PRINCE HARRY MARRIAGE COULD MEAN IRS PEEK INTO ROYAL FAMILY’S AFFAIRS
When it comes to having personal family affairs break into the major media news cycle, there’s no family quite like the British royal family. In this regard, the world was abuzz this week with the news that Prince Harry is officially engaged to be married to Meghan Markle, a U.S. actress.
Now normally, if you were looking for the latest news on the British royals, the Expat Tax Professionals tax blog would not be the first source that comes to mind. So why are we tackling this topic in this week’s blog?
If the title of our blog hasn’t given it away already, Ms. Markle, like our clients, will soon have the unenvious tax status of a U.S. citizen living abroad, which as many of you know, comes with a number of particular U.S. tax and compliance obligations. As we see it, these obligations could very well give the IRS a peek into the financial affairs of the famously buttoned-up royal family.
WORLDWIDE TAXATION OF U.S. CITIZENS – EVEN ROYALTY
As a basic rule, U.S. citizens, even those residing outside the United States, are considered to be U.S. residents for tax purposes and are therefore subject to U.S. tax reporting on their worldwide income.
This is not to say that Ms. Markle will necessary owe the IRS any taxes after moving abroad. Even if she were to earn income while living abroad, she may benefit from certain provisions designed to prevent the double taxation of income (for example, tax in both the U.S. and the U.K.). For instance, the foreign earned income exclusion (FEIE) allows expats to exclude a certain amount of income earned abroad. Expats are also generally allowed to use foreign taxes paid as a credit against their U.S. tax obligation.
Nevertheless, even if these provisions were to eliminate Markle’s U.S. tax obligation, they do not eliminate her obligation to file a U.S. income tax return on an annual basis. This is because in order to claim the FEIE or foreign tax credit, she must file certain forms with a tax return. In some cases, a late filing of these forms could bar her from making these claims or subject her to IRS penalties.
INFORMATION REPORTING TO THE IRS – THE KEY ISSUE
Would the requirement for Markle to file an annual return necessitate IRS involvement in the affairs of the royal family?
The brief answer is – possibly yes. U.S. expats who hold accounts or other assets overseas may be subject to a number of specific filing requirements in the form of informational forms, such as the FBAR and the FATCA Form 8938. These forms ask for detailed information about the expat taxpayer’s assets and accounts, including when jointly held by another person.
Markle’s filing obligations could therefore include the requirement to report information to the IRS about her joint foreign accounts and assets, or in some cases, the financial dealings of her royal husband. If a failure to report these items is discovered, this could lead to the further involvement of the IRS into these financial affairs.
While all this potentially juicy financial information should in theory be kept confidential by the IRS, there is also always the possibility that leaks, either accidental or purposeful, could expose the royal family’s financial information to public consumption.
CITIZENSHIP RENUNCIATION AS AN OPTION
In order for Markle (and her future children) to escape the U.S. tax net, she may consider renouncing her U.S. citizenship, but this solution involves a number of unique tax issues, including the onerous “exit tax,” and could take considerable time to fully process legally.
You can read our recent article on CNBC.com for an analysis of the tax issues involved with citizenship renunciation:
http://www.cnbc.com/2016/05/17/exposing-the-hidden-tax-costs-of-renouncing-us-citizenship.html
Last year, a British politician, Boris Johnson, renounced his U.S. citizenship in a well-publicized case that exposed many to the issues of U.S. worldwide taxation, FATCA, and other expat-related challenges. Johnson was one of 5,411 individuals to renounce his American citizenship in 2016. In this regard, the political and social ramifications may be other aspects for Markle to consider before taking the drastic step of citizenship renunciation.
These and other tax issues are certainly not unique to the engaged royals, but their case may shine some new public light on the tax challenges facing U.S. citizens living abroad.
