The imposition of penalties asserted against holders of undeclared offshore accounts has received much attention. Coupled with criminal prosecutions, including foreign banks, such as Credit Suisse and two of its bankers, should convince American citizens of the importance of compliance.
The compliance obligation also applies to resident aliens and this is not surprising. The untold story appears to be that of persons who U.S. citizens but do not know it. Imagine one’s surprise to learn that he or she is subject to these penalties for non-reporting even though he or she has never set foot in the U.S.
We know that individuals born in the United States are U.S. citizens unless born to a parent having full diplomatic immunity. If born to a parent having only official acts immunity, the child is a U.S. citizen if born here. Not every person will make that distinction.
Even more surprising is that the birth of a child outside the U.S. may result in U.S. citizenship under certain circumstances. Any person born overseas to two U.S. citizen-parents was a U.S. citizen at birth provided at least one parent resided in the U.S. at any time prior to the child’s birth. Any person born overseas with only one U.S. citizen-parents was a U.S. citizen at birth provided at least one parent was physically present in the U.S. for five years at any time prior to the child’s overseas birth. Residence was not required. As one might expect, there have been prior versions of the rule to complicate evaluation. For overseas births occurring between 1934 and 1941, the child was a U.S. citizen if a parent was present in the U.S. at any time prior to the child’s birth. For overseas births occurring between 1941 and 1986, the parent was required to reside or be present in the U.S. for ten years, five of which must occurred after age 14 or 16.
These rules may have created a U.S. citizen out of a parent or grandparent, who, in turn, may have unintentionally caused a child or grandchild to become a citizen. This would also require the Accidental American to report the foreign account to IRS.
Attorneys are frequently called upon to identify ownership by family members in order to apply various rules of attribution under the Internal Revenue Code. In the estate planning context, relationship is important in applying the special valuation rules in Chapter 27. Attribution rules appear in corporate (§318), partnership (§707(b)(3) and §267), pension (§414) and international (§958) taxation. In most cases, the familial relationship matters rather than U.S. citizenship of residency. In the international context, attribution in a CFC (Controlled Foreign Corporation) setting can have a different outcome if some owners are family members but are not U.S. citizens or residents. Given the rules on citizenship described above may create an Accidental American, great care must be taken in undertaking this evaluation.