimum income requirements are met) and pay any taxes that might be due. US citizens must also comply with other requirements such as the gift and estate tax regulations, and the requirement to file a foreign bank account report.
You might remember in recent years former Prime Minister Boris Johnson having to denounce his US citizenship earned on birth, but not before he had a huge tax bill.
While you might think it will not impact you as you don’t have the same profile as the former Prime Minister, there may come a time when it becomes an issue, so it’s better to get out in front of it.
Banks and other financial institutions are required by law to check for US connections and report these to the IRS. As a result, opening a new bank account or making a new investment can often inadvertently raise a US tax compliance issue.
Another trigger is when a US citizen comes to renew their US passport. The US Department of State may have a record of individuals with unpaid tax bills or unfiled tax returns and can, in many cases, withhold the applicant’s passport until such matters are settled.
For individuals who are not compliant with their taxes there is the possibility of catching up by filing under the IRS streamlined offshore procedure, which involves filing three years of tax returns and six years of foreign bank account reports.
Under this procedure penalties may be mitigated assuming that the failure to file was non wilful. Tax and interest may be due on any balance owed to the IRS, however for those living abroad there are likely to be mechanisms to avoid double taxation. Once the individual has caught up, they would then be required to comply with annual filing requirements like any regular US citizen.
Relinquishing US citizenship is possible, but has its own issues from a tax and immigration perspective e.g., the right to travel to, and work in, the US. From a tax perspective, when relinquishing US citizenship individuals need to be aware that should income or general wealth exceed certain limits, then there is potential to be considered a ‘covered expatriate’ and an exit tax may apply. There are some exceptions to this rule based upon personal circumstances, however the exit tax would certainly apply where an individual is not currently compliant with tax return filings.
A US citizen child who renounces their citizenship will not be subject to the exit tax as long as they do so before they reach 18.5 years of age, and on the basis that they have not been residing in the US for more than 10 taxable years prior to the relinquishment date.
You should consider your options and consult US tax specialists before making any decisions on how best to become compliant.
:: KellyAnne Murtagh (k.murtagh@fpmaab.com) is senior tax manager at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
