Taxing by Citizenship – A Much Needed Break by the IRS?

Taxing by Citizenship – A Much Needed Break by the IRS?

by Tameron McDougall of Tax Advisory Partnership

The IRS has recently introduced the Streamline Voluntary Disclosure programme. This scheme has been offered as something akin to an olive branch. Its aim is help those US citizens residing outside the US get up-to-date with their filing obligations, at the same time as limiting exposure to the numerous (and sometimes hefty) tax and reporting penalties.

The US tax net extends far beyond its own shores. It is not widely known that the US is one of the few countries in the world that charges income tax based on their individuals’ citizenship. If you are a US citizen or, in fact a green card holder, it is likely that you are required to file a US tax return annually to the IRS, even though often this does not result in any additional taxes.

Having made the move to the UK, or having been born and/or raised here, you might make the somewhat sensible assumption that your requirement to furnish US tax returns ends there. Unfortunately it does not. Regardless of where you reside you are required to report worldwide income on your US tax return.

IRS penalties for late, incorrect or incomplete filing can be particularly severe. We are often contacted by individuals for whom the fear of these penalties is the reason for their non compliance or “delinquency” as it affectionately termed. To further complicate matters, it is necessary to try and report non-US income in a system that doesn’t necessarily provide for the nuances of foreign assets.

Although the above sounds like an expensive and somewhat daunting task for the ‘delinquent’ filer, it is not all bad news. The IRS have begun to address the issue that not every US citizen abroad is aware of their need to file annual returns, recognising that reducing the filing and penalty burden is likely to encourage compliance and will ultimately lead to more individuals filing and paying tax in the US.

Cue the introduction of the Streamline Voluntary Disclosure programme. Aimed at individuals who are residing outside the US and present a low compliance risk, it provides a hassle free environment for filers to enter the US tax system and get up-to-date.

Benefits of the programme are twofold. Firstly, you need only submit three years’ worth of late filed tax returns and information statements, together with, six years’ of Report of Foreign Bank Accounts (FBAR). The previous procedure called for at least six annual tax returns. Secondly, and for some most importantly, if accepted on to the programme, late filing, late payment and FBAR penalties will not be assessed. This is a significant draw to delinquent filers. Both tax based penalties and reporting only penalties may be eliminated under this programme and with the latter usually outweighing the former, it is music to most taxpayers ears.

It is important to understand that there are a few hurdles to jump through in order to qualify for the scheme and some individuals unfortunately will not be eligible. But, if you are a US citizen or Green Card holder living in the UK (and have been since January 2009), have not filed US returns or FBARs or at least have some that remain outstanding and you have fairly uncomplicated financial affairs, it is well worth considering your eligibility for the Streamline Voluntary Disclosure programme whilst the option is still available. You should arrange an initial consultation with a qualified tax advisor dealing with US tax issues.

Whether or not you qualify for the SVD, it is vital that you bring your affairs up to date, as the next phase in this IRS carrot and stick programme, may not be so user friendly.

U.S. Treasury Circular 230 Disclosure:  Any U.S. tax advice contained in the body of this e-mail was not intended or written to be used, and cannot be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

Submitted by: Tax Advisory Partnership

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