Case study 1 – Born in the US but left as a baby
Mr Smith was born in the US when his parents were relocated to New York for work. He left at the age of six months and has never returned, apart from the occasional holiday. Now at 35 years old, he was recently asked by his UK bank about his US tax status as they noticed he was born in New York when reviewing his file.
Mr Smith is married to a British citizen and has two young children. He owns his home jointly with his wife, which they are looking to sell. He has two pension pots and three UK bank accounts, plus a stocks and shares ISA.
In speaking to Mr Smith, it quickly became apparent that he had not filed any US tax returns and had only became aware of the need to file based on the recent correspondence with his bank.
Without the Streamlined Filing Compliance Procedures his potential penalty exposure would have run into many tens of thousands of pounds for not reporting his foreign assets, including the pension funds.
His actual US tax liability was very low. The only reason he owed any tax at all was due to the investment income earned in his ISA which, whilst tax-free in the UK, was taxable in the US. We were also able to advise him on the US consequences of selling his home, which could lead to a US tax liability without appropriate planning.
Case study 2 – British-born with US citizenship and a UK Company
Mr and Mrs Jones left the UK in 1993 to move to Florida. They obtained US citizenship in 2005 and returned to the UK in 2009. On returning to the UK, they set up a UK company, which they held 50% each. The company held UK property which was rented out. After their return to the UK, they correctly filed UK tax returns but were unaware of the need to continue to file US tax returns.
After discussing their case it was concluded that their failure to file was due to a misunderstanding of the law and so was ‘non-wilful’. They met the other requirements and so qualified for the Streamlined Filing Compliance Procedures.
The complicating factor here was the existence of the UK company. There are complex rules to navigate when a US person controls a foreign corporation which can include the US owners being taxed on the profits of the company irrespective of actual distributions. There are also significant penalties for failure to disclose their interest in the company amounting to $10,000 per year. These penalties were avoided by entering into the Streamlined Filing Compliance Procedures.
Case study 3 – Accidental American receiving trust distributions
The Williams family was UK born and raised apart from one of three sons who happened to be born in the US while his parents had been seconded for work. They had returned to the UK and lived for many years. It was not until the US son’s eighteenth birthday that they became aware that he may have a US tax return filing requirement.. He was in full time education so had very little income of his own, but we were required to determine his US filing requirements as he was the beneficiary of two family discretionary trusts, both of which had made distributions to him.
The individual was able to file US income tax returns and trust filings through the Streamlined Filing Compliance Procedures and avoid penalties, which in this circumstance was highly beneficial. The penalty exposure for failing to, or incorrectly, filing Form 3520 for non-US trusts is the greater of $10,000 or 35% of the gross value of distributions received.
The IRS have begun imposing penalties more frequently in relation to Form 3520 filings and in this instance the individual could have faced penalties of $40,000 (excluding those which could be applied to late filed FBARs and income tax returns outside of the procedure). This would have been very severe for an accidental American who only just started University and who has four more years of full-time education ahead. Fortunately, the individual was able to tax advantage of the Streamlined Procedures which turned a potentially expensive process into a largely form-filing exercise, as there was very little required by way of tax payments.
The individual is now deciding whether or not to maintain his US citizenship and is weighing up the pros and cons of doing so.
Would you like to know more?
If you have a question about whether you may have a US filing requirement, please get in touch with your usual Blick Rothenberg contact, or John Bull.
Or if you would like to learn more about whether you may owe the IRS taxes or about the Streamlined Filing Compliance Procedures, please visit our hub.