There are two types of Americans in our world. One is dubbed an ‘Accidental American’. He is born in the US and automatically a citizen, whether he has a passport or not. The other has lived a large part of his life in the United States, your average American, for want of a better word. At this time, both have been living in the UK but want to return to the US to live. So, what should they watch out for from an immigration and tax perspective?
Americans who want to relocate back to the US need to be aware that it may not be as simple as buying a plane ticket and finding somewhere to live - even if you have a great job offer in the US.
If an American has married a foreign citizen, he needs to keep in mind that his spouse will have no status in the US and will need to be sponsored by his/her partner or through employment. The sponsorship process can take time and it is critical that Americans living abroad plan relocations well in advance, to the extent that this is possible. Our motto is always plan ahead – it wasn’t raining when Noah built the Ark.
Today we are focusing on those relocating to the US – not those already there – and the process involved, which is called adjustment of status. These cases are split as follows:
• Consular processing cases
• Direct filing cases abroad.
Consular Processing Cases
In situations where the US citizen already lives in the US but his family is located abroad, the Consular Processing procedure must be followed. The first stage involves filing an immigrant petition (Form I-130) with US Citizenship and Immigration Services (USCIS) in the US. These cases currently take approximately 10-12 months to process. Once approved, the immigrant petition is then sent directly to the National Visa Center (NVC) in New Hampshire, where the document collection stage is completed. The NVC typically takes about 2-3 months to complete this step. Finally, everything is sent to the nearest US Embassy or Consulate overseas, where an interview is scheduled for the relative to attend. So, to avoid these lengthy processing times, it’s actually sensible to file directly with US Citizen and Immigration Services (USCIS) overseas (see below) before being reassigned by your employer. The advice again is to plan ahead and not assume that a green card for a spouse can be obtained quickly. If the US citizen is suddenly asked to move back to the US for work purposes, this could create huge problems for the family. The family can expect a prolonged separation while waiting for the process to conclude, actively putting the US citizen at a commercial and personal disadvantage over a non-US citizen eligible for a non-immigrant visa (work permit). Ironically, work permit applications for non-US citizens can be much faster and it is not uncommon for an entire family to be able to move to the US within a few weeks of starting the visa process.
Direct Filing Cases Abroad
When both the US citizen and the foreign relative live abroad, the I-130 can be filed at a local USCIS office (located at a US Embassy). This is based on the presumption that the US citizen has a non- temporary immigration status in the country of application, (e.g., if he is in the UK he has a UK work visa, a British spouse or Indefinite Leave to Remain. Alternatively, for your Accidental American, a British passport also works!).
There are 28 USCIS sub-offices scattered across the globe in 24 countries, including six in Europe: Austria, Germany, Greece, Italy, Russia and the UK. There are many benefits to filing at an overseas office: the whole process is typically much quicker and sending documents to the NVC is completely eliminated. The USCIS and the Embassy are often quite accessible. In many locations, they will respond to email, and sometimes, even phone calls. Anyone who has tried to receive information from USCIS in the US about their particular application knows it can be difficult and is only possible after wading through a tedious 1-800 menu.
It is not uncommon for families to complete the process and move to the US in as little as 4-6 months, with a green card waiting for them on the other end, as opposed to the 12-15 months it takes on average for US citizens within the US trying to sponsor relatives living abroad.
It is important that you file as soon as you can when you know you are relocating to the US. If you don’t file at least six months before your planned relocation date, you are likely to have to leave without the rest of the family. Be very careful around the summer time too. Children starting school in the US will not be grounds to expedite the petition.
US citizens, must provide the Embassy with their last tax return and their tax information relating to the last three years as part of the process of sponsoring their dependents for a green card. Those who have never filed a US tax return will need to deal with this quickly and concurrently with the US immigration filing.
