Tax returns and FBAR - streamlined procedure

Hello, I'm a UK citizen always resident in the UK, but my wife is a US citizen (been living in the UK >10 years). Before we had children she worked in the UK and filed tax returns, but after a few years' break she's returnined to work part time a couple of years ago, and was under the impression that her low income fell below the reporting threshold - however it appears that for "married filing separately" this is only $4000, which means she should actually have submitted tax returns. At the same time we discovered this, we found out about FBAR which we had not known about at all - and over the past few years we have had account balances over $10000 while saving a deposit for a house.

We understand that we should follow the "streamlined procedure" involving 3 years of tax returns and 6 years of FBAR submissions - question 1 is:

1. Is this right - does the "streamlined procedure" cover what we need to declare?

The tax returns are fairly straightforward and we don't think any tax is going to be owed, but in case anything slightly exceeds the standard deductions my question 2 here is:

2. Do my wife's UK National Insurance contributions count as taxation which can be offset against her adjusted gross income? Or pension contributions, or union dues?

The FBAR process is going to be a little harder, since we don't have records to hand going back 6 years and will have to request information from banks. Question 3 is:

3. We have read advice indicating that we are best off getting all the information together and submitting all the tax returns and FBARs at once rather than doing what we can now, and adding the earlier years' FBARs later. Is this right?

Finally, we have had a few savings accounts over the years - some in my wife's name, some in mine, and some joint. We have moved money between them to try to keep up with interest rate changes, prompting my final question 4:

4. Are transfers between accounts belonging to me and my wife in any danger of being classified by the IRS as income for either of us? Most/all of the money involved was earned by me and is now tied up in a house.

Very grateful for any links/advice to help us get this sorted out and back into compliance - thanks in advance.

Always a cause for consternation.

Before I go to your specific questions, you mention children (plural). If your wife meets the requirements for automatically passing USC to the children, the children are also USCs. Did these children have US Social Security numbers during the tax years in question? If so, and if your wife's income was not great, she may qualify as filing "Head of Household". I believe the threshold for HoH is higher than for "Married Separate", and may exceed her income, in which case filing would not have been mandatory.

If the above is not the case:
1. - The Streamlined Procedure is one option for her situation. BUT, please see [*A] below.

Your wife will likely qualify for FEIE (Foreign Earned Income Exclusion), or, as an alternative, she will have paid UK tax and that tax can offset US tax due by use of FTC (Foreign Tax Credits). There should be no need for the questions on union dues or NI contributions (you declare gross income), but let's continue.

2. - UK National Insurance contributions - No.

      Union dues - I'll take a stab at this, but warning, I may be wrong. No, unless she were to use "Itemised Deductions" (Schedule A) in which case she may possibly be allowed to use them (and it's here that I'm uncertain. I'm sure others will correct me.) It's unusual for someone in your wife's position to use itemised deductions. Most use the standard deductions instead.

      Pension contributions - You'll find different views on this, so I'll leave it to others to comment. The different reasons for either Yes or No (and both may be argued) can be slightly complex.

3. - You may utilise either method, but, assuming you will complete and file the delinquent tax returns soon, doing everything at once works quite efficiently. Subject to [*A].

4. - "In general" (and assuming the transfer of funds [gifts?] do not exceed form 3520 thresholds) the key reporting requirement is for your wife to report the balance, either at 31 Dec. or if higher during the year, for ANY account for which she has signature authority, on an FBAR (if aggregate total is over $10,000) and possibly form 8938.

[*A] If using the Streamlined method, your wife will have to sign a statement claiming the filling ommission was non-wilful. You have a complication in that your wife has, in the past, filled US returns from abroad, and therefore should have known of the requirement to file. This may render the "non-wilful" claim void.

(IMO) Given the situation [*A], it may be best to contact a dual qualified US/UK advisor prior to doing anything at all. They may well suggest others methods of coming back into compliance. Be careful, and make sure the advisor has your best "financial" interests in mind as well as your best "compliance" interests. Hint - a "quiet" filing might be preferable.

Make sure you understand all the options available, and their consequences, before proceeding.
   

First, thanks for taking the time to write such a helpful reply. Bottom line is this is looking more complex than I'd hoped (or imagined - having never had to deal with anything other than PAYE UK taxes!), and we'll be seeking professional advice.

Re: children, I believe they would qualify as USCs (this was how I found out about all these obligations, via a shared article on "accidental Americans") but have not had their births registered in the US. I'm yet to determine if we are obliged to register them, and if not then whether they could be the target of any enforcement activity. But I guess this is probably a lower priority than getting my wife's taxes/FBARs resolved.

