People born in the United States, although people traveling away at a very young age, are often unaware that they are American citizens. The lack of this knowledge in many cases costs many thousands of dollars overseas because of the Foreign Account Tax Act, which forces banks to disclose the identities, accounts and investment income of these Americans residing abroad. These Americans can be people who were given birth to in the United States and if that is the case, then they have automatically acquired citizenship by birth. They can also be young children of parents who have obtained US citizenship one way or the other. Obviously, the persons nationality would stay the same, most likely from a Middle Eastern country that they regard as their true home. In most scenarios, these individuals would have never filed a U.S. tax return as they were unaware they had U.S tax liabilities, which could be very problematic.

At some point, they find out that they have a tax problem when they go to their banks and they are being questioned because it can be seen in their passport that their birthplace was in the United States. Then, they know they have to pay U.S taxes and also have to report their accounts to the United States Government under a law called Foreign Account Tax Compliance Act (FATCA). FATCA is a US tax law that was passed in 2010 as part of a larger Hiring Incentives to Employment Act (HIRE). 

Although FATCA is a US tax law, it is changing the way banks in other countries conduct their business. Under FATCA, a foreign bank or investment house or even a financial institution is required to withhold 30% of their US total source income. A financial institution may have a portfolio of investments in the US. FATCA proposed that 30% of their US source interest, US gross dividends, 30% of stock sales, 30% of mature securities, 30% of US real estate sold all will be withheld as a tax, before the financial institution and its account holders are ever reached.

Now, foreign financial institutions may not like this development and will likely try to avoid a tax relationship with FATCA by agreeing to report directly to the IRS the identity, account information and investment income of all clients considered to be United States persons.

Account holders who are Americans must also certify that they know and understand what their tax obligations are or they run a risk of having their accounts closed, in some cases permanently. Banks usually go through their clients list looking for any signs of United States Citizenship. This is commonly known by checking the passport as it will indicate the person’s place of birth. Clients are then advised to fill out a W-9 Form. Form W-9 is used in the United States tax system by a third party who must file an information return with the Internal Revenue Service. It asks for the name, address and taxpayer identification information of the taxpayer. The form is not sent to the IRS, it stays with the person who originally files the information return for verification purposes. The information on the form W-9 and any payment made are reported on a Form 1099 in the IRS. There may also be an IRS penalty of 50 dollars in each case when the Form W-9 is not filled out, so you might want to fill it out on time so that you don’t get a tax penalty for underpayment.

Not only does the US tax its citizens on their worldwide total income, but the US also requires its citizens to declare and prove the existence of any accounts held by financial institutions outside the US.

This foreign bank account report is due every year if a person has a total balance of at least US $10,000 over all their non-US accounts at any time during the year.

The foreign bank account report is informational only. There is no tax or fee payable when you submit this report. But penalties for filing this report are not timely. Civil penalties can reach up to $10,000 per violation. In the event of an intentional failure to file, civil penalties may reach fines of $100,000 or 50% of the account balance at the time of the breach. Late filers may also be subject to criminal penalties.

No one would want to face these penalties of course. While some would still like to retain their US citizenship, others would very much like to renounce it so as to avoid unnecessary payments in the future. It is becoming harder to get yourself out of the US tax system. Also not just for citizens, but also for the green card holders. The fees for renouncing citizenship have greatly increased. A publisher pays a $2,350 fee to the consulate or embassy to process a waiver.  The fee was $450 before September 12, 2014. This fee is in addition to any tax paid by the IRS.

FATCA comes into play as a mechanism used by the IRS to detect its citizens who have investments and unreported income received abroad, the omission of which carries a series of civil and criminal penalties. Here are some examples of the IRS failure to pay penalty:

Penalty for non-filing of disclosure statements on foreign accounts: All US citizens are required to file this disclosure statement to report any direct or indirect financial interest and / or power of signature they have on any bank account or financial platform abroad whose accumulated value exceeds $10,000 USD, at any time during the calendar year. For cases where the filing violation is unintentional, the fine amounts to $10,000 for each unreported account and when it is determined that the non-filing was intentional, the fine will be the highest amount between $100,000 or 50 % of account value at the time of violation for each unreported account.

Tax Evasion: prison sentence of up to 5 years and a fine of up to $250,000

REQUIREMENTS TO FILE A PROPER PAPERWORK

ü Request a social security number.

ü File U.S tax returns that report global income for the past 5 years.

ü File US foreign bank account reports for the past 6 years.

ü Pay some taxes and fines.

ü Schedule an appointment at an embassy or consulate to renounce citizenship and pay a $2,350 processing fee.

ü File a final tax return in the U.S. and pay a special citizenship tax, called the withholding tax.

A lot of questions arise after people learn about their options. Most people are devastated. Most people say that they do not deserve the fines given to them because they were not aware of their tax obligations and filing requirements. They believe it isn’t fair on them as they have probably lived most of their lives in the Middle East and know nothing about such rules. For example, a person can be born unexpectedly in the United States while the parents were on vacation there. Now, he grows up not knowing he was a US citizen or about tax obligations and filing requirements. People have said in the past that the IRS agents have the mentality of not always believing them when they claim not to be aware. Many people have also had their cases held for years now without being resolved so they don’t even know where they stand and could possibly receive some tax penalties.

It is very important for taxpayers to educate themselves about their tax obligations, asks questions so they know if they have to pay tax in another country so they don’t get into difficult situations with the IRS later on and might get some tax penalties.