In light of the global development and implementation of information-sharing legislation (for instance, FATCA which mandates financial entities to disclose details about US account holders to the IRS), maintaining accurate and current tax affairs has become increasingly crucial.

Over the last ten years, the IRS has heightened its scrutiny of US citizens residing abroad, enforcing strict adherence to tax returns and information returns filing, along with accurate declaration of all foreign accounts and assets. Consequently, numerous individuals are realising that their filings are not up-to-date, prompting them to contemplate voluntary disclosure.

The Implications of Not Filing Your Tax Returns

Neglecting to declare a foreign bank account or failing to file US tax returns can lead to severe repercussions, possibly necessitating a voluntary disclosure.

Fortunately, Xerxes Associates LLP is adept at guiding clients through their voluntary disclosure alternatives, encompassing streamlined compliance procedures and voluntary disclosure programmes.

If you identify as a US person – which includes citizens, Green Card holders, and those meeting the substantial presence criterion – possess a non-US bank account either in the UK or another nation, and haven’t filed a FBAR or US tax return, it’s probable that there are filing requisites you have overlooked. Moreover, companies and trusts are subject to additional reporting requirements.

Navigating Late Tax Return Filings

At Xerxes Associates LLP, we excel in assisting individuals who haven’t previously filed the necessary US tax and information returns. We empathise with the potential distress and anxiety stemming from unintentional errors and the hefty fines levied for late submissions. Allow us to support you in this endeavour.

We are always open to conducting a preliminary discussion concerning voluntary disclosure, analysing your specific circumstances and exploring the potential solutions, without any commitment from your side.

Being dual UK and US practitioners based in the UK, we are well-versed with the intricacies of UK taxation and can adeptly assist you with the necessary disclosures.

IRS Streamlined Foreign Offshore Procedures

In 2014, the IRS broadened the scope of the streamlined filing compliance procedure, facilitating overseas Americans to submit overdue US tax returns, a scheme initially launched in 2012. This initiative permits delinquent taxpayers abroad to come into compliance without facing penalties and additional charges, with a more inclusive eligibility criteria and the abolishment of all penalties linked to late filings or payments.

For the majority of individuals reaching out to us, this streamlined procedure tends to be the preferred pathway. This IRS-approved procedure is generally accessible to all taxpayers, provided they haven’t been under any prior or ongoing civil or criminal investigation by the IRS, and can affirm their non-wilful actions. It’s vital to acknowledge that the IRS may cease this procedure at any moment.

We welcome the opportunity to review your case and determine the likelihood of your eligibility for the streamlined procedure, and to discuss potential waivers concerning penalties and necessary filings.

Voluntary Disclosure Process

Individuals uncertain of their non-wilful omissions and hence, possibly ineligible for the streamlined procedure, the IRS still offers a voluntary disclosure pathway.

Since the closure of the previous offshore voluntary disclosure programme in September 2018, the current approach grants more latitude to IRS agents in determining suitable civil penalties. This now encompasses a potential 75% tax liability penalty for tax returns and civil penalties for deliberate failure to file FBARs, although exemptions might be applicable in extreme cases.

Engaging in voluntary disclosure necessitates an initial criminal pre-clearance with the IRS Criminal Investigations, followed by submission of returns and agreement on taxes and penalties with the IRS Large Business & International division.

This method might seem more punitive, but IRS agent discretion allows for penalty mitigation under specific circumstances. In all scenarios, it presumes complete cooperation from the taxpayer and a mutual agreement with the IRS regarding taxes and penalties.

Expert Assistance with Late Filing Services

Understanding the strain of lagging in your US tax commitments, we at Xerxes Associates LLP are equipped with the expertise to help US expats become up-to-date with their filings. For further information on your obligations or assistance in determining the most suitable options, contact us today or submit an enquiry online.

Contact us via www.xerxesllp.com or fill out our contact form to discuss your expat tax situation with us.

It’s common knowledge in the realm of expat taxation that U.S. citizens residing abroad encounter a range of unique tax challenges and opportunities. This holds particularly true for self-employed expats, as their income may be subject not only to U.S. income taxes but also U.S. self-employment taxes, including social security taxes, depending on the circumstances.