Tax Considerations For The Accidental American
Most countries with income tax regimes impose income tax on worldwide income on their residents. The US is unique in that it imposes income tax on worldwide income of both a US resident and a US citizen, regardless of where in the world the latter lives. An accidental American often does not realise the general requirement (with limited exceptions) to file a US income tax return reporting their worldwide income and a foreign bank account report (FBAR) declaring non-US accounts in which he has a beneficial ownership interest, or over which he has signatory authority annually.
The US income tax return is due no later than June 15 (or the next business day) of the year following the calendar year. There is an automatic extension to October 15 (or the next business day). The FBAR, for years after 2015, is due on October 15 of the year following the calendar year.
Although the FBAR is filed with the US Department of the Treasury, the US Internal Revenue Service (IRS) has jurisdiction to enforce the filing of accurate FBARs. A wilful failure to file an accurate FBAR can be subject to a high civil penalty (up to $100,000 or 50 percent of the balance of the non-US account, whichever is greater) and criminal penalties. As a result, while an accidental American may be focused on their US income tax liabilities from their income tax returns, wilful failure to file accurate FBARs could lead to much more significant financial loss.
Once an accidental American is made aware of the requirement to file a US income tax return and the FBAR, he should engage in deliberate action to become compliant. This does not only mean timely filing of US income tax returns and FBARs on an ongoing basis. It also means taking corrective action for prior years for which he did not file US income tax returns or FBARs. Moreover, as mentioned, evidence for the last three years of US income tax returns is also needed when an accidental American sponsors his spouse for a green card. As a result, an accidental American’s US immigration concerns can be delayed by the US tax and FBAR corrective work, which makes it critical that his US immigration and US tax advisers coordinate.
Streamlined Foreign Offshore Procedures – Qualification
Fortunately, the IRS has issued procedures for such corrective action, known as the “Streamlined Foreign Offshore Procedures," to the extent that such accidental American’s failure to file timely US income tax returns and FBARs was “non-wilful.” Non-wilful means that the failure to file was the result of negligence, inadvertence, or mistake, or was the result of a good faith misunderstanding of the requirements of the law. In short, this means that, to be deemed non-wilful, an accidental American did not know, and had no reason to know, of filing obligations, or reasonably relied on a tax professional who provided incorrect advice. An accidental American whose failure to file is deemed non-wilful can instead convert his non-wilful conduct into wilful conduct, and thus lose the ability to correct under the Streamlined Foreign Offshore Procedures, by engaging in undue delay in correction. An obvious example of this is an accidental American who, learned of the requirement to file US income tax returns and FBARs on 1 January 2015, but waited until 1 January 2019, to engage in corrective action.
In addition to being deemed to be non- wilful to use the Streamlined Foreign Offshore Procedures, an accidental American, in any one or more of the most recent three years for which the US income tax return due date has lapsed must not have a US home and must have been physically outside the US for at least 330 full days. Finally, the accidental American, in order to use the Streamlined Foreign Offshore Procedures, must not be under a civil examination or criminal investigation by the IRS.
An accidental American’s qualification to use the Streamlined Foreign Offshore Procedures means he will not be subject to failure to file and failure to pay penalties or accuracy related penalties with respect to amounts reported on previously unfiled US income tax returns, or to information return penalties or FBAR penalties. If an accidental American does not qualify to use the Streamlined Foreign Offshore Procedures, he will have to apply to the IRS to correct the failure to file prior US income tax returns and FBARs under the Voluntary Disclosure Program from 20 November 2018. Unlike the Streamlined Foreign Offshore Program, penalties, such as the civil fraud penalty on US income tax returns and the wilful failure to file penalty for FBARs, are not abated.
Streamlined Foreign Offshore Procedures – Procedure and Tax Liability
The very first step for an accidental American under the Streamlined Foreign Offshore Procedures is to obtain a US Social Security Number (SSN). An accidental American can contact the Federal Benefits Unit of a US embassy or consulate for assistance in obtaining an SSN.
