# Just discovered that my daughter should have been filing US tax returns



## Tech-Jock (Sep 25, 2021)

Hello all - my first post here. Thank you for providing this resource.

Background:

My daughter is in her early twenties and has dual US/UK citizenship.

I used to have a US Green Card and my family and I were resident in the US from 1994 to 2006. My daughter was born while we were there.

My daughter went to university here in the UK (and had a part-time job for some of that time) and since graduating two or so years ago has had a full-time job.

My daughter was told by her bank that because she is a US citizen, they have to file some form with HMRC (but as I write, I don’t know how they knew she was an American citizen). I am not sure if filing this form will trigger HMRC to do something that might alert the IRS to my daughter’s existence but this is the reason we have started to worry and research.

From the research she and I have done so far, it appears that she should be (and should have been) filing a Form 1040, Form 2555 and FBAR form every year (she has not done that ever), so it now appears that she is one of these ‘Accidental Americans’.

I'm hoping someone could assist me with a few questions:


From the instructions found on Form 14653, it looks like my daughter only needs to file tax returns for the 3 previous years (2018, 19 and 20). Sounds correct? Does a form 2555 also need to be completed for each year in the amnesty process?

In regards to the filing of the FBAR forms, the amnesty procedure mentions the requirement to file 6 years of FBAR forms. However, is that 6 years even if the total aggregated value of all accounts for any given year does not total $10,000? 

My daughter contributes to a workplace pension from her employer. Does she need to determine the value of this pension for each of these 6 years so that she can declare it on the FBAR? If so, presumably, this pension will be part of the aggregate value of all her accounts as well?

In another post on this forumrelating to someone else who had discovered he/she should have been filing tax returns after 50 years abroad, there was a comment about receiving a ‘stimulus benefit’ of $3200 from the US government. Can anyone advise whether my daughter could claim that and if so, how?
Thanks for any and all assistance.


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## 255 (Sep 8, 2018)

@Tech-Jock -- In answer to your questions:

1. You are correct. The 2555 needs to be filed to take advantage of the Foreign Earned Income Exclusion, FEIE. This will essentially eliminate any U.S. tax owed. Of course, if her income was under the "standard deduction," she wouldn't owe any tax anyway.

2. If her aggregated accounts are under $10K -- there is no FBAR filing requirement.

3. Foreign pensions are reportable on the FBAR -- so yes. There value will be part of the "aggregate."

4. Your daughter is eligible for the stimulus payments in the U.S. There have been three total, so far. The first two, she'll be able to claim for 2020 by completing the "Recovery Rebate Credit Worksheet," on page 59 or the IRS form 1040 Instructions, and entering the result on line 30 of IRS form 1040. She'll need to do the same thing for 2021, to capture the third tranche. https://www.irs.gov/pub/irs-pdf/i1040gi.pdf https://www.irs.gov/pub/irs-pdf/f1040.pdf She should get a nice refund!

You should become familiar with the US-UK Tax Treaty United Kingdom (UK) - Tax Treaty Documents | Internal Revenue Service and the US-UK Social Security Totalization Agreement https://www.ssa.gov/pubs/EN-05-10199.pdf

Be wary of US Passive Foreign Investment Company, PFIC, reporting requirements (her company pension may/or may not fall in this category.) Also, I generally recommend filing U.S. taxes, even if you don't owe anything or aren't required, just to establish a record. Cheers, 255


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## Tech-Jock (Sep 25, 2021)

255 said:


> @Tech-Jock -- In answer to your questions:


Thank you very much @255 !


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## Nononymous (Jul 12, 2011)

Your daughter is what's known as an Accidental American, a dual citizen with no meaningful connection to the US beyond parentage or place of birth.

While your daughter may be required under US law to file US tax returns, she needs to decide whether it makes sense for her to do so. There is no risk to her ignoring US law - global compliance rates are on the order of 10 percent and the IRS has extremely limited abilities to track down and penalize non-residents. She should take her time, do some further research, and make a careful decision.

There are two advantages to her coming into compliance now: if she acts quickly she can possibly collect up to $3200 for the pandemic stimulus benefit; if she has plans of moving to the US in the near future, she won't need to get caught up after arrival. Should she wish to begin filing, it might only need to be the past few years if prior to that she was earning under the reporting threshold ($12,400); similarly FBARs are only required when the total balance of all accounts exceeds $10,000. She could use the streamlined program or backfile one year only (to collect the stimulus full stimulus benefit) or simply begin filing going forward. If your daughter does file, set up a US dollar Wise account to collect the stimulus payment - much faster and easier than a paper cheque. Note also that the benefit is not taxable by the UK.

