Do Foreign Citizens Who Obtain US Citizenship File US Tax Return?


W

W

As I understand it, US citizens must file a US federal tax return on all of
their worldwide income, even if they are currently not residents in the US.
Are there exceptions to this?

Here is the case someone asked me about today. A citizen of Brazil, who
was born in Brazil and lived there for their entire lives, obtains US
citizenship. The person might have done this in order to have a US
passport, or it might have just been a "vanity" issue to have dual
citizenship. Do such individuals now have an obligation to file a US tax
return on their Brazilian income? Obviously they get a credit for foreign
taxes paid. I'm not asking about the mechanics of the return, but rather
just when there is an obligation to pay US tax and file.

Assuming such an individual later realizes their mistake and wants to back
out, are they subject to all of the stiff penalties that the IRS has set up
for US citizens who renounce citizenship?
 
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J

John Levine

As I understand it, US citizens must file a US federal tax return on all of
their worldwide income, even if they are currently not residents in the US.
Are there exceptions to this?
Only the usual ones for people with too little income to owe tax.
Here is the case someone asked me about today. A citizen of Brazil, who
was born in Brazil and lived there for their entire lives, obtains US
citizenship. The person might have done this in order to have a US
passport, or it might have just been a "vanity" issue to have dual
citizenship. Do such individuals now have an obligation to file a US tax
return on their Brazilian income?
Yes. US citizens pay US tax on their worldwide income, no matter
where they live. Ask any expat and you'll get a long diatribe about
what a pain in the patoot this is, and how unfair it is that the US
has this uniquely onerous rule.
Assuming such an individual later realizes their mistake and wants to back
out, are they subject to all of the stiff penalties that the IRS has set up
for US citizens who renounce citizenship?
Of course. How in the world could someone go through the entire
process of becoming a US citizen without realizing this?

R's,
John
 
W

W

John Levine said:
Of course. How in the world could someone go through the entire
process of becoming a US citizen without realizing this?
The interesting thing is that South America is loaded with such people.
They get citizenship through a parent or brother/sister who worked in US,
and then they never move to the US or work there.

I'm pretty sure 90% of them have no clue what they signed up to.

Why doesn't the IRS pursue them, because to my knowledge that group of
people (US citizens who never lived or worked in the US) do not get notices
from the IRS asking for a return.
 
M

Mark Bole

Of course. How in the world could someone go through the entire
process of becoming a US citizen without realizing this?
[...]
Why doesn't the IRS pursue them, because to my knowledge that group of
people (US citizens who never lived or worked in the US) do not get notices
from the IRS asking for a return.
Just guessing -- if they've never filed a return, do not have a Soc.
Security number, and don't get any 3rd party reporting (from US
employers, banks, brokerages, etc), then probably the IRS simply does
not know they exist.
 
A

Alan

Just guessing -- if they've never filed a return, do not have a Soc.
Security number, and don't get any 3rd party reporting (from US
employers, banks, brokerages, etc), then probably the IRS simply does
not know they exist.
Nothing wrong with your comment. But in this instance (A citizen of
Brazil, who was born in Brazil and lived there for their entire lives,
obtains US citizenship.) the person could have only obtained citizenship
by either being a permanent resident of the US or serving in the US
military. In both instances they would have SSNs. If in the military,
tax returns would have been filed and if a permanent resident then
"most" probably they were working here and filed tax returns.

I suppose in this unreal world of theoretical questions without any
substance, anything is possible.
 
M

Mark Bole

Nothing wrong with your comment. But in this instance (A citizen of
Brazil, who was born in Brazil and lived there for their entire lives,
obtains US citizenship.) the person could have only obtained citizenship
by either being a permanent resident of the US or serving in the US
military. In both instances they would have SSNs. If in the military,
tax returns would have been filed and if a permanent resident then
"most" probably they were working here and filed tax returns.
The OP posted a followup earlier:
They get citizenship through a parent or brother/sister who worked in US,
and then they never move to the US or work there.
Again, I am far from an expert on this, but from a few searches it does
appear that:

1) family members can request permanent resident status for
siblings/children (I guess they cannot go directly to citizenship, but
must go through permanent resident status first). Likewise, someone
could marry a US citizen, get resident/citizen status, and then get
divorced.

2) as Alan said, becoming a permanent resident appears to require
issuance of an SSN. But based on (1), it does not necessarily mean you
have ever worked in the US, or have recently worked in the US.

So in answer to the OP's followup question,
Why doesn't the IRS pursue them, because to my knowledge that group of
people (US citizens who never lived or worked in the US) do not get notices
from the IRS asking for a return.

.... I'd change my previous comment to leave out the part about not
having an SSN, but the rest still stands. If they've never filed a
return (or filed no recent returns), and get no 3rd party reporting, the
IRS computer probably isn't going to send any notices or inquiries, or
even if they did, they might well have an invalid address on file.

And even if they did, what's the point if the person has no US assets
and no plans to ever visit or live here? How much is it going to cost
the IRS to try to collect... nothing? They would not have anything on
which to base a substitute return and assess any tax or penalty.

Related to this, I recall seeing news stories in the last few years,
regarding children born abroad to US citizens, who have never been in
the US and who now may be subject to severe penalties for not filing
FBAR and FATCA forms in the past.
 
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A

Alan

Again, I am far from an expert on this, but from a few searches it does
appear that:

1) family members can request permanent resident status for
siblings/children (I guess they cannot go directly to citizenship, but
must go through permanent resident status first). Likewise, someone
could marry a US citizen, get resident/citizen status, and then get
divorced.