In the Streamlined Foreign Offshore Procedures filing, an accidental American files past due FBARs for the immediately prior six years for which the FBAR filing deadline has passed. While an SSN is not required for an individual to file an FBAR, it is recommended that an accidental American obtains the SSN first before filing this package of six past due FBARs, in order to link the corrective FBAR filings with the corrective US income tax return filings. This corrective FBAR filing is performed before any other corrective filings under the Streamlined Foreign Offshore Procedures.
An accidental American must also file US income tax returns for the immediately prior three years for which the US income tax return filing deadline has passed under the Streamlined Foreign Offshore Procedures. An accidental American will be able to avail of such US income tax relief provisions as the foreign exclusions and the foreign tax credit. However, an accidental American who is tax resident in a country with higher income tax rates than the US could be paying higher-than-expected US income tax for two reasons. Firstly, income tax treaties to which the US is a party usually have savings clauses that severely restrict the ability of a US citizen to avail of treaty benefits. Secondly, the US has historically had regimes that penalise US tax residents for foreign income and investments, such as the regimes governing controlled foreign corporations, passive foreign investment companies, and foreign trusts with US owners and US beneficiaries. It is this second reason where an accidental American can be tax punished due to the incongruence of the US income tax system with the tax system of the home country where an accidental American is tax resident.
Finally, under the Streamlined Foreign Offshore Procedures, an accidental American must file the above-referenced last three years of US income tax returns using IRS Form 14653. On that Form, an accidental American explains the reasons why failure to file was due to non-wilful conduct, including the identification of any tax professionals who rendered incorrect advice and upon which advice he reasonably relied. An accidental American also certifies on Form 14653 that all required past due FBARs have been filed, and ensures that all income tax, including all late payment interest, has been paid fully.
All in all, a US citizen planning on bringing his foreign family to live in the US is advised to keep up to date on procedures and processing times and seek advice where necessary. It often takes considerably longer for a US national to bring his family to the US than it takes a foreign national to relocate under a non-immigrant visa. When accompanied by foreign family members, the route of the return should be set out well before the expected homecoming, with a concerted effort and lots of forward planning.
Charlotte Slocombe is a partner with Fragomen LLP and a powerhouse in US corporate immigration and consular services. Based in London, she has been practicing US immigration law since 2005 and is responsible for establishing and managing Fragomen’s EMEA Consular and Documents Practice.
Charlotte specialises in US consular matters, including highly complex inadmissibility filings and SME new company set ups, as well as providing VIP services for large corporates or high net worth individuals. Her dedicated team handles consular filings into other jurisdictions and document authentication. Charlotte is also part of Fragomen’s wider Government Strategies and Compliance Group which is recognised as an influential voice in immigration regulations and policy worldwide.
Fragomen is a leading firm dedicated exclusively to the delivery of immigration services to companies around the world. The firm has more than 3,800 staff in more than 50 offices and provides services to many of the world’s leading corporations. It works with clients to facilitate the transfer of skilled employees into over 170 countries. Fragomen’s professionals are respected thought leaders in the immigration field providing evidence and expertise to governments across the world including the UK Parliament, the US Congress, the European Union and the United Nations.
Charlotte is a New York licensed attorney, a UK Solicitor of England and Wales, and a named thought leader in corporate immigration 2019 by Who’s Who Legal.
Website: www.fragomen.com Email: CSlocombe@Fragomen.com
Clayton E. Cartwright, Jr., is the founding and managing member of The Cartwright Law Firm, LLC, in Columbus, Georgia, which specialises in the areas of international taxation and employee benefits. A frequent speaker and author for immigration law seminars and practice guides, he advises businesses, financial institutions, attorneys, accountants, investment advisors, and individuals on matters including expatriate taxation, cross-border employee transfers, withholding and reporting requirements, and permanent establishments. He earned his undergraduate degree in accounting, Beta Gamma Sigma, from The College of William & Mary and his law degree, cum laude, from Georgetown University.
Website: www.lawcart.com Email: ccartwright@lawcart.com