I'm a U.S. citizen through my parents, but never paid U.S. taxes: Can I move to the U.S.?

Will a U.S. citizen who has only ever lived and paid taxes abroad face unpleasant IRS demands upon moving to the United States?

Question

I’m a mid-career professional with American citizenship by virtue of my parents. I was born in the Middle East and have never lived in the United States, but now think I want to move there permanently. I honestly had no clue that I should have, as a U.S. citizen, been reporting to the IRS or paying taxes (despite never having lived in the U.S. and visited only a handful of times - which still kind of amazes me...) until my new accountant told me about the obligation just a few months ago. What will these ten-plus years of nonpayment mean for me if I do end up moving to the United States? Am I looking at hefty fines, or possibly something worse?

Answer

You’re definitely not alone in your surprise concerning U.S. tax obligations for folks who have limited ties to the country apart from being American passport holders. But don’t fret too much - there’s a good chance you won’t end up having to pay much, if anything, to the IRS.

You might not owe any taxes at all. This is most often the case for Americans living abroad where they qualify for the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC), which, taken together or in some cases alone, can wipe out your U.S. tax liability altogether.

The IRS will treat you as compliant concerning your U.S. tax obligations for a given year if you would not have owed any taxes had you filed a return for that year, thanks to the FEIE or FTC. This means you could be all squared away already with the IRS, even though you've never filed a single tax return.

To see whether you might qualify for the FEIE, check out “Overseas American Citizens: When You Need to File a Tax Return or Pay U.S. Taxes.” For more information on the FTC, see “How Foreign Tax Credit May Reduce Tax Bill for an American Expat.”

You’ll have to run the math to figure out whether these would have reduced your tax liable to zero - which will mean you’re considered compliant - for each of the years for which you should have filed a return but did not.

The U.S. government recognizes that tons of people who, like you, should be paying taxes, might not even know about this requirement. It lets American citizens who do have an outstanding tax liability off the hook with respect to the fine they would otherwise have to pay if they prove that there was a “reasonable cause” for their failure to file tax returns.

Reasonable cause “may be established if you show that you were not aware of specific obligations to file returns or pay taxes, depending on the facts and circumstances.” This probably cuts in your favor, assuming you can persuade the IRS that you really did only recently become aware of your requirement to pay. Factors that are taken into consideration in this analysis, such as your level of education and whether you’ve been penalized before, may help you as well. For more on when the “reasonable cause” standard is met see the IRS page “Information for U.S. Citizens or Dual Citizens Residing Outside the U.S.”.

Even if you should have paid U.S. taxes and you don’t establish “reasonable cause” for not having done so, you probably won’t be asked by the IRS to pay taxes or penalties for anything beyond the last six years. You’re unlikely to face anything beyond a fine - like having a lien put on your U.S. property (which can affect your credit score) or a criminal prosecution - for any taxes you should have paid as long as you haven’t intentionally tried to defraud the United States government.

Nevertheless, you may wish to consult a U.S. tax lawyer or professional for a full personal analysis.

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