US Taxes: US/UK Dual Citizen & UK Ltd. Co. Director

Hi,
I have a question about filing US tax returns in arrears in light of my changing circumstances since I have been in the UK.  Have searched through here a bit but not come across anything that covers each circumstance.

CIRCUMSTANCES
•   2001 – Came to the UK on a UK company sponsored work permit
•   2003 – Got married to a non-US citizen (Japan)
•   2004 – Last US tax return filed
•   2005 – Obtained HSMP visa and left the UK company that sponsored work permit.  Joined new company
•   2005 – First child born
•   2007 – Acquired ILR. Second child born.  UK Citizen
•   2008 – Left company that I joined in 2005.
•   2008 – Formed my own limited company and became an independent consultant working through that company as a Director
•   2010 – Acquired UK citizenship for me and first born.  Passports awaiting.

I have never previously owed any tax, so had become lax in filing and submitting my forms since being here after 2004.  Don’t envision owing any taxes up to 2008.  However, from 2008 & 2009, I am not sure.

As my circumstances have changed quite a bit since I first arrived, there are a number of questions now that I am looking to catch up on outstanding returns:

QUESTIONS
•   Filing Status – What is the appropriate Filing Status that I should use now:
o   Single;
o   Married Filing Separately;
o   Head of Household?

After getting married, in 2003 and 2004, I filed as “Single” since my wife is not American and does not have a SSN.  Thought it wouldn’t matter.  If anything, thought it could be more conservative in that my personal deduction would be less.  Thought I saw somewhere on here that “Married Filing Separately” was most appropriate and then writing in “Non-Resident Alien” under wife’s SSN.  Is that correct?  Should I included kids under "Dependents" as they have SSN?

•   Form 2555 asks about employer and employer address.  As my employer is my UK limited company and my registered address is my home address, would that raise any flags and be perceived as “self-employed”?  How would I account for the fact that this was formed part way through the 2008 US tax year and I was employed by my 2nd employer for before that?  Do I need to submit two separate forms – one for each employer and type of employment?  I do not consider this being “self-employed” but imagine it could be interpreted as such in the US.  Any other forms that need to be completed/submitted?

•   UK Dividend Income – For most of my income from my limited company, it is in the form of dividends.  Is there potentially any additional tax due on this income other than what I pay here? Can I just include on Form 1116 under Part II just the total USD equivalent in column (r) or required to report actual UK dividend income from my own limited company as a separate figure?

•   Personal Income vs. Corporate Income – Is only personal income received taxable and included on the 1040 and associated forms or does the corporate (limited company) income also need to be reported even though that is taxed separately here in the UK and unclaimed income to me personally – i.e., only disbursements to me need to be claimed?  I know someone who claims he only reports personal income received but not sure how he goes about reporting it on his tax forms.

Realise that this is pretty detailed but appreciate any guidance that anyone can offer who might have been in a similar situation.   Thank you.

You appear to have created a Controlled Foreign Company and be delinquent in filing FBARS, Forms 5471 and income tax returns. You will probably owe US taxes on the UK dividend income.  IRS penalties for the 5471 and FBARS could be substantial.  I suggest professional advice.

Fantastic.    

Had absolutely no idea about any of that.  Anybody know any good international tax specialists with dual US/UK personal and corporate knowledge?  Thought only personal annual income was involved.

To make things a bit more complicated, am in the process of contemplating a new contract role based in Singapore, either through UK limited company or establishing new entity in SG.  DTA exists between UK and SG but not US and SG, as far as I know but as UK citizen now, would that matter?

I had assistance on some tax matters that ended up being no big deal.  It sounds like you have a more complicated situation. 

The two groups that I found the most helpful:
http://www.gtn.com/ (for the US side of stuff)

and this partner in a UK law firm:
Emma Lampier ELampier@kingsleynapley.co.uk)
http://www.kingsleynapley.co.uk/ (for the UK side of stuff)

Thank you for the info and links.  Will certainly check them out.  Hope my experience mirrors yours in that ends up not being a big deal. 

Generally speaking a single firm that is both US and UK qualified can provide the required advice and both save costs and get optimum answers. The firm referred to in the UK are UK lawyers who will not typically handle UK or US tax compliance so may not be ideal where getting the compliance right is one of the main aims.

