Perils of 'Accidental' U.S. Citizenship
The Nestmann Group, Ltd.
by Mark Nestmann: Comply
or Don’t Comply: It Doesn’t Matter
most other countries, its comparatively easy to acquire U.S.
a U.S. citizen merely by birth within the geographic boundaries
of the United States. In most cases, youre also a U.S. citizen
if you were born outside the United States, and at least one parent
was a U.S. citizen or green card holder. In both these examples,
citizenship is automatic. Generally, you need not take any affirmative
action in order to acquire or retain U.S. nationality. Only in the
case of naturalization after an extended period of legal residence
in the United States do you need to make a petition for U.S. citizenship
The ease of
acquiring U.S. citizenship by birth means that there are hundreds
of thousands of accidental U.S. citizens roaming the
world. Many of these individuals dont realize theyre
because the United States, alone among major nations, imposes income
tax, capital gains tax, gift tax, and estate tax based on citizenship,
accidental U.S. citizens have the same fiscal responsibilities as
U.S. citizens resident in, the United States. Among other obligations,
they must file a U.S. personal tax return annually and pay any tax
due. They must also file a gift tax return to report details of
any gifts they make in any one year that exceed $13,000. If they
make lifetime gifts more than $5 million, they must pay gift tax
on the excess.
death, their heirs must file a U.S. estate tax return and pay estate
tax at a top rate of 35% (increasing to 55% in 2013). The estate
tax applies to all property owned by the deceased U.S. citizen,
valued at its highest and best use. (An estate tax treaty
or credit for estate tax paid in another jurisdiction may reduce
obligations also come with U.S. citizenship. For instance, all U.S.
citizens must disclose any investments in non-US bank, financial,
or other financial accounts. Failure to make this disclosure
is punishable with a fine up to $250,000 and a five-year prison
accidental or otherwise, face additional tax pitfalls with reference
to their non-US investments and business activities. U.S. tax provisions
for interests in non-U.S.-registered mutual funds, controlling interests
in non-U.S. corporations, and interests in non-U.S. trusts are but
three examples of the many tax landmines that accidental
U.S. citizens may inadvertently detonate.
The tax and
reporting perils of U.S. citizenship came to mind recently when
I learned of the tribulations of a lifelong citizen and resident
of Mexico. Ive changed the facts a bit to protect his identity,
but this gentleman, now well past retirement age, grew up in a tiny
town in Mexico near the U.S. border. At the time of his birth, the
town lacked any medical facilities, so when his mother went into
labor, his parents drove to the nearest hospital, which happened
to be just inside the U.S. border.
70 or so years, and this gentleman was longing for some relief from
hot Mexican summers. So, he did what countless other wealthy Mexicans
have done he purchased a condo in San Diego. At closing, though,
he encountered a strange anomaly. The closing documents listed him
as a U.S. citizen. He tried to correct what he believed to be a
mistake, but the broker assured him there was no mistake. Since
he was born in the United States, he was indeed a U.S. citizen,
although he had never applied for a U.S. passport.
Our hero thought
that was the end of it, but when he came to spend his first summer
in San Diego, one day, he received a notice from the Internal Revenue
Service. Since he was a U.S. citizen, the notice informed him, he
was obligated to file U.S. tax returns. And there was no record
of him filing a U.S. tax return for the preceding three years. The
notice invited him to respond immediately.
A few days
later, he drove over to the local IRS office to see if he could
resolve the situation. After a brief conversation, he was shocked
to learn that the IRS had already commenced an examination. The
agent started using terms such as willful failure to file,
criminal penalties, and jeopardy assessment.
At this point,
our hero hired a criminal tax defense attorney. Hes spent
about $100,000 in legal fees to date, but recently received a notice
from the IRS informing him that they no longer believe that he willfully
failed to file U.S. tax returns.
since an examination was already underway, hes not eligible
to participate in the latest IRS offshore amnesty program. As such,
hell need to pay 25% of the peak value of his unreported non-U.S.
accounts for the period 2003-2010. Unfortunately for him, the value
of these accounts fell about 35% in the global economic turmoil
of 2008-2009. The accounts that were once worth $2 million are now
worth about $1.3 million. Nonetheless, hell need to pay a
$500,000 penalty to avoid criminal prosecution.
hell need to file six years of past due tax returns and information
returns disclosing his interests in Mexican corporations and other
Mexican entities. These returns must be prepared according to U.S.
Generally Accepted Accounting Procedures (GAAP), which means that
the Mexican financial statements for each year must be converted
to U.S. GAAP. He estimates that will cost an additional $50,000,
To tally things
up: our heros total cost of accidental U.S. citizenship: $650,000,
and counting. Total benefit of U.S. citizenship: none.
say, this elderly Mexican gentleman has now filed a formal petition
with the State Department to surrender his U.S. citizenship and
expatriate. That will eliminate any future U.S. tax or reporting
obligations on non-U.S. income or property, but doesnt affect
his past tax or reporting obligations.
There are many,
many more accidental U.S. citizens in similar circumstances. And
the IRS is making it a very high priority to find them. Those U.S.
citizens who have already acquired a U.S. passport are at particularly
If you were
born in the United States, or have at least one U.S. citizen or
resident parent, youre almost certainly a U.S. citizen. In
that event, if youre not 100% compliant in your U.S. tax and
reporting obligations, you too may find yourself on the receiving
end of an IRS audit.
wait to get audited. If you fit this scenario, you have until Aug.
31, 2011 to take advantage of the latest offshore voluntary
compliance initiative from the IRS. You may be eligible to
pay a 5% penalty, rather than 25%. Plus, of course, any taxes that
might be due, plus interest. Fortunately, in many cases, you can
credit taxes you paid in the country in which you reside against
any U.S. tax liability.
For more information
on the IRS 2011 Offshore Voluntary Disclosure Initiative, click
here. And, if wish to participate, dont hesitate to contact
me at [email protected] for
a referral to an international tax attorney who can assist you.
youre fed up with the continuing and escalating obligations
that come with your U.S. citizenship, contact me. My firm has helped
dozens of U.S. citizens permanently and legally eliminate future
U.S. tax and reporting obligations through the process of expatriation.
We can even help you obtain a second passport, if you dont
have one already.
with permission from The
Nestmann Group, Ltd.
Nestmann [send him mail]
is a journalist with more than 20 years of investigative experience
and is a charter member of The
Sovereign Society’s Council of Experts. He has authored over
a dozen books and many additional reports on wealth preservation,
privacy and offshore investing. Mark serves as president of his
own international consulting firm, The
Nestmann Group, Ltd. The Nestmann Group provides international
wealth preservation services for high-net worth individuals. Mark
is an Associate Member of the American Bar Association (member of
subcommittee on Foreign Activities of U.S. Taxpayers, Committee
on Taxation) and member of the Society of Professional Journalists.
In 2005, he was awarded a Masters of Laws (LL.M) degree in international
tax law at the Vienna (Austria) University of Economics and Business
© 2011 Mark
Best of Mark Nestmann