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For 'accidental Americans,' the hidden costs prove taxing

Why We Wrote This

When one hears about US citizenship in the news lately, it's usually about "Dreamers" who are trying to find a way to get it. But there are some people in the reverse situation: They have citizenship in the United States that they were only dimly aware of. And because of recent US legal changes, it's causing such problems for them that they want to abandon their citizenship entirely.

David Goldman/AP/File
Chris Bush holds a sign attracting business outside a Liberty Tax Service on the final day of the US Income Tax filing deadline in April 2015 in Atlanta.

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For many abroad, US citizenship is a highly desirable prize. But some are finding it a costly burden – one they might not have even been aware they had. It all stems from recent legal changes in the United States meant to root out secret accounts abroad. The law now requires foreign banks to report the identity and assets of any US citizens to the IRS. Several governments have signed agreements to enforce it. And that has led to nasty surprises for “accidental Americans” like Marilyn Wiles-Mooij, a European born in the state of Georgia. Ms. Wiles-Mooij thought she had renounced her US citizenship two decades ago. But in 2014, her French bank informed her that if she did not supply a Social Security number, her accounts would be seized over her failure to comply with US tax requirements. She doesn’t have an SSN. “We’re being refused bank accounts and health insurance; we’re being asked to pay huge amounts of money,” says Fabien Lehagre, president of the Accidental Americans Association advocacy group. “It’s unforgivable. We’ve never lived or worked in the US.”

Tom Wallis was born in France to a French mother and American father. But his father passed away when he was just six years old. Apart from one year he spent working in the United States, Wallis has spent little time tending to his American roots – he thinks of himself as French.

But four years ago, his sister tried to apply for a loan. Her French bank asked her to declare whether she was American, and knowing her father's lineage, she replied yes. That's when she, and her siblings discovered they owed the American government tens of thousands of dollars in taxes – with Mr. Wallis alone on the hook for more than $100,000.

“We had to tell the French banks that we were American and we had to declare our revenue, property, and companies to the US,” says Wallis, from his home near Grenoble. “This is when we all started to see that being American was an issue.”

Wallis is one of thousands of “accidental Americans” living around the world – people who hold US citizenship due to an American parent or having been born in the states, while retaining little or no attachment to the US. Thanks to a combination of US legal changes and intergovernmental agreements in recent years meant to root out hidden bank accounts abroad, these accidental Americans are coming into the crosshairs of the IRS. Those without Social Security numbers are at risk of losing their accounts, while others are notified for the first time that they need to – and should have been for years – start declaring US taxes.

The problem is bad enough that groups like the Accidental Americans Association (AAA) in France are organizing to fight Foreign Account Tax Compliance Act (FATCA), the key US legislation behind the issue, and relieve some of the burdens for people like them. They’re pleading their case before the French Senate and the European parliament in the coming days and months, and pushed to get the issue addressed during the recent meeting between President Trump and French President Emmanuel Macron.

“These are people who have done nothing wrong to see their lives overturned,” says John Fredenberger, an American tax attorney based in Paris since 1971. “They can either declare [their taxes], pay [the US], or renounce their citizenship. Basically, those are the options.”

‘We’re the ones paying’

FATCA was signed into law in 2010 to fight foreign tax havens and secret accounts abroad, by requiring foreign banks to report the identities and financial assets of any client with US status to the IRS. FATCA gained even more strength when the US began signing FATCA intergovernmental agreements (IGAs) with foreign countries requiring the reciprocal exchange of banking information.

When France approved an IGA with the US in 2014, people like Marilyn Wiles-Mooij found themselves collateral damage.

“I only realized four years ago that I was American when I received a letter from my bank threatening to close my accounts if I didn’t give them my Social Security number,” says Ms. Wiles-Mooij.

But Wiles-Mooij didn’t have a Social Security number. Born in Georgia 67 years ago to a French mother and British father, Marilyn Wiles-Mooij thought she had given up her US citizenship two decades ago after signing documents to stop renewing her passport. But in 2014, when the banks came calling, she realized her citizenship was intact and she was at risk of losing her accounts.

Holding onto their bank accounts in the only country they’ve ever known is only half of the problem for accidental Americans. Many are shocked to find they owe thousands of dollars in unpaid taxes for the years they should have been filing. Wallis says he spent 50,000 euros ($59,700) in lawyers fees, only to be told that he owed $115,000 to the IRS.

“I know in the beginning, this law wasn’t against normal people like us, but in the end, we’re the ones paying,” says Wallis, who has yet to pay his taxes.

Americans abroad do have options. They can commit to a “fresh start” program if they agree to declare and pay any outstanding taxes in the last three years as well as outline in good faith why they hadn’t prior. If and when their records are clean, they’re free to renounce their citizenship – assuming they’re willing to pay for it, at $2,350 each.

But Mr. Fredenberger, the tax attorney, says this doesn’t get to the heart of the issue. While IGAs require US banks and foreign banks to offer information on their clients to the other government, the US side is not holding up its end of the deal.

“If you look at the American Banking Association, no one is taking the lead to reciprocate and tell American banks to look at their client records,” says Fredenberger. “They’re not doing it and I don’t think they ever will.”

Fredenberger says that even the language in the agreement is unsubstantial and vague. He argues that because the US hasn’t held up its end of the agreement, it should be canceled.

In addition, financial experts estimate that the gains seen by the IRS in instituting FATCA have been far less than the headaches it produces. While FATCA was passed on the assertion that it would regain the some $100 billion in tax revenue lost to offshore tax abuses, experts say that the amount of tax that it has collected has been statistically insignificant.

Raising awareness

Fabien Lehagre, president of the AAA and an accidental American himself, is working with a French lawyer to show that the decree used to enforce FATCA is unconstitutional under French law. In October, they presented their case to France’s administrative Supreme Court, claiming that the French constitution requires such agreements to be reciprocal, and that FATCA violates European laws on personal data protection.

On May 15, a bipartisan committee will present a proposition to relieve some of the burdens for accidental Americans at the French Senate, with hopes it can then move onto the National Assembly for debate. And this summer, the European parliament will address the issue during a plenary debate.

“Our main goal is to raise awareness, but we do have specific demands,” says Mr. Lehagre. “We’re being refused bank accounts and health insurance, we’re being asked to pay huge amounts of money. It’s unforgivable. We’ve never lived or worked in the US.”

The AAA is also hoping their work will inspire other accidental Americans to join forces. While those in the Netherlands have been organizing, the French are thus far the only ones to raise the issue publicly. But the only real, lasting solution for accidental Americans would be the repeal of FATCA itself – and that seems unlikely.

“I was really shocked when FATCA was enacted. It’s offensive and the US tax authority has no basic jurisdiction over these people,” says Thomas Brever, a tax attorney in Minnesota and former trial attorney with the IRS. “But I think the IRS would laugh [that the French are trying to end FATCA] because I don’t think the chance of success is very high. I don’t think they’re going to get anywhere.”

Wallis says that in the meantime, the longer he waits to pay his outstanding taxes, the worse things will get for him. But, he says, it’s out of the question that he’ll cave to US demands.

“Maybe one day the US government will tell me I have to pay…. My lawyers told me I could go to jail,” says Wallis, “but I’m never going to pay that amount. I’ll go on a hunger strike before I do.”

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