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Changes to US tax: Tips and advice

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4th Dec 2013
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At the recent UK200 Group annual conference, Texan member Clint Bateman spoke about some of the key things UK accountants need to know about recent US tax developments. 

For many years, the US did nothing about offshore tax avoidance and it was easy for US expats to keep assets in Swiss bank accounts and hide income, explained Bateman. 

But in 2009, the States started an intense campaign against undeclared bank accounts, and since then, many thousands of people have admitted hidden accounts and paid “stiff” penalties, including the owner of Beanie Babies. 

More than 120 taxpayers and tax advisers have been criminally charged since the crackdown.

Outlined below are changes to income taxes, FBAR filings, the new FATCA laws and penalties. 

FATCA laws

In 2010, America passed the Foreign Asset Tax Compliance Act (FATCA), which means foreign financial institutions need to report information to the Internal Revenue Service (IRS) and becomes effective in 2014. 

This act applies to both US citizens and green card holders and has harsh consequences, including if foreign banks don’t comply, then they lose access to the US market. 

In addition, Bateman explained, taxpayers could face 30% tax withheld from dividends, stock, interest and stock sales and the discovery of wilful evasion will lead to penalties, prosecution and possible account forfeitures. 

If the institution in which the foreign account is held obtains a global intermediary identification number (GIIN), it does not have to withhold US tax on payments made - with no GIIN though, it must report a 30% withholding tax. 

One of the results of FATCA is that some smaller UK financial institutions have stopped opening accounts for US citizens, Bateman said: “Now that’s rude, and a little discriminatory.” 

FBAR filings 

Foreign Bank Account Reporting (FBAR) applies to all US citizens, green card holders and US corporations and entities with foreign bank accounts and can be done with the US Treasury. 

These filings are due annually on 30 June and cover foreign bank and financial accounts - including but not limited to pensions and finance policies. These must be filed if the aggregate value goes above US$10,000 at any one time. 

The filings are informational only, there’s no tax paid but there are very stiff penalties of US$10,000 for being late, said Bateman. This could also include a 50% forfeiture of the highest balance in the account for each year. 

There are several amnesty programmes in place, he explained further, but some are hard to qualify for and most have penalties involved. “The bottom line is, file your FBAR filings, and file them on time,” he advised. 

Income tax update

US citizens and green card holders need to file their income tax no matter where they live, Bateman said, and are taxed on their worldwide income. 

This includes, but isn’t limited to: Salaries, interest, business income, rents, royalties, pensions, miscellaneous income and are taxed at graduated rates, the maximum of which is 39.6%. 

Qualified dividends are taxed at 15% or 20%, long-term capital gains are taxed at the same rates and interest on municipal bonds is exempt. 

Those filing can also claim foreign tax credit on any income also taxed by the foreign country that they’re in and can exclude foreign earned income (FEI) or US$99,200 and as a result, many expats don’t owe US tax which has contributed to past low compliance. 

Bateman advised accountants to be aware of the tax treaty between the US and UK, which overrides the tax law. This wasn’t a factor in previous years, but as income levels have risen, Bateman said he finds it has come into play more and more. 

 

Do you have US citizen or green card holder clients? What have you found to be the most significant tax change in recent years?

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By David Treitel
06th Dec 2013 22:35

Given that the UK has several hundred thousand Americans living here, many UK accountants will have one or two of them amongst their current client base.

I am afraid that this report is incorrect in several respects. The US/UK tax treaty between the US and the UK does not provide many "overrides [to] the tax law". Instead it includes a saving clause that saves the right of the United States to tax its citizens in most circumstances as if the treaty does not exist. The video also suggests that "foreign" (e.g. UK) banks will be reporting directly to the IRS; which is factually wrong as the UK and the US have an inter-governmental agreement which instead means that the reporting will be made via HMRC.  The video also suggests that individuals without reasonable cause for being late could be fined $10,000 for late filing of each FBAR. Unfortunately that amount is not how the US authorities read the statute, so further advice on this obligation may also be prudent.

