The US is one of the few countries in the world to tax their citizens not on their US residency status but on their citizenship. This means that US citizens (and Green Card holders) living outside of the US are still required to file an annual US tax return with the IRS.
There are many individuals residing outside of the US that have been unaware of this. Some may even be considered to be “Accidental Americans” where they acquired US citizenship at birth but have spent very little time or no time actually living in the US (for example an individual born to a US parent but has lived their entire life outside of the US or a person born in the US but left at a very early age).
This article discusses the Streamlined Filing program that the IRS introduced during 2012. This was designed to help “non-wilful” US persons to get back in to the US tax filing system and thereby become US tax compliant.
“But I’ve no tax to pay so it’s probably not necessary?”
The annual filing obligation is required even if the US citizen has little or no US source income since they are required to report their worldwide income on a calendar year basis. Due to the potential offset of foreign tax credits in respect of taxes settled in the foreign country in which they reside, there may be little or no US tax payable with the US filing although this does not remove the need to submit annual US tax returns. It can, however, be more of an administrative requirement that comes with being a US citizen or from holding a Green Card.
However, if an individual had income that was taxed at a low or zero rate in the non-US country (for example, in the UK no UK tax will arise from ISA income or typically from the sale of an individual’s private principle residence) then US tax liabilities may arise – Boris Johnson being a high profile individual who was subject to US tax on the disposal of his home due to him having US citizenship at the time of sale.
As well as the US tax return filing obligation, there could also be additional filing requirements for US citizens or Green card holders. Whilst some reporting’s may be informational returns with no US taxes to pay, the penalties for non-US tax compliance in respect of these forms can be severe.
Common Examples of Informational forms are:
- Form 8938, Statement of Specified Foreign Financial Assets
- Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations
- Form 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships
- Form 8858 Information Return of U.S. Persons With Respect To Foreign Disregarded Entities
FOREIGN BANK REPORTS
In addition to the above tax return forms, US persons may be required to file foreign bank reports. These forms are required annually if an individual holds more than $10,000, in aggregate, within non-US bank accounts at any point during each calendar year. If required to complete these, and under the streamlined filing program, late forms for the last 6 years are required. We would recommend that these forms are completed as soon as possible since penalties for non-filing can be substantial ($10,000 per non-US account not disclosed per year).
A link to these reports and form instructions are below.
Getting up to date
So, how does one come up to date under the streamlined filing procedure?
• Submit late tax returns for the last three years including any related information returns and pay the tax due, if any.
• Submit late Reports of Foreign Bank accounts for the last six years
• Complete form 14653 (We can also help compete this form and review the explanation statement required)
Continued filing of US returns and foreign bank reports will be required unless the individual decides to renounce their US citizenship (briefly discussed below).
Renouncing your US citizenship (‘Expatriation’)
Some US persons, who (for example) have no intention of ever living in the US, may consider expatriating, i.e. renouncing their US citizenship. This means that they would no longer be considered to be a US person from the date that of expatriation. In the year of expatriation, they would be required to report their worldwide income on a US tax return up to the date that they expatriated and only income from US sources thereafter. Once expatriated, they would not be required to file future US tax returns (unless of course they were in receipt of certain US sourced income).
Anyone considering expatriating should also seek US immigration advice. In addition, they would have needed to have had filed at least 5 years of US tax returns before the tax year in which the expatriation occurs. Therefore for someone looking to expatriate during 2020 will need to have filed prior year US tax returns from 2015 through to 2019.
Where an individual’s net worth exceeds $2 million, an exit tax might apply. The expatriating individual whose net worth exceeds $2 million is deemed to have disposed of their worldwide assets on the day before expatriation and if the gain exceeds a certain limit (revised annually) then actual US tax could be payable upon the deemed disposal (except where certain exceptions apply). As such, this will require careful consideration.
- WHILST THE STREAMLINED FILING PROGRAM COULD CONTINUE TO BE AVAILABLE FOR MANY YEARS TO COME, THIS IS BY NO MEANS GUARANTEED. ONCE THIS PROGRAM ENDS THERE MAY BE VERY LIMITED MEANS FOR DELINQUENT US TAXPAYERS TO GET THEMSELVES BACK WITHIN THE US TAX FILING SYSTEM AND UPT DATE. THIS MAY ESPECIALLY BE SO WITH THE “OVDP” PROGRAM SOON TO END. THOSE US CITIZENS THAT ARE DELINQUENT US TAX FILERS WHO ARE ABLE TO, BUT DO NOT VOLUNTARILY, ENTER INTO STREAMLINED FILING MAY BE REQUIRED TO FILE ADDITIONAL US TAX RETURNS (TYPICALLY AT LEAST ANOTHER 3-5 YEARS OF US TAX RETURNS) PLUS THEY MAY BE SUBJECT TO POTENTIALLY PENALTIES ON THEIR RETURNS AND/OR FOREIGN BANK ACCOUNTS.
- THE INTERACTION OF THE UK AND US TAX ALSO NEEDS CAREFUL HANDLING, AND THE APPLICATION OF THE UK/US TAX TREATY IS OFTEN IMPORTANT. THERE MAY EVEN BE A THIRD JURISDICTION TO BEAR IN MIND IN TERMS OF ESTABLISHING TAXING RIGHTS AND CLAIMING APPROPRIATE FOREIGN TAX CREDITS, WHERE THE SOURCE OF INCOME ARISES OUTSIDE BOTH THE UK AND THE US. HAVING YOUR US AND YOUR UK RETURNS PREPARED BY THE SAME PREPARER CAN HELP TO KEEP COMPLIANCE COSTS DOWN AS WELL AS WELL AS BEING LESS TIME CONSUMING FOR YOU. WE CAN OF COURSE ASSIST IN ALL AREAS AND PROVIDE AN ESTIMATE OF FEES AND WORK INVOLVED, WITHOUT OBLIGATION.
Please contact us to speak to an adviser about UK and US tax assistance.