In this blog post, we will delve into the fundamentals of the U.S. self-employment tax system, outline the key tax exemptions, and highlight practical considerations that self-employed expats should bear in mind to minimise their overall global tax burden.

Self-Employment and Social Security Taxes on Income for Expats

According to U.S. tax law, if you are self-employed and your net earnings from self-employment amount to $400 or more (a relatively low threshold), you are required to:

File Schedule SE

Pay self-employment tax, which encompasses Social Security taxes The IRS categorises individuals as self-employed if they own their own business or work as independent contractors. It’s important to note that self-employment tax differs from income tax. The self-employment tax rate stands at 15.3% of net earnings, consisting of a 12.4% Social Security tax and a 2.9% Medicare tax on net earnings.

For the tax year 2022, the Social Security portion applies to the first $147,000 of earnings, increasing to $160,200 in 2023. Additionally, an additional 0.9% Medicare tax may be applicable if your net earnings from self-employment exceed specific thresholds. It’s worth emphasising that even if you are self-employed abroad, you are still liable for U.S. self-employment taxes on foreign earned income that is exempt from income tax due to the foreign earned income exclusion.

The Role of Social Security Totalization Agreements

Social security totalisation agreements between the United States and numerous foreign countries can prevent individuals from being subject to self-employment taxes in both nations Totalisation agreements, akin to tax treaties, are designed to address social security and Medicare taxes rather than income taxes.

These agreements serve two primary purposes:

Eliminating issues of double social security taxation

Establishing provisions for protecting social security benefits for individuals potentially subject to two social security systems

In summary, if you are self-employed abroad or earn income abroad while paying social security taxes to another country that has a totalisation agreement with the United States, you are unlikely to be required to pay self-employment taxes to the U.S.

A comprehensive list of countries with totalisation agreements can be found here: https://www.ssa.gov/international/agreements_overview.html

Planning Strategies for Self-Employed Expats

The imposition of the self-employment tax, in addition to income tax, can have a significant or even devastating impact on a growing business. This is particularly true for those residing in countries without a totalization agreement, as it could result in individuals being subject to double self-employment taxation.

For this reason, tax planning is crucial to reduce self-employment taxes for expat citizens within the bounds permitted by U.S. and local tax systems. Effective planning often involves establishing a company structure, which, on one hand, can lower self-employment taxes but, on the other hand, may present various tax and reporting pitfalls for the uninformed.

Our recommended approach is to tailor a strategy based on your overall circumstances, including your country of residence and its tax regulations, as well as your present and projected financial situation, such as gross and net profits and income sources. By evaluating different company structures from a tax perspective, we can analyse and determine the optimal structure for you and your business.

Taxation processes can be confusing, but Xerxes Associates are here to assist.  Contact us via www.xerxesllp.com or fill out our contact form to discuss your expat tax situation with us.

In a positive development for the American expatriate community, the U.S. Supreme Court has delivered a ruling that favours taxpayers and limits the scope of FBAR (Foreign Bank Account Report) penalties. This decision not only significantly reduces the proposed penalties imposed on taxpayers but also establishes an important precedent for calculating FBAR penalties going forward.

Understanding FBAR Obligation and Penalties

The FBAR obligation arises when the total value of an individual’s foreign financial accounts exceeds $10,000 at any point during the calendar year. The FBAR, also known as FinCEN Form 114, must be filed electronically using the BSA E-Filing System, administered by the Financial Crimes Enforcement Network (FinCEN) under the U.S. Department of the Treasury.

Failure to file an FBAR due to negligence or a “non-willful” violation can result in a penalty of $10,000 per account, per year, unless reasonable cause can be established. Conversely, a “willful” failure to file can lead to civil penalties equal to the greater of $100,000 or 50% of the balance in each unreported account, and in certain circumstances, even criminal penalties may apply.

US Supreme Court’s Verdict on FBAR Penalties

In the case of Bittner v. United States (No. 21-1195, decided on February 28, 2023), the U.S. Supreme Court ruled that the $10,000 penalty for non-willful FBAR violations should be applied per form rather than per account. The decision was reached by a narrow majority of 5-4, overturning the previous ruling in favour of the IRS by the U.S. Court of Appeals for the Fifth Circuit. The Bittner case itself witnessed a substantial reduction in the penalties imposed, from $2.72 million to $50,000, due to the Supreme Court’s verdict.

