Don’t Let Your Employees Become Accidental Americans
Updated: Mar 2
Human Resources (HR) has the power to prevent honest employees from being investigated by the IRS. Helping employees and their children avoid civil and/or criminal IRS investigations is as simple as alerting them to the concept of “Accidental American.”
Who Is An Accidental American?
“Accidental American” is a phrase used to denote certain individuals who are unaware that they are subject to U.S. tax laws. They may have been born in the U.S. and left as infants. They may have held a Green Card at one time but have not been back to the U.S. for years. An Accidental American has not maintained ties to the U.S. She has carried on with her life in her home country.
A 30-year old French artist whose mother worked as a scientist for a pharmaceutical company in New York City. The artist was born in New York City and left with her parents when she was six months old. She runs a successful gallery in Aix-en-Provence, France and has never returned to the U.S.
A 50-year old Indian who worked as an engineer in Silicon Valley in California for eight years but left the U.S. three years ago. The engineer had a U.S. Green Card but it has expired. This is no problem because the engineer has started her own successful business in Bangalore, India and has no plans to apply for a new Green Card.
An Accidental American can be contrasted to a typical U.S. citizen. The typical U.S. citizen – by birth or through naturalization – is fully connected with the U.S. and identifies as an American.
What Is FATCA?
The U.S. Foreign Account Tax Compliance Act (FATCA) is a tax transparency regime that requires foreign financial institutions (FFIs) to identify “U.S. Persons” holding foreign financial accounts. The FFIs collect certain account holder information which ultimately may be shared with the U.S. Internal Revenue Service (IRS).
The goal of FATCA is to enable the IRS to detect U.S. tax evaders who maintain financial accounts either directly in offshore accounts and investments or indirectly through ownership of foreign entities.
Abrupt U.S. Tax Wake Up Call
An individual who is a U.S. citizen is taxed on global income not solely income earned in the U.S. and not solely income earned while she is living in the U.S. Given that the overwhelming majority of the world uses a residence based tax system, many U.S. citizens find the global tax system to be unfair. Nonetheless, as U.S. citizens, it is their responsibility to be aware of U.S. tax laws.
But would our French artist from the above example really think about U.S. tax laws?
Similarly, our Indian Green Card holder thought about her U.S. tax responsibilities while she was in the U.S. but now her Green Card is not even valid. She can no longer work in the U.S., why would she think she is subject to U.S. tax laws?
But in fact, both of these individuals are subject to U.S. tax laws.
Pursuant to FATCA, FFIs will review non-U.S. financial accounts and if there is an indication of being a “U.S. Person” then the FFI will report their accounts to the French and Indian tax authorities. The French and Indian tax authorities will in turn share that information with the IRS. FATCA has put the artist and engineer on the IRS’ radar as U.S. tax cheats subject to civil and criminal penalties for failure to file their U.S. tax returns and pay taxes on their global income.
Human Resources Departments Must Help
HR departments have done a great job assisting U.S. expats with annual U.S. tax returns while they are on assignment abroad. Similarly, HR has ensured that non-U.S. employees on assignment to the U.S. understand their annual U.S. tax return requirements.
However, additional training is necessary to protect non-U.S. employees for the long term. HR should use the following opportunities to inform non-U.S. employees about the implications of FATCA:
Inbound orientation training
Green Card sponsorship application
Addition of U.S. born child to health insurance
Exit interview / termination of employment
Without awareness of her potential U.S. Person status, the employee will not know to seek out tax advice how to mitigate U.S. tax liability. HR is in a good position to alert the employee before she faces significant adverse consequences.