The US Internal Revenue Service (IRS) has significantly stepped up its international compliance efforts in recent years.
The IRS is criminally charging more and more taxpayers since 2009 due to a result of undeclared non-US accounts.
If recent events are evidence of a reinvigorated appetite in the IRS to increase international compliance, now is an ideal time for everyone to take on a defensive move by increasing their knowledge of this area and finding out if they are liable.
US citizens and green card holders living outside the US must file a US tax return each year. Also, they must comply with their UK tax requirements. Living or working in the UK can create US tax issues and pitfalls.
You come to us having just moved to London and have a US green card.
Before digging into any UK tax issues, we will run through the following list of US tax snags that could apply because of your US status.
There are a few fundamental aspects that should be understood: tax years, exchange rates and deadlines.
· UK and US taxable years. UK and US tax years are different. Most US taxpayers operate on a calendar year, while the UK tax year runs from 6 April to 5 April.
· Foreign exchange. When preparing US returns, any of your income will have to be converted into US dollars and reported on a calendar year basis.
You can use your monthly pay statements, bank interest statements, or year-end statements.
· Deadlines. You can receive an automatic two-month extension from the IRS so that the tax return is due on 15 June rather than 15 April.
Because the UK tax year does not end until 5 April you may not have your annual statements by June. In this case, you can file an extension, which would give you until 15 October to file federal income tax returns.
· However, if you owe tax to the IRS interest will accrue from 15 April. It is therefore worth trying to file your US tax returns as soon as possible. The foreign bank account report remains due on 30 June, even if you obtains an extension to file taxes later. Your UK self-assessment tax return (if you are required to file one) is, of course, due by 31 January after the end of the tax year.
Treaties and pensions
Close attention will need to be paid to the US/UK tax treaty and totalisation agreement.
If you are an employee in the UK, you will be likely to be subjected to tax under the PAYE system. Because of the treaty, generally you will not be double-taxed on your UK employment income and you can use the foreign tax credit and the foreign earned income exclusion to avoid paying any tax in the US.
If you are self-employed, you will need to opt out of US social security taxes by claiming the benefits of the US/UK totalisation agreement in the US, even though you may be paying National Insurance.
This is not automatic but, to opt out, you will need to obtain a certificate of coverage from HMRC’s National Insurance Contributions Office. A photocopy of this must be attached to your income tax return each year as proof of the US exemption.
On retirement savings, most employer-sponsored pension plans should not be problematic for US tax purposes. However, remember that you shouldn’t use a self-invested personal pension (SIPP) or individual savings account (ISA) without detailed US tax advice.
This is because these investments may be treated as foreign trusts for US federal tax purposes and you would need to report capital gains each year. SIPPs and ISAs also need to be reported each year on your FinCEN form 114.
The foreign bank account report
It is worth taking a closer look at the FinCEN form 114.
Non-US bank account reporting can cause real issues. For instance, if you were to acquire a home in the UK with an offset mortgage, the offset account should be reported on your FinCEN form 114.
So should all your accounts, including any SIPPs, ISAs, savings and current accounts and interests in other investment entities. If you have more than $10,000 or its equivalent in the other currency in all your non-US accounts you must report them by filing FinCEN form 114 by 30 June after any calendar year in which the $10,000 threshold is met.
The filing deadline cannot be extended and the IRS can take up to six years from the original filing date to assess penalties for failure to file this form.
The penalties for failing to file the FinCEN form 114 are severe and can include criminal sanctions. Non-wilful violations would expose you to fines as high as $10,000 for each year you fail to file this form.
The annual penalty for wilful failure to file is generally the greater of $100,000 or 50% of the maximum amount held in all of your non-US accounts during the year.
Although the IRS claims that finding wilfulness requires significant evidence of wrongdoing based on all the facts and circumstances, one court intimated that the simple failure to correctly answer a question about non-US accounts on a taxpayer’s return (by checking the wrong box) is sufficient to establish willfulness.
Criminal penalties are also possible and can include fines of up to $500,000 and/or 10 years in prison. Although rare, criminal prosecutions relating to FBAR violations do occur.
As a result of the implementation of the Foreign Account Tax Compliance Act (FATCA), more foreign financial institutions (FFIs), such as banks, stockbrokers, pension plans, hedge funds, insurance companies and trusts outside the US, must disclose the names of their US account holders to the IRS.
State tax returns
If you have workdays in the US during the year, you may need to file a state tax return. Although the double tax treaty provisions may treat US source income earned during her US workdays as non-US source, the treaty will not cover state taxes. If you work in a state like California for a week you may be subject to state income taxes.
Further points to note for New York and California:
• New York does not accept a copy of federal extension for delayed tax return filing, so if you work there during the calendar year you will need to file a separate state extension for delayed tax return filing.
• If you need more time to file your California return, you will be allowed a six-month extension without filing a request.
If you have any questions or think you have to file a US Tax return contact us now.
Don’t forget to follow our blog!