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KEY POINTS
- Americans, wherever they live, must file annually or face severe penalties.
- A one-time amnesty might reduce some penalties.
- The US may obtain data on non-compliant persons.
- A good opportunity to come clean.
- UK tax advisers cannot overlook recommending US compliance.
American citizens and green card holders living in the UK are annually required to file both US tax returns as well as numerous US information returns, reporting such data as the names and addresses of UK bank accounts.
Penalty led?
The penalties for simple failure to file are astonishing. A typical American in the UK with just a small company and a bank account who might owe around $100 in US tax, could be charged penalties that are not too far off $4 million (see Ginger).
Given that there are more than 250,000 Americans in the UK, most of us will either know a US citizen or someone with an American spouse or family.
If any US person is behind with US filing, there is a very short deadline available right now to catch up. The IRS (US Internal Revenue Service) announced last month that US individuals with unreported income, assets, bank accounts, trusts, companies, SIPPs and other entities now have the chance to come clean.
Limited opportunity
The 2011 Offshore Voluntary Disclosure Initiative (OVDI) requires filing of original or amended US tax and information returns for each of the eight years 2003 to 2010. All of the paperwork has to be completed and filed with the IRS by 31 August 2011.
Filing on this basis limits the number of years required to only 2003 to 2010 (so no earlier filing is required), generally eliminates criminal prosecution by the IRS, and reduces penalties to a more manageable level.
Those who choose to participate will be charged a penalty of 25% of the assets concerned. This will be calculated as a percentage of the total of the highest value of each financial account during the eight years, plus the value of non-US assets acquired with unreported income.
The effect of this can be seen in Ginger under the OVDI. In addition, any tax due will be assessed, plus a 20% penalty will be charged on tax on unreported income as well as normal US late payment and late filing penalties.
The 25% penalty can be reduced to 5% or 12.5% in limited circumstances, such as for so-called ‘accidental Americans’, who did not even know they were US citizens.
For individuals who have filed all of their US tax returns and also paid all required US taxes, but overlooked filing information returns, these can also be filed by 31 August 2011 but on a penalty-free basis. This includes, but is not limited to, forms TD F 90-22.1, 3520, 3520-A and 5471.
Those who fail to come forward face the possibility of being charged civil penalties for wilfully failing to file (at the levels set out in the Ginger example) and fear of criminal prosecution once the IRS has found them through other means.
How would they know?
Historically it has been assumed that the US did not have the resources to find its taxpayers abroad, so could never fully enforce US tax rules.
That assumption seems to be shifting. Now that ethical business practice includes payment of tax, slightly more dubious sources of information seem to be making their way to tax authorities. Wikileaks, for example, has generated huge amounts of press over recent months.
Equally, it is common knowledge that many governments have been paying substantial amounts to buy stolen data containing names of tax evaders and details of their hidden money, and including the names of bankers, accountants, lawyers and financial advisers who conspired to help evade tax.
Much of this data makes its way to America along with information gathered more conventionally from treaty partners and under tax information exchange agreements.
At the same time, the IRS is also prosecuting banks and bankers who created products designed to evade US tax or securities laws and is looking to track movements of money held offshore by US persons.
From 2013, the very act of providing such private data directly to the US government will become compulsory for almost all financial institutions worldwide under the upcoming Foreign Account Tax Compliance Act (FATCA) regime (part of the Hiring Incentives to Restore Employment Act signed into law March 2010).
The FATCA means that the global financial community will have to ask for huge quantities of additional data from every account holder and investor (initially to find US persons who hold accounts) and requires almost all financial enterprises globally to enter into agreements with the US government to provide details of US taxpayers.
What should the UK adviser do?
The UK tax profession is strictly governed by codes of practice and Anti-Money Laundering Regulations. The Chartered Institute of Taxation's guide to professional conduct states that a tax adviser who knew there was tax due that had not been paid would need to advise the client to correct that ‘irregularity’ or cease to act and consider a report to the money laundering reporting officer.
The Money Laundering Regulations 2007 oblige an adviser or his firm to consider a report to the Serious Organised Crime Agency (SOCA) if there is a suspicion that US tax might be unpaid.
This is because such unpaid tax would be criminal property. Reports to SOCA of proceeds of crime that include unpaid US tax might be forwarded to US tax authorities. Acting for a non-compliant US person would in any case be uncomfortable for an adviser given that the scale of potential civil penalties exceeds the limits of most professional indemnity insurance policies.
Failure to file US tax returns, filing false income tax returns, or wilfully not filing a report of foreign bank and security account form, could all be perceived as tax evasion and criminally punished by imprisonment and/or substantial fines.
Given the significantly increased focus by the USA on the prosecution of tax and financial advisers who assisted clients holding assets outside the country, any UK-focused adviser who has a US client may think about suggesting that the client also works with a US tax specialist to be reassured that the client is fully globally compliant.
Practical steps
While it provides certainty on amounts payable, the 2011 OVDI is not suitable for every US taxpayer who might be behind with filing. The costs under the disclosure initiative are significant: 25% of total account balance will have no correlation to income tax liabilities or penalties that might be levied where a case with good reasonable cause comes before a court.
Indeed, most non-compliant US citizens in the UK probably owe no US tax at all, but still may not realise they were supposed to have filed.
Many may simply not know that they were required to report, for example, the existence of bank accounts held jointly with a spouse, a UK inheritance or gift, a UK pension plan or an ISA.
Civil penalties listed in the example are those that could be charged for ‘wilful’ failure. In deciding if someone wants to participate, it is therefore necessary to compare the amounts due if the OVDI were chosen with the potential financial penalties if the IRS and Department of Justice were to allege that any failures were wilful.
Specific facts, dates and actions would also need to be reviewed to see if there might be a reasonable cause argument for the lateness or inaccuracy of any required US filing.
Next steps
The FATCA will increase information flows in the international financial world from 2013, but at a hugely increased compliance cost to all US persons living outside the USA, as well as to all financial institutions.
Already with regard to 2011 US returns due to be filed in 2012, US persons will have much more complex annual income tax and information returns to file, each with ever larger penalties.
From 2013, the FATCA will require that most UK financial institutions send lists of all US customers straight to the IRS. Given that the USA has now decided to use the Act to enlist the world’s financial sector to help it hunt down missing tax revenues, it is imperative that all US taxpayers who have not completely filed their US returns think before 31 August 2011 about catching up under this initiative.
Such individuals have less than six months to find eight years’ worth of details about income and accounts, prepare eight years’ worth of tax returns and asset statements, complete OVDI disclosures and arrange to pay the total amount due including the 25% penalty. This is doubtless a tough choice to have to make.
In IRS language, the 2011 OVDI is ‘the last, best chance for people to get back into the system’.
For many Americans in the UK, choosing to give one quarter of their assets to the IRS may indeed be the cost of becoming compliant.
David Treitel is tax director at US Tax Financial Services Ltd, London office. He can be contacted on 020 7357 8220 and by email.
