The Internal Revenue Service (IRS) is scary for most Americans.
However, it doesn’t need to be that way. If you do things right, the IRS is helpful and non-threatening.
Ignoring your IRS commitments is the wrong way to go about your tax affairs: Especially when there are ways to get a tax amnesty that removes all late filing and non-declaration penalties.
There is nobody in this world who is happy about paying income tax: USA citizens have it rougher than most because they are still liable for some US taxes even if all their income is off-shore.
1. Not declaring foreign bank accounts
If you live in the UK then you will naturally have a UK bank account. You might have two or three when you include online banks and joint accounts.
The US Treasury Department wants to know about them. They won’t steal your hard-earned sterling, but they will penalise you severely if you fail to fill in an annual Foreign Bank Account Report (FBAR) declaration using FinCEN Form 114.
You need to provide this information if the total balance of all your foreign accounts exceeds $10,000 at any point in the tax year. Pension accounts are included, so your balances are almost certain to exceed the $10,000 threshold for filing.
Penalties are horrendous. Even a non-wilful omission to file FBAR forms can earn you a $10,000 penalty for each account.
Deliberate non-disclosure of non-US bank accounts could result in fines of $100,000 per account or even prison.
2. Not filling in an annual tax return
Even if your US income is zero, the IRS still demands that you file your annual Form 1040 Income Tax return. Failure to file will cost you dearly in late payment and ‘failure to pay’ penalties.
Your UK income will not be taxed twice because of the UK/USA tax treaty whereby everything you pay to Her Majesty’s Revenue & Customs (HMRC) reduces your US federal tax bill by the same amount,
3. Thinking there is no way out
Stress kills, and there is no stress like dealing with the IRS and thinking you owe them $100,000 or more. The IRS is never going to give up, and sooner or later they will catch up with you.
There IS a way out.
The IRS has a system called Offshore Streamlined Procedures. If you apply for consideration under this system and can testify that your delinquency was non-wilful, then you can get a total amnesty regarding any late or non-payment penalties.
You will still need to repay tax you owe, with interest, but any tax you owe that goes back more than three years is ignored. Similarly, you only need to file FBARs for the past six years: Even if you have lived in the UK for the past thirty years you will not have to pay any FBAR penalties, let alone going back to 1990.
Requirements for eligibility for Streamlined Procedures are simple:
- This is a one-off deal. You will not be eligible if you have used the IRS Streamlined Procedures on previous occasions
- Your omissions to file must be non-wilful
- You need to come clean with the IRS regarding all your foreign sources of income and bank/savings accounts.
4. Not paying medicare tax
If you are self-employed, you need to pay the federal health insurance tax, even if you are covered by the NHS and have UK private health insurance.
5. Ignoring state income taxes
Some states are reluctant to cut you off because that would limit their ability to tax you. California, New Mexico, South Carolina, and Virginia are renowned for their taxation of expats who have no intention of ever returning.
It is very easy to make mistakes when dealing with the IRS. US ex-patriots are in an especially complex situation and the only sure way to avoid issues with the US tax authorities is to use a service that employs US-certified CPA.
The only way to find someone who is experienced in dealing with the IRS is to use a US-based service, preferably an online service to remove the need for trans-Atlantic air travel. A tax-submission service will pay for itself because the specialist knowledge you gain access to will save you penalties and could give you easy access to an amnesty.