In the event of potential serious noncompliance, remember this: an accountant's records are not safe from subpoena. There are many excellent tax attorneys in the US familiar with noncompliance issues. If an attorney you retain hires an accountant on your behalf, reporting to him or her, that accountant's file is "attorney work product" and immune to subpoena.

While the IRS rarely proceeds criminally against accidental infringement and noncompliance, nor against trivial violations involving small amounts of tax, the new reporting requirements are so draconian that you may wish to proceed cautiously. There do not seem to be many possibilities for waiving penalties, although even now it seems the IRS does not normally go back more than 6 years where the tax recovery would be insubstantial.

Split nationality within families raises other issues too, especially with respect to inheritance (QDOT, transferee liability and other arcane issues). There are wildly differing views as to the reportability of certain UK institutions: think of trusts used in the UK in lieu of tenancy in common (or joint tenancy of more than four persons) for real estate.

A public forum is not the best place to resolve such matters, unfortunately.

Here in the UK much of a qualified accountants workpapers are subject to professional privilege so the issues described are only rarely of any consequence (ie they only become material in criminal cases).

Here in the UK much of a qualified accountants workpapers are subject to professional privilege so the issues described are only rarely of any consequence (ie they only become material in criminal cases).

Fair enough, but aren't we talking about IRS enforcement and a potential prosecution in the USA? I'm thinking of the particularly aggressive sort of IRS investigations that we saw in the UBS case, and in others where the IRS has served a subpoena on an officer of a foreign bank who happened to be visiting the US, or more frequently on the US branch of a foreign bank. Here are some examples from a footnote from a scholarly article that also cites some UK cases: United States v. Bank of Nova Scotia (In re Grand Jury Proceedings), 691 F.2d 1384 (11th Cir. 1982), cert. denied 462 U.S. 1119 (1983); United States v. Field (In re Grand Jury Proceedings), 532 F.2d 404 (5th Cir. 1976), cert. denied 429 U.S. 940 (1976). Compare the issue of self-incrimination risk in the context of the "same-sovereign" rule: United States v. Balsys, 524 U.S. 666 (1998); King of the Two Sicilies, (1851) 1 Sim. (N.S.) 301, 61 E.R. 116; Rio Tinto Zinc Corp. v. Westinghouse Electric Corp., [1978] A.C. 547. And see R. v. Spencer, 31 C.P.C. 162, 145 D.L.R. (3d) 344 (Ont. S. Ct., 1983) (Crown witness subpoenaed to give evidence as to customers and transactions of foreign bank), Murphy v. Waterfront Commission of New York Harbor, 378 U.S. 52 (1964) (effect of immunity granted by a different sovereign).

There's another issue: when a foreign country uses a tax treaty to ask for assistance (i.e., seizure of documents or collection of information) from the treaty partner, the target taxpayer does not necessarily have the usual defences.

Only the OP knows the extent of his or her risk. My own advice would be to look for an attorney-CPA in the USA. There is a professional association of attorney-CPAs; some of them are well-versed in dealing with nonfilers and potential targets of prosecution.

As you must know the biggest risk is where a (serious) nonfiler discusses his or her options with an accountant and then, despite the criminal liability, decides not to file. The press has published IRS press releases about recent arrests and convictions; here's one from the other day: http://article.wn.com/view/2010/04/23/UBS_tax_evader_cites_Holocaust_in_seeking_leniency/ What the press does not publish are stories about absconders who never again come within the jurisdiction of the IRS, and unlike, say, Norman F. Dacey http://www.uniset.ca/other/cs2/TCM1992-187.html , don't have US assets or income.

And aren't in a position to get a presidential pardon like Marc Rich. Who still can't visit the US because of state-law arrest warrants and civil liability. But he can't be extradited either. (His major offence wasn't tax evasion but Iran sanctions-busting dating from 1979-80.)

I speak to roughly a dozen delinquent filers every single week year round.  They mostly can't afford a US attorney; nor would most US attorneys understand US international tax, UK pensions, ISAs, premium bonds, child trust funds, dividend tax rates, high-tax kickout rules, the unconventional tax year and hundreds of other UK specific items.

I concur dual US/UK qualified.  A well qualified UK based adviser will "smell" any true risk in good enough time because s/he will know the issues and will be in the right time zone and speak the same language (and of course is bound by UK Money Laundering Regulations).