Should she decide not to become compliant, life is easy: don't file anything. If she needs a US passport for travel (she might get a lecture if she tries to enter America on a UK passport showing US birthplace) she can obtain one, there is no requirement for tax compliance, no check with the IRS. The great advantage of non-compliance comes later in life when one's affairs are more complex. There are some ugly reporting requirements for certain types of "foreign" investment (see: PFIC) or "foreign" business ownership (see: GILTI) plus the tax advantages of ISAs are not recognized, and of course one can owe US capital gains after the sale of a primary residence (see: Boris Johnson).

Her immediate concern is FATCA and possible restrictions on banking services available to her as a US citizen. What likely happened with her bank is that she was asked about citizenship, or asked to show ID with place of birth. The bank identified her as a US person and requested her Social Security Number. As a consequence of this, a limited amount of information might be reported back to the US: year-end balance and interest/dividend income for some of her accounts. HMRC is involved insofar as they receive the data from financial institutions, then send it on to the IRS - this is a workaround devised to avoid banks violating national privacy laws. Currently there is no evidence that the IRS uses FATCA data to find and contact non-compliant US persons abroad. Some institutions in some countries will restrict the products and services offered to US persons (at worst they will only allow basic bank accounts, no investments) because of perceived compliance risk; some will even refuse any US customers.

Depending on the country and the bank, it can be very easy or very difficult for a person born in the US to avoid FATCA by not disclosing US citizenship. (Canadian banks ask the question but make no attempt to validate the answer; EU banks typically want to see ID showing birthplace.) Your daughter is somewhat fortunate in that UK passports show place of birth but not country, so if it's not anything too obviously American (i.e. not Las Vegas) then she can simply claim not to have been born in the US and answer "no" to any questions about US citizenship. I'm sure there's a Springfield in Yorkshire somewhere. Obviously the cat's out of the bag with her current bank, so if she chooses non-compliance then she'll need to start fresh with a new bank.

To formally rid herself of US tax obligations, your daughter could renounce her US citizenship. There is no requirement to be in tax compliance before doing so, although there's a good argument to be made in favour of filing to collect the stimulus benefit as it will nicely offset the $2350 renunciation fee.


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## Tech-Jock (Sep 25, 2021)

Nononymous said:


> Your daughter is what's known as an Accidental American, a dual citizen with no meaningful connection to the US beyond parentage or place of birth.
> 
> ...and of course one can owe US capital gains after the sale of a primary residence (see: Boris Johnson).
> 
> To formally rid herself of US tax obligations, your daughter could renounce her US citizenship. There is no requirement to be in tax compliance before doing so, though given that the fee is $2350, there's a good argument to be made in favour of filing to collect the stimulus benefit as it will offset the cost.


Thank you so much for your answer @Nononymous. The comment about capital gains surprised me the most as when I returned from the US, I sold my US house and shortly after that my UK house (both of which I was claiming mortgage interest tax relief on). I did not even consider that it might attract capital gains. Are you saying that Americans are routinely paying CGT when they sell their primary residences?


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## Nononymous (Jul 12, 2011)

Tech-Jock said:


> Thank you so much for your answer @Nononymous. The comment about capital gains surprised me the most as when I returned from the US, I sold my US house and shortly after that my UK house (both of which I was claiming mortgage interest tax relief on). I did not even consider that it might attract capital gains. Are you saying that Americans are routinely paying CGT when they sell their primary residences?


There is an exemption up to $250k per person or $500k per couple, so it needs to be a substantial gain, but yes, beyond that the gain is taxable. Boris followed some poor advice and sold his London home _before_ giving up his US citizenship, thus landing himself with a hefty bill. (Boris is apparently not good with money.)

My point of reference is Canada. Here, we don't have a mortgage interest deduction but also no capital gains on sale of primary residence; in the US it's the opposite, both the deduction and the tax on gains. In a way, each system is fair - you're either taxed gradually (no interest deduction) or at the end (gains on sale). Where it's horrible is when a dual citizen living Canada sells a house at large gain and would in theory owe US capital gains tax after a lifetime of having no interest deduction. Fortunately the vast majority of dual citizens in Canada do not file US tax returns, so they would never declare the sale or pay such a tax.


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## Nononymous (Jul 12, 2011)

@Tech-Jock Before she files anything, your daughter should do some further research into the potential pitfalls and limitations that tax-compliant Americans face when investing in the UK (or elsewhere). Beware of anything labelled PFIC. In short, there's an opportunity cost to US tax compliance. (On the flip side, there are possibilities of investing in the US, though as a non-resident there are relatively few firms willing to take one's money.)


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