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US ExPats and the IRS – The 10,000 Foot Overview

The IRS needs your money. You might well be paying taxes in the UK, and you might think HMRC talks to the IRS, but you would be wrong. The IRS can ask HMRC for information on you, but that might not happen for years, and meanwhile, you are sinking deeper into the quicksand of IRS rules, and penalties.

US Citizenship

You do NOT need to renounce your US citizenship to avoid US taxes. There is a UK/US double taxation agreement as well as US laws that mean your UK sourced and taxed income is not further taxed by the IRS.

However, as a US citizen, you DO NEED to submit certain forms to the IRS each year. Failure to submit a form can lead to a hefty penalty, so looking for help with your US expat taxes is a much less extreme option than renouncing your citizenship.

Annual Form 1040 IRS Tax Return

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You MUST submit your annual tax return on Form 1040. You can do this online without any help from a professional, but professionals do remove the worry.

Foreign Bank Account Disclosures

FBAR disclosures are relatively simple: You just have to record the details of each foreign bank account and the maximum balance during the tax year. 

The IRS expects you to disclose details of any joint accounts and any other bank accounts where you are an authorised signatory. However, you send this information separately from your Form 1040.

The easiest way to disclose the required information is to file online, but you can apply for permission to file a paper FBAR Form.

Penalties for failure to disclose foreign bank accounts can be as high as $10,000 for each account for every year you don’t tell the ITRS about it.

State Taxes

You might think you have left your home state, but state legislators may think differently. You could still be liable to pay state taxes on your UK income unless you can convince your home state that you have cut all ties permanently.

Some states are especially reluctant to cut ties and make it very difficult for you to escape their tax net. If you were resident in California, New Mexico, South Carolina, and Virginia then expect problems in removing your state tax liabilities.

Affordable Care Act Exemption

Under the Affordable Care Act, every American must have health insurance and there are penalties to pay if you don’t have it. As a UK resident and taxpayer you are covered by the NHS, but you need to fill in a Form 8965 and attach that to your annual Form 1040 to remove the risk of an ACA penalty.

Third-Party IRS Filing

UK accountants will not be able to file your IRS paperwork on your behalf because they won’t have a US Taxpayer Identification Number (TIN). The only people who will have experience and expertise dealing with the IRS will be US certified CPAs.

There are American companies that operate online. Look for one that specialises in dealing with expatriate issues with the IRS and that uses only US-certified CPAs rather than one that outsources much of the work to offshore freelancers.

Removing IRS Penalties

There IS hope. 

There is a legal way to avoid any IRS penalties, even if you have not filed a Form 1040 and have not thought to complete a Foreign Bank Declaration FDBAR Form for several years.

The IRS has a system of Streamlined Procedures for Americans living abroad. If you do not have a pending IRS audit and have not previously applied for the streamlined procedures, then this could give you a total amnesty and penalty forgiveness, though you will still have to pay any tax and interest that you owe.

The Short Version

The IRS is never going to give up or go away. They WILL come after you at some point.

The sooner you start talking to them, the easier and cheaper it will be.

Paying a US tax submission service to submit all your IRS and Treasury Department forms should pay for itself in reduced or eliminated penalties. US-trained CPAs have all the specialist knowledge needed to negotiate on your behalf and they know how to get the IRS to forgive your sins without you paying any penalties.