2) as Alan said, becoming a permanent resident appears to require
issuance of an SSN. But based on (1), it does not necessarily mean you
have ever worked in the US, or have recently worked in the US.

So in answer to the OP's followup question,



... I'd change my previous comment to leave out the part about not
having an SSN, but the rest still stands. If they've never filed a
return (or filed no recent returns), and get no 3rd party reporting, the
IRS computer probably isn't going to send any notices or inquiries, or
even if they did, they might well have an invalid address on file.

And even if they did, what's the point if the person has no US assets
and no plans to ever visit or live here? How much is it going to cost
the IRS to try to collect... nothing? They would not have anything on
which to base a substitute return and assess any tax or penalty.

Related to this, I recall seeing news stories in the last few years,
regarding children born abroad to US citizens, who have never been in
the US and who now may be subject to severe penalties for not filing
FBAR and FATCA forms in the past.
I forgot about citizenship deriving from having one or two parents who
are US citizens. That said, in one way these people are no different
then those people who were born and lived in the US their whole life and
never filed tax returns because their source of income was either from
an entity that had no reporting requirement (e.g., foreign source
income) or they were paid "under the table." These folks are also
unknown to to the IRS.
 
P

Pico Rico

Mark Bole said:
Of course. How in the world could someone go through the entire
process of becoming a US citizen without realizing this?
[...]
Why doesn't the IRS pursue them, because to my knowledge that group of
people (US citizens who never lived or worked in the US) do not get
notices
from the IRS asking for a return.
Just guessing -- if they've never filed a return, do not have a Soc.
Security number, and don't get any 3rd party reporting (from US employers,
banks, brokerages, etc), then probably the IRS simply does not know they
exist.

But if they know, or suspect, they DO go after them. Hence the increase in
US citizenship renunciations. And the even greater moaning and groaning for
all the record keeping requirements, even if US taxes are not owed.
 
P

Pico Rico

Alan said:
Nothing wrong with your comment. But in this instance (A citizen of
Brazil, who was born in Brazil and lived there for their entire lives,
obtains US citizenship.) the person could have only obtained citizenship
by either being a permanent resident of the US or serving in the US
military. In both instances they would have SSNs. If in the military, tax
returns would have been filed and if a permanent resident then "most"
probably they were working here and filed tax returns.

I suppose in this unreal world of theoretical questions without any
substance, anything is possible.

Perhaps "obtains US citizenship" really means he was a US citizen all along
(i.e. born in Brazil to US citizens) and has now formally had his US
citizenship recognized by the US government.
 
D

D. Stussy

What is more likely is that a child born to citizen parents abroad who never
steps foot in the U.S. could get away with it. Existing as a dependent
doesn't necessarily mean that one grows up to be a taxpayer. Short of
self-reporting, there would be no document trail to indicate income that is
reported to the IRS.
 
S

Stuart A. Bronstein

tb said:
Sorry I don't understand... Are you saying that a person can
serve in the US military without being a US citizen or permanent
resident alien?
Yes, they certainly can - and do. After World War II many Filipinos
who had served in the US military applied for the citizenship they
had been promised before they signed up. But they were turned down.
And to this day Congress refuses to approve it.
 
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S

s_pickle2001

The interesting thing is that South America is loaded with such people.
It depends on your definition of "loaded".
They get citizenship through a parent or brother/sister who worked in US,

and then they never move to the US or work there.
Getting citizenship through a US citizen brother or sister is a long process and it cannot happen without deliberate actions on your part. First you need your brother or sister to sponsor you for permanent residence, which I think involves few years' wait, then you have to live in the US as a permanent resident for 5 years andm only then can you apply to become a citizen.
 
S

s_pickle2001

Sorry I don't understand... Are you saying that a person can serve in

the US military without being a US citizen or permanent resident alien?
Not only "can", but in principle all men between the appropriate ages living in the US, including illegal aliens, are liable for military service. Only people with certain visa types are exempt.
 
T

tb

Yes, they certainly can - and do. After World War II many Filipinos
who had served in the US military applied for the citizenship they
had been promised before they signed up. But they were turned down.
And to this day Congress refuses to approve it.
I guess what I am asking is: A Mexican can cross the border illegally
and join the military no questions asked?
 
A

Alan

I guess what I am asking is: A Mexican can cross the border illegally
and join the military no questions asked?
To join any branch of the US Military you must be a citizen or resident
alien. Resident alien is defined as an individual who is a lawful
permanent resident of the US (has a green card). Individuals who are
resident aliens because of passing the substantial presence test may not
enlist in the US military.
 
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W

W

Mark Bole said:
... I'd change my previous comment to leave out the part about not
having an SSN, but the rest still stands. If they've never filed a
return (or filed no recent returns), and get no 3rd party reporting, the
IRS computer probably isn't going to send any notices or inquiries, or
even if they did, they might well have an invalid address on file.

And even if they did, what's the point if the person has no US assets
and no plans to ever visit or live here? How much is it going to cost
the IRS to try to collect... nothing? They would not have anything on
which to base a substitute return and assess any tax or penalty.

Related to this, I recall seeing news stories in the last few years,
regarding children born abroad to US citizens, who have never been in
the US and who now may be subject to severe penalties for not filing
FBAR and FATCA forms in the past.
Children born abroad is a perfect example. Many without understanding the
details are accumulating a silent hidden liability.

And FATCA is a perfect example of why this topic now becomes important.
Because these people will with FATCA in many cases become visible to the
IRS. The IRS will receive notices from foreign banks that a US citizen has
an account outside the US and is collecting some kind of interest on that
account.
 
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