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Remain Compliant to Retain Passport
Nomaan Ilyas of Frontier Group highlights a key issue for Americans Abroad
Tax compliance has been a pertinent headline issue under the spotlight in recent times in both the UK and the US, requiring individuals to bring their tax affairs up to date on both sides of the Atlantic.
The Fixing America’s Surface Transportation Act (FAST Act) requires the IRS to notify the State Department of people who owe more than $51,000 in back taxes, penalties and interest. Failure to pay back the taxes can potentially result in the State Department to deny, refuse renewal or even in some more severe cases, revoke their passports. In an article by the Wall Street Journal, they reported that at least 362,000 US citizens are affected by this policy and the IRS are in the process of informing the State Department of these individuals.
In 2012, the IRS introduced the Offshore Voluntary Disclosure Initiative to assist taxpayers to reduce their tax penalties. The 2012 OVDI mirrored its predecessor 2011 OVDP which followed on from the original 2009 OVDP, however, the maximum “FBAR-related” penalty rose from 25% to 27.5%. Participants of the OVDI must file all original and amended tax returns as well as include payment for back taxes and interest for up to eight tax years, not to mention paying accuracy-related and/or delinquency penalties. However, due to significant decrease in the number of participating taxpayers, the IRS has announced that the Offshore Voluntary Disclosure Initiative will close in September 2018.
Is all hope lost?
In a word, no. The US Streamlined Foreign Offshore Compliance Procedure was introduced in June 2014 to assist non-resident US taxpayers whose foreign account non-compliance was “non-wilful” and is far less onerous and expensive compared to the various OVDIs we have witnessed. This consists of amending or filing for the first time the last three years of US tax returns to report earnings from foreign assets, paying the necessary tax and interest as well as filing and/or amending previous six years of delinquent Foreign Bank Account Reports (FBARs). The operative term to note here is that this procedure will only be applicable to “non-wilful” individuals, an observation which is determined and judged by the IRS on a case by case basis.
HMRC: "Requirement to Correct" facility
Additionally, there is a final opportunity to correct your affairs with HMRC, potentially with no penalties! HMRC introduced the Requirement to Correct (RTC) statutory obligation for taxpayers with overseas assets to correct any issues with their historic UK position. Failure to comply with this regulation, individuals will face punitive financial penalties and potentially other severe sanctions. HMRC wants all taxpayers who have or who had any offshore financial connections (including those who consider themselves to be non-UK domiciled and/or non-UK resident) to review their UK tax affairs to ensure that all tax returns are correct. Furthermore, taxpayers should ensure they submitted tax returns for all years for which they owed tax on income or gains. Originally, taxpayers had to disclose to HMRC of their intention and provide information of their UK tax affairs before the deadline of 30 September 2018. HMRC have recently updated their guidance and are allowing taxpayers to notify HMRC of their intention to disclose via HMRC’s Worldwide Disclosure Facility by 30 September 2018. If the process is completed within 90 days of HMRC’s acknowledgement, further penalties can be avoided. Previously, all corrections were required to have been made by 30 September 2018.
What to do next?
The main takeaway from this article is that both the HMRC and IRS have taken these matters very seriously and is paying very close attention to American expats living outside of the US. In light and spirit of the FAST Act, we would suggest the best course of action is to Act FAST and contact your tax adviser before it’s too late.
The article was written by Nomaan Ilyas, Managing Director of Frontier Group, a firm of advisers specialising in US,UK and International Tax return preparation services and advice.