08 Apr Tom LR Griffiths explains US and UK disclosure
For US citizens living abroad, there is no escaping the wide net cast by the Internal Revenue Service (IRS). Failing to file US tax returns or to report a foreign bank account can mean harsh penalties, and the need for voluntary disclosure. Here’s everything you need to know about US and UK disclosure…
Over the past decade, the IRS has increased its focus on US citizens living overseas to make sure people are tax compliant. This means keeping tabs on whether you are filing tax returns, information returns and properly declaring foreign bank accounts and assets held.
An increasing number of people are falling behind in meeting these requirements, leading them to take the decision of voluntary disclosure. If you fulfil any of the following criteria, it’s very likely you have filing requirements for the IRS:
- You’re from the US, whether a citizen, a lawful permanent resident (Green Card holder) or someone who has passed the substantial presence test.
- You have a non-US bank account (also known as a foreign bank account) open in the UK or another country.
- You haven’t filed a US tax return or a Report of Foreign Bank and Financial Accounts (FBAR).
In my role at Ingleton Partners, I specialise in both UK and US tax requirements. The consultancy is fully accredited on both sides of the Atlantic, meaning we are in a unique position to advise on the disclosures needed, and how US tax disclosures might interact with UK taxes.
Streamlined disclosure procedures
Most of our clients are guided by the IRS Streamlined Filing Compliance Procedure (streamlined procedure). There are around nine million US expats living abroad, and a high percentage don’t realise that they still have to file taxes every year with the IRS.
The US is one of only two countries in the world that tax citizens on their income regardless of where they live. It’s possible that you might not be aware of this for many years, meaning you haven’t filed for a long time. If this is the case, the streamlined procedures are for you.
The procedures were introduced in 2012 by the IRS in an attempt to encourage US expats to catch up on all outstanding tax returns. It’s for people who are considered low-risk by the Government and is a simpler way to catch up and potentially escape without penalties.
Since 2014, the streamlined procedures have been available to most US taxpayers, thanks to a relaxation of initial restrictions. As long as you’ve never been investigated by the IRS before, and can prove you didn’t wilfully fail in your obligations using a signed declaration (Form 14653) then it’s an option. If this is your chosen route you must submit:
- Latest three years of federal returns.
- Latest six years of FBAR forms.
- Signed ‘Certification by US Person Residing Outside the US) statement (Form 14653).
If you qualify and comply with all of the submissions, you won’t pay any penalties, including failure to file, failure to pay or FBAR. If you don’t qualify for streamlined procedures, then you will need to go down the voluntary disclosure programmes route.
In September 2018, the Offshore Voluntary Disclosure Programme (OVDP) was terminated by the IRS and replaced by a modified programme. The OVDP had been specifically for US taxpayers who had wilfully failed to disclose. It didn’t protect them from penalties, but it did stop any criminal prosecution against them.
The new amnesty programmes from the IRS are for noncompliant US taxpayers and are designed to encourage voluntary compliance. The new voluntary disclosure rules have altered from the previous iteration in various ways:
- The disclosure period is now six years (it was eight years under the OVDP).
- It can now be used for domestic disclosures in addition to foreign.
- Taxpayers must submit for criminal pre-clearance with IRS Criminal Investigations before using voluntary disclosure.
- The civil penalty has substantially increased, with up to a 25% penalty on tax due and usually 27.5% penalty on undisclosed foreign assets.
- Failure-to-file penalties can be directed at foreign corporations or partnerships at the discretion of the IRS.
The following aspects of the OVDP remain the same:
- You must file all Federal Tax Returns and other reporting from the disclosure period.
- You must pay interest and penalties on all unpaid tax.
HMRC and UK disclosure
HMRC actively search for businesses that are not registered, and any undeclared income. If they discover you have been receiving income that should be taxed, you could be charged interest and penalties. There is also the risk of prosecution for serious cases. This UK Government department has powers to gather information from all types of online areas, such as credit cards and online sales.
Disclosing your undeclared or under declared income to HMRC voluntarily means you will most likely escape prosecution. If you co-operate with the enquiry following disclosure, this will reduce fines.
HMRC run various campaigns aimed at people who need to bring their tax up to date. Voluntary disclosure campaigns require you to calculate income, tax, penalties and interest that you owe. Penalties are usually 20% of the tax you owe, compared with up to 100% they can levy on people who deliberately conceal their income.
Ingleton Partners, work with clients to bring their tax affairs up to date and ensure disclosure is made before HMRC demands it. Legislation changes often, and the Finance Bill 2019 was signed into law in February. It extends the time limits for HMRC to open assessments into offshore non-compliance up to 12 years. Advice from professionals is vital during these complex negotiations with HMRC.
About Tom LR Griffiths
Tom LR Griffiths is a US and UK tax advisor and former Senior Consultant at Ingleton Partners.