Are we being conned about UK pensions and the IRS?

I finished our tax return this week. It was relatively simple as these things go for retirees, as the only issue was whether to take a treaty position and exempt DH's UK state pension (all $5009 including the Christmas bonus and the Winter Heating Allowance).

As some of you know, I have spent hours researching this, and in the end, because of other things going on in our life, I decided to just call it all taxable and pay the Feds. We do NOT have enough UK income to get a tax credit this year so we lose big time. And it hurts.

Sorry, but I am of the view that we are let down by Congress and tax professionals, as they do NOT want to be responsible for a client having to pay penalties and interest. Therefore they err on the side of caution because they can't get a definitive answer from the IRS and don't want to make a stand (well, most don't). And for me, hiring a professional wold have cost more than just paying tax that we might not owe.

But when does the IRS review a return and say, "excuse me, Mr/Mrs TP, we are send a refund because you declared more income or you were entitled to a treaty-based position".....probably...never??? And the professional community contributes to this because for far too many, it's anything for a quiet life, and better to tell you that you need to pay more than risk the wrath if your assumptions are deemed incorrect by whatever poorly trained IRS drone happens to by doing the data entry and kicks you out for a closer look.

Primary fault - Congress
Secondary Fault - Tax 'professionals'
Victims - we lowly taxpayers who are just trying to conserve our retirement and other funds and still meet our obligations as US citizens.

here ends the rant of the day

But when does the IRS review a return and say, "excuse me, Mr/Mrs TP, we are send a refund because you declared more income or you were entitled to a treaty-based position".....probably...never??? And the professional community contributes to this because for far too many, it's anything for a quiet life, and better to tell you that you need to pay more than risk the wrath if your assumptions are deemed incorrect by whatever poorly trained IRS drone happens to by doing the data entry and kicks you out for a closer look.

Primary fault - Congress
Secondary Fault - Tax 'professionals'
Victims - we lowly taxpayers who are just trying to conserve our retirement and other funds and still meet our obligations as US citizens.

here ends the rant of the day

Well put.

The IRS is always non-comittal in it's answers that involve particular foreign investments such as SIPPs. They'll say things like "if a SIPP qualifies as a pension as defined under Article, yada, yada then", leaving you no better off than before you asked the question. IMHO tax professionals interpret the tax treaty in a conservative way to protect themselves, keep things complicated so we remain dependent on them and because the interpretations are often geared to the needs of high net worth people rather than the regular tax payer.

When it comes down to it in the case of a SIPP I believe that making a treaty claim or not making the claim and filing the 3250 etc are both correct. Which way you choose to go will depend on your future plans, tax rates and how complex you want your taxes to be. If you will be moving back to the USA and will be in a high tax bracket in retirement treating a SIPP as a foreign trust might be advantageous as you can build up a large US tax free basis and the SIPP distributions will be free of UK tax.