Accidental Americans are faced with tax filings whether they want their U.S. citizenship or not
While Ted Cruz may be doing everything to prove he is a “natural born” U.S. citizen despite being born in Calgary, his situation underlines how figuring out U.S. citizenship for tax purposes is not as simple as it seems. You can be born in another country, never set foot in the U.S. and still be considered a U.S. citizen.
The idea of having an unknown U.S. citizenship may seem intriguing or amusing at first but the U.S. tax filing system is based on both citizenship and residency. So if the U.S. considers you a citizen, you need to file annual returns with the IRS if you meet the minimum income or any other requirements.
While Mr. Cruz is using the rules to prove his citizenship, the U.S. filing rules and regulations are complex, onerous and often punitive for people who are classified as “Accidental Americans” and now find themselves caught up in the U.S. tax system.
People can be U.S. citizens based on where they were born or the citizenship of one or both of their parents. You do not have to register with the U.S. government or apply for a passport to become a U.S. citizen. So if you are an “Accidental American” not having the paperwork does not mean you are not a citizen.
You can only acquire U.S. citizenship in two ways at birth — either by Jus soli (law of the soil) or Jus sanguine (the law of the bloodline). The first one is easy. If you were born on U.S. soil, you are a U.S. citizen. Even if your parents are in the country illegally, children born in the U.S. become citizens. And this includes being born in Puerto Rico, Guam, U.S. Virgin Islands and the Northern Mariana Islands.
It is the law of the bloodline where things can get complicated. This is based on a concept in civil law where citizenship can be determined by the citizenship of one or both parents or obtained through grandparents.
Even if you were born in the U.S. because that was the closest hospital or it was the only one who could handle a particular kind of birth but you have lived in Canada all your life, the U.S. considers you a citizen.
It does not mean everyone born to U.S. citizens is a U.S. citizen. However, it does mean persons born outside of the U.S. to parents who are both U.S. citizens at the time they were born and at least one parent has lived in the United States at some point in their lives are conferred citizenship at birth. For children born to one parent who is a U.S. citizen, there are rules for the length of time your parents lived in the U.S. to determine if you are automatically a citizen at birth.
The law of the bloodline confers U.S. citizenship on babies at birth when they meet the requirements. The births happening outside of the country to one or two U.S. citizen parents should be registered with the U.S. consulate or Embassy. Failing to apply for a Consular Report of Birth Abroad (CRBA FS-240) does not mean the child loses their U.S. citizenship. It just means the parents did not acquire proof of U.S. citizenship. The child is still considered a U.S. citizen with all the rights and obligations of a U.S. citizen.
This is how Mr. Cruz is claiming his U.S. citizenship since he was born in Canada. But it is also the same law that is causing major headaches for some Canadians who are now finding out they are also Accidental Americans. Even if you were born in the U.S. because that was the closest hospital or it was the only one who could handle a particular kind of birth but you have lived in Canada all your life, the U.S. considers you a citizen.
If you want to run for the U.S. Presidency, the law of the bloodline may be useful. But if you find yourself suddenly a U.S. citizen that needs to file multiple years of returns with the IRS, you probably don’t.
There are ways to renounce your U.S. citizenship though it does not release you from your tax filing obligations. You cannot use it to get into tax compliance but you can renounce without being tax compliant. However, it is not usually the best choice because the IRS can still expect you to file returns.
Relinquishing citizenship without being five years tax compliant will mean you are considered a “covered expatriate” and fall under the rules for the U.S. exit tax In addition, the IRS has no reason to waive or reduce the outrageous penalties imposed for failing to file some of the forms now that you are no longer a citizen.
In most cases, it is better to use one of the current “amnesty” programs to become five years compliant and then move on without your citizenship ties to the U.S. Before you act, discuss your situation with an attorney and a cross border tax specialist who can explain expatriating. It may not mean the clean break you want if you still have ties with the U.S. For example, inheritances received by U.S. persons from a covered expatriate can be subject to U.S. estate taxation at the highest rate (for 2015 this is 40 per cent) and cause previously untaxable income to be taxed at 40 per cent.
For “Accidental Americans,” you may not want the U.S. citizenship but it cannot be declined. There is a possibility that the IRS will never find you but if they do, the voluntary disclosure programs may no longer be available to you.
Specializing in U.S. and Canadian tax preparation, Cleo has more than 15 years of tax expertise. amexpattax.com