In this blog, we compare the major tax amnesty programs in the United States and the United Kingdom that are available for taxpayers with unreported overseas assets and income.
While both countries offer programs to correct your tax affairs, amnesty offered in the U.S. is currently friendlier and more straightforward than the UK program.
Tax Amnesty in the United Kingdom
When it comes to correcting your tax affairs where foreign income or gains should have been reported but were not, the UK offers a voluntary disclosure program called the Worldwide Disclosure Facility (WDF).
The WDF is for individuals, companies, and trusts resident in the UK, which need to disclose offshore income, gains, or assets that have not been declared correctly to HM Revenue & Customs (HMRC).
Examples of offshore income include:
- Interest earned on non-UK bank accounts
- Dividends from shares held overseas
- Rental income from a non-UK property
- Gains from selling non-UK property or investments
- Income earned while working abroad but still a UK tax-resident
Since signing up to the Common Reporting Standard (the OECD initiative for automatic exchange of financial info to fight tax evasion), HMRC receives automatic data from more than 100 countries about UK taxpayers with accounts, property, or investments overseas. This means undeclared foreign income is far more likely to be detected than in the past.
Once HMRC has given you notice, the scope for reduced penalties is narrower. Acting before receiving notice from the HRMC can lead to a more favorable outcome. Therefore, voluntary disclosure via the WDF is strongly advised.
To use the WDF, you need to make a voluntary disclosure by registering your intention to disclose with the HMRC, then submitting your filings (including details of undeclared income and gains, tax and interest calculations, and a personal explanation statement). After registering your intention to make a disclosure via the Digital Disclosure Service, you generally have 90 days from the date HMRC confirms your registration and issues a Disclosure Reference Number (DRN) to submit your full disclosure, pay the tax, interest, and penalties.
The number of years you are required to report depends on the severity of the non-compliance. For offshore matters, the HMRC can extend the scope to 12 years, even for non-deliberate behavior (replacing the previous 4 and 6-year rules for careful and careless cases).
The WDF doesn’t eliminate penalties, but rather results potentially in lower penalties, depending on whether the non-compliance was careless, deliberate, or deliberate and concealed. This somewhat vague framework is a challenging aspect of the program.
Tax Amnesty in the United States
The main tax amnesty program in the United States is the Streamlined Filing Compliance Procedures, which are designed for delinquent individual taxpayers – those who are late or have never filed – who can certify that that their failure to previously report all income, pay all tax, and submit all required tax information returns, including FBARs, resulted from non-willful conduct. This relatively low threshold simply requires that your delinquency was not intentional.
There are two types of Streamlined Procedures, one for U.S. taxpayers residing outside the United States (the “Foreign Offshore Procedures”), and the other for U.S. taxpayers residing in the United States (the “Domestic Offshore Procedures”).
Under the Streamlined Foreign Offshore Procedures (for taxpayers residing outside the United States), the taxpayer is required to submit:
- 3 years of tax returns and information returns
- 6 years of FBARs
- Non-willful certification (Form 14653)
Under this foreign offshore program, the taxpayer avoids all of the penalties normally associated with delinquency (e.g., failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, FBAR penalties). The participant is required to pay unpaid taxes with interest.
The domestic offshore program (for taxpayers residing within the United States) bears a 5% penalty on the highest aggregate balance/value of one’s foreign financial assets (while the foreign offshore procedures have no such penalty).
The potential to avoid penalties completely under the foreign offshore program, and the clear penalty assessment amount under the domestic program, make the Streamlined program generally a friendlier and more straightforward program than its UK counterpart. The WDF is, however, broader in scope as it allows not only individuals, but also companies and trusts, to participate.
With global reporting schemes (CRS and FATCA) bearing down on taxpayers, it’s important to understand the options available to you if you are behind on reporting offshores assets or income. The availability of tax amnesty varies from country to country, so it’s crucial that you understand the program or programs that can apply to your particular situation.
