Likely penalties for non disclosure of foreign income when no tax is due?

Likely penalties for non disclosure of foreign...

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A person received foreign income (an IRA distributional) in a previous tax year and didn't declare it.

HOWEVER that person's total income for the year (including the foreign income) was below the amount of their personal tax allowance.

No tax is due.

The person did not report the foreign income because they believed they did not have to as there was no tax to pay and they had not been asked to fill in a return.

What are the penalties likely to be when this foreign income is disclosed to the HMRC?

The HMRC usually talks about penalties for failure to notify as a proportion of tax due (e.g. 10%).

As no tax is due is it correct to assume then that the penalty will also be zero, or are other penalties possible?

Replies (9)

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By JCresswellTax
12th Sep 2013 09:23

Why

Do you think they have to notify HMRC?

Are you looking at their guidance for Self-Assessment?

I don't actually agree with this.  If there is no chargeability to income tax, I would consider not notifying HMRC of this foreign income.

Just because HMRC would like a Tax Return, does not mean they are entitled to one.

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By David Treitel
12th Sep 2013 12:17

An IRA distribution is NOT income. It might represent the proceeds of sale of US mutual funds; the gains on which might be taxable as offshore income gains.  A US pension plan (such as an IRA) has no special treatment under UK domestic law; unless the client elects to benefit from the US/UK tax treaty provisions; which can only be done by registering for self-assessment and claiming the benefit of the treaty in the white space.  If the registration for SA or the filing of the relevant UK return was late there may be automatic HMRC penalties.  Separately, a US return may be required and US tax may be payable, depending on facts and circumstances.

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By IvyJ
24th Sep 2013 16:32

Thank you for your replies.

Yes I was looking at their guidance for self-assessment.  The person is tax liable for the most recent tax year and needs to register for SA by the 5th October. However in the preceeding tax year they received an IRA distribution, did not declare it (not being registered for SA) AND their total income was below allowances (as per original post).

I was trying to find out what penalties (if any) might be expected by belatedly telling HMRC about the previous year's foreign income when registering for SA now.  Penalties for non-disclosure are based on a percentage of the potential lost income.  This implies that there will be no penalties when the tax owed is zero.  However can anyone point me to any additional penalties that might be levied when the income is disclosed?

I should have specified in my first post that it is an inherited IRA, received by a UK citizen and tax resident who is an NRA from the standpoint of the IRS. Article 17 of the double taxation treaty states that distributions from this IRA will be taxable in the UK (and in the UK alone).  There was no withholding at source so there was no need to submit an SA return to the HMRC to claim foreign tax relief.

The HMRC seems in places to imply that all foreign income must be disclosed.  However the legal framework specifically states that there is an exemption to the obligation to notify chargeability where there is "no net liability to income tax for the year".

I was going to recommend that the person discloses the earlier income when registering for SA, just to avoid any possible complications or nasty surprises further down the line.  I did though want to first have a heads-up as to what sort of penalties they might expect.  On the other hand if it is sufficiently clear that the HMRC is not going to be interested in this and is not going to issue any penalties for undisclosed income which falls below the personal tax allowance threshold, then I may tell them not to bother.

Thank again for your input.

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By Vaughan Blake1
24th Sep 2013 17:02

Keep it simple

No tax = no interest + no penalties + no need to file.

HMRC may chose to issue a notice to complete a prior year SATR.  In which case they can file within the relevant time limits.

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By David Treitel
24th Sep 2013 17:21

As an inherited IRA the beneficiary of the estate is required under US law to take RMDs (required minimum distributions) based on the decedent's circumstances.  From a UK perspective the distributions to my mind will be a combination of the capital inherited (streamed out as a series of future payments) plus growth within the IRA (again streamed out over a period).  The theory here is the same as the UK rule for a purchased life annuity. Consequently the capital inherited should not be taxable in the UK at all; rather only the growth - and thus only a modest part of each RMD will be taxable in the UK as foreign income. 

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By IvyJ
30th Sep 2013 20:57

Thanks again for your replies.

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By footprints
08th Nov 2013 09:41

Inherited 401k

Are the rules the same for an inherited 401k? I've been told my deceased fathers 401k will remain as a 401k with me as his beneficiary. I've been told by the 401k provider that as a non resident alien I can not roll it into an inherited ira as I am not resident in the USA. I explained it would not be in my name but in my deceased fathers name with me as his beneficiary. They said no!

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By footprints
24th Apr 2015 18:38

401k
If a 401k provider is changed by the company part way through a client taking distribution. Is there any change to how the IRS view the distribution? The client was advised by a tax advisor that so long as distribution was paid out over a period of 13 months then any taxes payable were due in the UK. However, the plan provider was changed part way through. Will the IRS want a tax form filed if the remaining balance is paid out in less than 12 months by the new provider. Thank you for any help offered.

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By footprints
24th Apr 2015 18:48

401k
The total period distribution will have taken will be 2 1/2 years.

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