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IRS Increases Pressure On US Expats - What Advisors, Clients Need To Know

Mark Davies, 5 September 2019

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The US Internal Revenue Service continues to chase after expat Americans.

There has been recent coverage on how the US Internal Revenue Service, the powerful tax collection authority, has turned the screws on expat Americans under the worldwide US tax system. That strange-sounding character, the "accidental American", emerges. People who were born in the US, but who haven't spent much adult time there, can find to their alarm that they have tax reporting requirements. (UK Prime Minister Boris Johnson is in this category, so it is reported.)

What to make of this picture? To discuss the area is Mark Davies, director, Mark Davies & Associates, a collaborating firm with Andersen Global in the UK. The editors are pleased to share these views and invite readers to respond. They do not necessarily agree with all views of guest writers. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

Like most UK tax advisors, when a prospective client says “I’m from [insert country], but I also have a US passport", my heart sinks a little for two reasons.

Firstly, for a foreigner living in the UK there can be considerable UK tax advantages to claim a foreign domicile and pay tax on the remittance basis. However, this is not necessarily a benefit for US citizens as they pay tax on a worldwide basis in the US, subject to double tax relief for tax paid where they live. Therefore, there is a limit to what tax planning can be done in the UK for US citizens. This is not to say that tax advice isn’t needed, far from it, as US tax rules are frequently different to local tax rules and care needs to be taken to avoid paying tax twice.

Secondly, if a client says they are from a country other than the US, and they have a US passport, he or she more often than not has failed to file the relevant US tax and bank account submissions. This is usually (bad) news for the client as frequently they have consulted you to give advice on a completely different matter.

This problem occurs because some people are born in the US but leave before they are issued with a US tax reference number and never realise that they have a duty to make annual declarations to the US. A notable example of this is Boris Johnson, who became a US citizen because he was born in the USA. He got picked up by the IRS when he sold his Islington home, presumably tax free in the UK due to private residence relief, but not so under US tax rules.

People who are born abroad to two US parents become US citizens without having stepped foot in the US. So, there is a whole host of so-called accidental citizens who do not know they have a duty to report to the US, plus those people who deliberately choose not to report (or fully report) in the US.

In 2010, the IRS stepped up the pressure with the enactment of Foreign Account Tax Compliance Act or FATCA, which means that international financial institutions have a duty to report financial information on their US clients annually to the US. The IRS can then compare what they received from their citizens with the information received from financial institutions.

But if the financial institution is unaware that a client has dual citizenship, they would not know that they had a duty to report their client’s information. In fact, without a US tax number they could not report even if they wanted to. In consequence, the IRS has increased the pressure again and is asking UK banks to check that their clients are not US citizens.  

Fearful of the large fines that the US can impose on financial institutions, British banks are keen to cooperate and avoid any suggestion that they are helping US citizens avoid their US taxes. So British banks are asking their customers to supply their US tax identification numbers where they suspect there is a US connection, for example if they have a US phone number. Failing to cooperate with your bank will lead to the bank either closing the account, or freezing the account. Some banks, on principle, will not operate a bank account for US citizens.

If you have US citizenship and there is a chance that you are not compliant then doing nothing is not an option. The IRS has a very particular set of skills, and they will look for you, they will find you, and they will tax (and fine) you. You can renounce your US citizenship, but this does require you to file five years of tax returns and pay an “exit charge” on leaving. 

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