US citizen tax treaty

US citizen tax treaty

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We have a UK resident, domciled and national who also holds US citizenship by virtue of birth. The IRS are requesting tax returns, which I understand they are entitled to as he is a US citizen, but they have also stated that the UK-US tax treaty does not apply to US citizens. No US tax is due because of the UK tax paid but any ideas why the convention might not apply?

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By lizzit
15th Feb 2012 19:13

US/UK treaty.

If you read the treaty, you will find the clauses that say it doesn't exempt US persons from filing and paying tax. If they're resident in the UK, the resulting tax usually works out to zero, but every so often you have UK tax-free events that are not US tax-free.  These include (but are not limited) to ISA income, sales of primary residences, and lump sum pension withdrawals.  In these circumstances, the US citizen is in for quite a rude shock.

Is your client doing all of the following?  

1) Filing the past six years (can be reduced to three if the balance due is small or nil) of income tax returns?

2) Filing the past six years of bank reports (FBARs)?

3) Requesting a Waiver of Penalties Under Reasonable Cause (vs the official OVDI programme)?

If your client is doing more tax years than noted in (1) and (2), or if someone has talked your client into OVDI instead of "quiet" disclosure, you'll want to get a second opinion to ensure that the client's best interests are being served.

Liz Zitzow

www.BritishAmericanTax.com

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By frustratedwithhmrc
16th Feb 2012 15:28

This is a lot of hassle that people sometimes go through

If the only reason that he has US citizenship is because he was born within the boundaries of the United States and he is to all intents and purposes UK domiciled and resident, then he might want to give some consideration to obtaining full UK citizenship (if he doesn't have it already) and getting rid of his US citizenship.

This is possible under the terms of the US Immigration and Nationality Act

"Section 349(a)(5) of the Immigration and Nationality Act (INA) (8 U.S.C. 1481(a)(5)) is the section of law that governs the ability of a United States citizen to renounce his or her U.S. citizenship."

I work with a number of US citizens who are resident in the UK and Europe and they all struggle due to the constraints placed upon them by the US IRS with regard to both the additional taxes and the regulatory filings (FATCA, FBARS, etc).

Equally, with the introduction of FATCA, they are being denied access to all but the most basic non-interest bearing bank accounts as non-US banks simply will not accept the regulatory overhead of dealing with US citizens (and thereby the IRS), as a consequence these non-US banks have been divesting themselves of US citizens.

If he doesn't need his US citizenship, he should probably get rid of it as it is more hassle than it's worth. This won't eradicate his additional tax liabilities up to the point of renunciation, but it will remove further tax and filing obligations after renunciation.

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By lizzit
16th Feb 2012 15:03

warning....

Don't give up US citizenship without first ensuring that the expatriation exit tax doesn't apply! He gets the tax advice and back taxes done first, then, based on that, the plan for expatriation is created and executed.

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