The key in most cases is for the UK adviser to ensure that the individual is fully US compliant (or possibly even think about ceasing to act) and that all US advice such as ownership of companies, the main home and investments are designed to optimize both US and UK tax positions.  Such advice is usually best given by specialist advisers based here in the UK who are familiar with typical UK and US inter-related tax issues and who are themselves regulated right here in the UK.

David Treitel | Managing Director | American Tax Returns Ltd

Enrolled Agent to the United States Internal Revenue Service

Accountant and Chartered Tax Adviser

The Old Exchange, 12 Compton Road, London, SW19 7QD

Tel: 020 3542 6330

Email: [email protected]

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By [email protected]
13th Dec 2013 02:38

I appreciate Mr. Treitel's comments.  I do feel it necessary to respond.

While it is true that the US/UK Tax Treaty has a clause that saves the right of the US to tax its citizens as if the Treaty did not exist, that right is, in practice, not enforced, in our experience.  In fact, Publication 901 - U.S. Tax Treaties, which is published on the official IRS website (www.irs.gov) contains a list of tax treaty positions applicable to the UK that match the positions outlined in the actual Treaty itself, which can also be obtained from the IRS website.  In our experience, we have a number of clients who benefit from lower taxes by claiming the Tax Treaty position, and have not had any of these position overturned upon audit.

Also, Mr. Treitel is correct in that the UK and US have entered into an intergovernmental agreement under which financial institutions in the UK report to UK Inland Revenue, who in turn will report dividend, interest, and other tax information to the US, when FATCA becomes effect. This was pointed out to the attendees at the Conference where my presentation was made.  So, I think it is important not to get lost in the mechanics of how the information is going to get reported, but understand that the information IS going to get reported under FATCA. 

Regarding the $10,000 late filing penalty for the FBAR form, Mr. Treitel is correct that the IRS may abate the penalty if they determine "reasonable cause."  However, the definition of "reasonable cause" is solely within their discretion, and it is well know among CPAs that recent years have demonstrated that IRS has tightened the "reasonable cause" definition, and are assessing more penalties.  Could it be they are trying to increase revenue???  

The bottom line is that if you are a U.S. Citizen living overseas, and are NOT current in your FBAR and Income Tax filings, you should seek professional assistance immediately.

 

Clinton F. Bateman, CPA

ABBM Group, Ltd LLP | 9575 Katy Freeway Ste 370 | Houston Texas 77024 USA

Telephone 713-552-9800

www.abbmgroup.com

[email protected]

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By David Treitel
13th Dec 2013 09:23

I am delighted that Mr Bateman and I are on the same page and on the same side; both helping Americans to comply with US tax and reporting obligations.  With over 25 years of US specialist knowledge and experience myself, we obviously have no disagreement at all.

It seems that my earlier reference to the US/UK tax treaty may however have been unclear. Many folks I have met quickly glance at the treaty and seem to imagine that it stops the United States from charging tax at all; and it was this myth that I was clarifying.

If the treaty is elected on a US return, the treaty modifies and ameliorates double taxation for Americans in only three ways.

It provides complete exemption from US taxation; but only in very limited circumstances such as for US social security pensions or alimonyIt limits the rate of some US withholding taxes, orIt allows one to pretend that some American source income such as bank interest and some capital gains are treated for US purposes as if they were foreign source; and therefore lets the United States give credit for UK taxation.

It is this last rule, known as the “resourcing” provision that is the most common and provides the most relief.  In common with other US tax advisers here in the UK each of these three provisions are well known and claimed frequently where relevant on the vast majority of US tax returns that we prepare.

As a business we speak with and help at least a couple of dozen folks each week who have never filed in the States; or have not filed for many, many decades. This is a normal part of not just our business, but of all US tax practices here in the UK.  While each set of facts will be different, most of these so called delinquent tax filers are able to get caught up without any history of IRS penalties being assessed.

I completely agree that accountants here in the UK with US person clients should take advice on the US tax position for themselves and for their practice. There is an excellent article on precisely this subject in the December 2013 edition of TAXline which I commend everyone to read.

David Treitel | Managing Director | American Tax Returns Ltd

Enrolled Agent to the United States Internal Revenue Service

Accountant and Chartered Tax Adviser

The Old Exchange, 12 Compton Road, London, SW19 7QD

Tel: 020 3542 6330

Email: [email protected]

 

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