TO STREAMLINE OR NOT TO STREAMLINE: THAT WAS THE QUESTION FOR THIS U.S. EXPAT
Currently, an estimated 8.7 million U.S. citizens are living abroad. (1) A growing number of these expats have begun to realize that their U.S. tax obligations did not end upon their change in residency. Most believe that their delinquency was an honest mistake, a result of non-willful conduct. If this is the case, the IRS Streamlined Program offers a great way to clean up a non-compliant history.The following is a case of a U.S. expat who discovered she was tax delinquent and asked us for the best way to come clean with the IRS. Her name has been changed to protect the innocent (or as we like to say, the non-willful).
MEET XINA PATTERSON.
Xina, a native Californian, moved to London at end of 2010 at the age of 32 for a work promotion at her UK-headquartered company, which included a healthy raise and pension benefits. Xina had worked for several years in San Francisco before the big move and had diligently filed her U.S. tax returns using Turbo Tax each year. Starting in 2011, she began working at her new London office. She purchased a nearby flat and opened a checking account at a local bank. Thinking her U.S. tax responsibilities ended upon her move, she stopped filing U.S. tax returns after 2010. In 2014, upon trying to open a savings account at a second bank, she was asked to fill out an IRS Form W9. She did so without thinking much of it. In 2015, during a casual conversation with a co-worker and fellow U.S. expat, Xina realized that she was in fact a delinquent U.S. expat taxpayer. She contacted us for advice.
OUR ADVICE FOR XINA.
Taking into account the overall circumstances of Xina’s situation, we advised her that while her case was not a “slam dunk”, she would be a very good candidate for the Streamlined Procedures because of the overall non-willful nature of her delinquency. If successful, she could avoid a number of harsh potential penalties, including tax and information return related penalties, FBAR penalties, and interest on top of the penalties.
While the solution seemed simple, Xina discovered that the implementation was, in fact, a complex exercise because of the various tax issues that would need to be analyzed in order to utilize the Streamlined Procedures in the best manner possible and to mitigate, or even eliminate, any payment of back taxes to the IRS. Some of the issues we addressed included:
- The Foreign Earned Income Exclusion – allowing us to exclude her wages and compensation from her U.S. tax liability
- The Foreign Housing Exclusion – allowing us to increase the amount of her excluded income due to housing expenses she incurred while living in London.
- The Foreign Tax Credit – allowing us to obtain credits for taxes paid in the UK.
- The Passive Foreign Investment Company (“PFIC”) rules – required in order to properly report her investments in UK ISAs.
- The US-UK Income Tax Treaty provisions – in order to defer income recognition with respect to her UK pension fund.
If you are a delinquent taxpayer living abroad, a number of options are currently available to you, including and in addition to the Streamlined Procedures. Our experts at Expat Tax Professionals are available to help discuss your options and implement the option that is best for you.