Implications of the Supreme Court’s Decision

The Bittner decision provides much-needed clarity and sets a precedent for the IRS in applying penalties for non-willful FBAR violations. However, tax practitioners have expressed concerns that this ruling may prompt the IRS to more actively pursue and impose higher penalties for willful FBAR violations. It would have been beneficial if the Supreme Court had addressed the specific criteria for differentiating between willful and non-willful violations. In the beginning of the decision, the Court refrained from delving into this matter, stating, “What, if any, mens rea the government must prove to impose a ‘non-willful’ penalty is not before us.” Notably, lower courts have consistently adopted a broader interpretation of “willfulness” for civil FBAR violations, encompassing recklessness and willful blindness, rather than limiting it to intentional violations used in criminal cases.

Taxpayers can find solace in the fact that the burden of proof for civil FBAR penalties rests with the government. The government must establish liability for the civil FBAR penalty by a preponderance of evidence, meaning it must demonstrate that the event was more likely than not to have occurred.

Despite the favourable U.S. Supreme Court decision, taxpayers with foreign accounts should remain vigilant and ensure compliance with FBAR requirements to avoid penalties altogether. Being aware of and fulfilling FBAR obligations from the outset is crucial to preventing penalty issues.

Taxation processes can be confusing, but Xerxes Associates are here to assist.  Contact us via www.xerxesllp.com or fill out our contact form to discuss your expat tax situation with us.

Working as a US expat in the UK can be an exciting opportunity, but it also comes with its own set of tax implications. In this article, we’ll explore some of the tax benefits available to US expats working in the UK, including the Foreign Tax Credit, the Foreign Earned Income Exclusion, and the UK-US tax treaty.

Foreign Tax Credit

The Foreign Tax Credit (FTC) is a tax benefit that allows US expats working in the UK to claim a credit against their US tax liability for any foreign taxes paid on their UK-sourced income. This credit is designed to prevent double taxation, where the same income is taxed in both the US and the UK. The FTC is generally available to US expats who pay taxes in the UK, but there are some restrictions and limitations to be aware of.

To claim the FTC, US expats must file Form 1116, which details the amount of foreign taxes paid and calculates the credit. The credit is limited to the amount of US tax that would be due on the same income, and any excess credit can be carried forward or back to other tax years.

Foreign Earned Income Exclusion

The Foreign Earned Income Exclusion (FEIE) is another tax benefit available to US expats working in the UK. The FEIE allows US expats to exclude a certain amount of their foreign earned income from US taxation. For tax year 2021, the maximum amount that can be excluded is $108,700.

To qualify for the FEIE, US expats must meet either the physical presence test or the bona fide residence test. The physical presence test requires US expats to be present in a foreign country for at least 330 full days in a 12-month period, while the bona fide residence test requires US expats to establish a bona fide residence in a foreign country for an uninterrupted period that includes an entire tax year.

UK-US Tax Treaty

The UK-US tax treaty is a bilateral agreement between the UK and the US that aims to prevent double taxation and promote trade and investment between the two countries. The treaty covers a range of tax issues, including income tax, capital gains tax, and estate and inheritance tax.

Under the treaty, US expats working in the UK may be eligible for certain tax benefits, such as reduced withholding tax rates on dividends, interest, and royalties. The treaty also provides for the resolution of disputes between the two tax authorities and contains provisions to prevent tax evasion and avoidance.

US expats working in the UK have several tax benefits available to them, including the Foreign Tax Credit, the Foreign Earned Income Exclusion, and the UK-US tax treaty. These tax benefits can help US expats reduce their US tax liability and avoid double taxation. It’s important for US expats to understand the rules and regulations governing these benefits and to seek professional advice if necessary.

Xerxes Associates LLP work closely with US and UK expats from all different backgrounds, circumstances and occupations as well as high-net worth individuals in order to help them through the complexities of US and UK tax compliance requirements (tax imposed on expatriates). If you have a query or would like a friendly no obligation chat about your requirements then please get in touch and we shall be happy to assist you.

Contact us via www.xerxesllp.com or fill out our contact form to discuss your expat tax situation with us.