1. I'll ask about the FEIE, but my wife's earnings have fallen within the UK personal allowance so no UK income tax has been payable. However I think for one tax year her earnings will work out as more than the standard deductions, so perhaps a small amount of US tax (maybe a couple of hundred USD) will be owed. We will be happy to pay it!

2. Sounds like it might be easier to just pay than try to argue it, but we'll leave that to our advisor.

3. Fingers crossed we get our old copy statements through soon.

4. Transfers won't exceed those thresholds, so all looks OK for just the FBARs. I don't know if they would have counted as gifts, I always thought anything we had was *ours* rather than mine or hers, and that wasn't affected by whose name a particular bank account was in. But I could imagine how other interpretations might exist.

On the topic of professional advice, I'm starting to read up on FATPs/CPAs etc, but is there an easy shortcut to knowing which type of advisor is likely to represent our interests most effectively? We're not really bothered about trying to minimise taxes owed or interest/late penalties, which we think is going to be limited to a small number of hundred USD in the worst case - far outweighed by peace of mind. The only really scary numbers are the (theoretical?) FBAR penalties.

Again, many thanks for helping me get my head around this.

Once your children have obtained their US social security numbers, it is most likely that your wife will receive refunds each year for child tax credits, so catching up is in your best interest.

In terms of selecting any tax adviser to assist with US tax matters, most UK based individuals will want to check that any proposed tax adviser is qualified with at least one professional accounting or tax institution in the UK as well as in the United States so that they know that the adviser is adequately regulated in the UK. Indeed, more broadly, for most UK based individuals there are often considerable advantages in having a UK based adviser who can jointly advise on both US and UK tax issues and (possibly) handle both sets of tax returns in the UK.

These include:
1. The client and the adviser being located in the same time zone.
2. Client documents and workpapers being held outside of the United States; which many people perceive as providing additional protection in the event of IRS investigations.
3. Advisers outside of the European Union are unable to offer the protections to clients provided by the UKs Proceeds of Crime Act, which requires all tax professionals throughout the UK to be regulated and supervised for anti-money laundering protection purposes. Here in the UK it is a criminal offence to offer any tax preparation or advice unless the adviser is supervised. Quite unlike within the EU, there is no requirement for mandatory regulation of tax advisers in most of the United States.
4. The fact that although there are roughly one million paid tax professionals within the United States, that there are naturally only very few amongst these who understand enough about the US reporting of foreign based taxpayers.
5. Most tax advisers outside of the UK are not bound by UK ethical standards, which set out fundamental principles of integrity, objectivity, competence and care, confidentiality and behaviour.
6. The opportunity in the unlikely event that things ever go wrong to get issues addressed through a supervisory body that is closer to the client than an adviser located several thousand miles away.

Re: children, I believe they would qualify as USCs (this was how I found out about all these obligations, via a shared article on "accidental Americans") but have not had their births registered in the US. I'm yet to determine if we are obliged to register them, and if not then whether they could be the target of any enforcement activity.

If citizenship transferred automatically to the children via your wife, it will not matter if their births have been registered or not, they will still be US citizens subject to all obligations. Be aware, unless things change between now and when they reach 18 years of age, any male child will have to register in the US Selective Service system (the military draft).

Presently, if they were born in the UK, did not have the births registered with the US Embassy, and never have a US passport or SSN, they may be flying 'below the radar' regards the US knowing about them. All US citizens, legally, should have a US Passport when entering the US. You and your wife will have to determine how you wish to handle this situation.

4..... I don't know if they would have counted as gifts, I always thought anything we had was *ours* rather than mine or hers, and that wasn't affected by whose name a particular bank account was in. But I could imagine how other interpretations might exist.

For US reporting purposes (FBAR FinCEN 114, 8938, etc.) anything that your wife has signature authority over is 100% hers (in $ monetary value), even if it's listed as a joint account. Joint accounts are listed as such on FBARs and 8938, and simply her accounts on schedule B.

Thanks again - yes I understand the US would consider our children to be citizens, and we plan to be ready to register fully or renounce citizenship around their 18th birthdays, depending on their wishes, which should make the selective service requirement clear at the time. In the meantime I'll bear your advice on passports for entry to the US in mind!

On the joint accounts, we're going to ensure we report everything she has authority over, including Child Trust Fund accounts. In the longer term, we plan to remove her authority from most/all of these, if only to simplify future submissions (in the event anything happened to me it would be a simple matter to get such authority reinstated).

As per your initial advice, we've contacted a couple of UK-based US tax advisors to work out how best to get back up to date. We should have all the tax forms done and the information ready to go into the 114s in the next week or so, just need the professional advice on how best to get it submitted.

Thanks again!

It is the PFIC tax on the child trust funds which will make these returns especially complicated. The children will likely owe US tax, so you will want to ensure that your children file their own US tax returns to report their own PFIC income and assets and possibly pay US tax.

I might be wrong, but I don't think PFIC would apply - they're cash Child Trust Fund accounts which are basically savings accounts, and only have a few hundred pounds in each of them. Is this really a tax liability?

I have no intention of taking any immediate action to register my children in the US or file tax returns on their behalf, but it's useful to know that investment accounts might be a potential minefield - thanks.

Great - in that case you'd declare the interest in the kiddie tax form on the US citizen parents' US tax return. The account would be in the parents signature authority section on the FBAR, so you could not stop mentioning the children to the US government in these circumstances.   

The kiddie tax form is only filed if the kids need to file a tax return in the first place (and then it is an election).  There would be no need to file a tax return for the kids if they only have a few hundred pounds in each of the child trust funds.

I will check and confirm with our financial advisor when we discuss all of this, but my understanding is we don't need to file their income anywhere. We might have to report on my wife's FBAR return *if* her designation on the account counts as her having signatory authority regarding "disposition of funds" - since she can't withdraw the money, she just keeps address details etc. up to date.

In any event, writing their names on an FBAR return is perhaps not the same as asserting that they are her biological children and/or USCs. If it turns out to have that effect then so be it - I'm not trying to actively hide anything, but I don't see that I'm under any obligation to voluntarily subject myself to yet more paperwork!

(When we dealt with the IRS many years ago, I was offered the "opportunity" to get an ITIN and file jointly with my wife. It didn't sound appealing then, and doesn't now!)

Sorry if any of the above replies came across as prickly and defensive - I'm finding this a frightening and upsetting situation and I suppose I'm trying to keep the scope of what we have to do as simple as possible. But we will have to do what's required, not what I'd like.

Initial contact with tax advisors has been less than reassuring. Responses so far have been very quick to advise that the streamlined procedure is suitable for us and that they can fill in tax returns and FBARs for us (for £££). So far nobody's engaging with the critical issue of whether we can establish non-wilful conduct, and if not then what the options, pros and cons are. It may be that I'm not looking for the right kind of advisor - if anyone has any suggestions of what to search for to find the people we need, I'd be grateful if you could share them.

(guya and theOAP's lists of things to watch out for are helpful, but it seems I could use some further advice in narrowing down the field)

I'm finding this a frightening and upsetting situation....

That's a normal response. The trick is to tackle this in a positive manner and not let it frighten you. I agree, that's easier said than done.

Initial contact with tax advisors has been less than reassuring. Responses so far have been very quick to advise that the streamlined procedure is suitable for us and that they can fill in tax returns and FBARs for us (for £££). So far nobody's engaging with the critical issue of whether we can establish non-wilful conduct, and if not then what the options, pros and cons are.

Make sure you are talking to qualified advisors who have handled the Streamlined Procedures before. Don't be afraid to challenge them. Ask how many they have done in the past and if have they handled returns with these circumstances.

Here's the form that will be required:

https://www.irs.gov/pub/irs-pdf/f14653.pdf

Ask them, given your specific circumstances, how they will answer the last section (starting with: Provide specific reasons for your failure to report all income, pay all tax,.......It's the bit in bold).

It may be they feel they will be able to provide an adequate response. The wording is important. They may feel they are able to answer, given your specific circumstances, with a satisfactory solution. As we said initially, Streamlined may be an option for you. That's why they are the pros.

Ask them what the consequences are if the IRS does not agree. They should be able to answer the question. Remember, you're interviewing them, and you must feel comfortable with their services. That's why we suggested contacting a qualified advisor. Be wary of the low cost 'tax return mills' who may file hoping it goes through unnoticed.

EDIT TO ADD: You may be able to do the FBAR filing yourselves.

Check this out:

http://www.forbes.com/sites/stephendunn/2014/07/20/all-you-need-to-do-is-file-your-delinquent-fbars/#3aef0b532e24

If you don't owe any tax I believe you can just file the delinquent FBARs - no penalties, n streamlined procedures.

Check this out:

http://www.forbes.com/sites/stephendunn/2014/07/20/all-you-need-to-do-is-file-your-delinquent-fbars/#3aef0b532e24

If you don't owe any tax I believe you can just file the delinquent FBARs - no penalties, n streamlined procedures.

This presumes that the returns reported every penny of income correctly in the first place...