Accidental American relative, should they use streamline process, or wait?

Hi, really hoping for some help here as I have been asked by a relative, who is an accidental American and who has just woken up to US filing and FATCA requirements, to help them out. They have never filed a US tax return, but are a low earner so unlikely to have income tax to pay. The big problem is they have sensibly for many years been investing in Stocks ISAs and some unit trusts into funds that are PFICS. These have over time become pretty substantial and from what I understand could be due for a large amount of US tax even though all gains are unrealised.

I’ve been doing some research and at the moment everything seems to point to the fact that they should go down the streamlined procedure, pay taxes due and ultimately give up citizenship to stop what feels like theft by the IRS. However i’ve Seen lots on here about various calls for the US to move to CbT and suggestions that FATCA breaches gdpr etc. So am wondering whether my relative should hold tight for now rather than risk paying a huge tax bill on unrealised investment gains, only to find that the legislation driving it is suddenly repealed. However if it isn’t and the streamline procedure is removed they could be in an even worse position!

Any insights would be hugely helpful as I don’t want to give them bad advice.

Thanks.

Let's give the relative a name. Let's call him Tom.

The first question is on what basis does Tom believe he has a claim to US citizenship?  This is always the first question. If Tom is not a US person he has no need to care. If he is a US person he is subject to all of the laws of the United States. Income tax is only a very small part of that body of law.

A Facebook group for UK accidentals has been set up within the past few days. https://m.facebook.com/groups/1785562104905613?multi_permalinks=1786136338181523&notif_t=group_activity&notif_id=1528060395017424&ref=m_notif Fabien Lehagre from the French accidental Americans group is now reaching out to British accidentals to expand the lobbying efforts which have been very successful so far.

Accidental Americans should not enter the US tax system. Think first and do not take any action that is founded in fear and panic. You are not alone. We can defeat this gross human rights injustice.

Thanks for the Facebook link LionHeart, I will take a look at that.

Guya, thanks also for responding. My relative has a US passport and a social security number, having been born there but leaving aged 3. They did go back and work there for a few months as an 18yr old, but were paid by a UK company and were not registered for tax locally. They lived in Singapore from the age of about 3 to 8, and have been a resident in the UK since then and have a UK passport.

The income tax issues are of little concern as they wouldn't owe much if anything. It is FATCA and the fines for non compliance that are scaring them, particularly with their stock and shares ISAs.

Any other thoughts much appreciated from people on here. Thanks.

The options:

1) Relinquish US Citizenship - unlikely available since born a dual national (?) but did not relinquish at 18 years of age and instead has a US passport which was used to allow work in the US for a period of time after 18. There remains a cost of $2,350 (currently) even if possible.

2) Renunciation with compliance - Become compliant (5 years) and then renounce according to guidelines thus avoiding "covered expatriate" status. Minimum cost of $2,350 (currently) plus any cost associated with becoming compliant.

3) Renunciation without compliance - US citizenship can be renounced, and is not dependent on becoming US tax compliant, but leaves the individual with "covered expatriate" status. Minimal cost is $2,350, but covered status will remain forever with possible consequences.

4) Full US tax compliance with the intention to carry forward US citizenship leaving the ability to travel/work/live in the US in future. Cost will be any associated with becoming compliant.

5) Continue to be non-compliant. (See LionHeart post above - reply #2)

Only the individual can/should decide after much research and thorough consideration of the options. The overriding decision is "does the individual ever intend to return to the US permanently in the future?".

6) The French Senate and the EU Commission have both questioned the treatment of accidental Americans as well as dual US/EU citizens. This creates a certain amount of pressure on the US but it is unlikely - at present - to alter US taxation of its citizens living in the EU. Only the US can change how it taxes its citizens, and neither France nor the EU can change that. (See 8 below)

7) There may be, by the end of June 2018, proposed legislation in the US to change the basics of taxation of US citizens resident abroad. It may cover special treatment of accidental Americans - but more likely it will propose reduced reporting/compliance yet retaining some degree of both. We'll have to wait to see the actual Bill, if such a Bill is put before Congress. Proposing legislation changes nothing until it is passed, and at some point in the future it could be abolished (thanks to US two party war politics). We'll have to wait to see the actual Bill put before Congress.

8 ) The current US/EU "trade war" may escalate. The EU is unhappy with the degree of reciprocity promised by the FATCA IGAs. If the trade war were to expand to other areas besides commercial products, an EU dictate for all EU countries to cease all FATCA reporting could result. This is real conspiracy/fake news/wishful thinking, but who knows?

We are assuming that Tom has a claim to US citizenship. We do not know that for certain.  A passport does not make one a citizen. It may have been issued in error.

If we assume Tom is indeed a US citizen; Tom will already have been reported on. Tom can vote or lobby here in the UK to repeal or change the 2012 Finance Act. If we assume this is unlikely to change significantly, Tom will continue to be reported on to HMRC.

Most folks in this situation choose to comply using the current penalty-free IRS streamlined procedures.  A good percentage also renounce. If Tom wishes to renounce he could do that straight away. 

He would avoid being a covered expatriate by filing tax returns & Form 8854 by this time next year. If he is worried the current penalty-free IRS streamlined procedures will not last that long he could file the delinquent returns sooner.

If Tom has no plans to live in the states he'd be mad to enter the system voluntarily. If he decides to, and owes no tax, just file the FBars and tax returns - no need to use streamlined.

https://www.forbes.com/sites/stephendunn/#5acacf5e6d87

Assuming Tom does go down the route of compliance first, he will indeed have some challenges with his ISA. They most likely contain PFICS and so will need a form 8621 for each investment for each year Tom submits. The forms are difficult and expensive to fill in, requiring historical data for the investments which may not have been recorded given their (assumed) tax feee status. For each investment he’ll need the dates and amount of every purchase or dividend reinvestment, accumulated income, interest etc. He’ll need historical dividends to do the excessive distribution calculations. He will not be able to use the marginally cheaper “Mark to market” tax calculation. Exchange rate fluctuations can also have surprising positive or negative effects. Selling the ISA’s now might be a good thing with the exchange rate so low. He might avoid some higher US PFIC taxes.

PFICS are thoroughly evil and it’s a royal PITA No US taxpayer really should ever own one. Sad that dual tax payers are effectively locked out of the ISA system.

I had to ‘clean ship’ of PFICS recently as was caught in a similar unsuspecting trap. I did 96 forms...


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Tom's best options are do nothing! or renounce without compliance.

I was in the same boat a few years ago and entering the US tax system caused me to renounce, because it was not possible to continue under that regime after spending my whole adult life in another country living as a tax resident of the UK and planning my financial life as a UK resident. Do not succumb to fear. On a practical matter it is difficult for the IRS to collect from people overseas assuming there are no US assets. 

I would not wait for change alone because change could always be undone in a future administration. Renunciation is the only way to fix the problem for good.  Renounce without compliance or continue to ignore it.

Tom's best options are do nothing! or renounce without compliance.

I was in the same boat a few years ago and entering the US tax system caused me to renounce, because it was not possible to continue under that regime after spending my whole adult life in another country living as a tax resident of the UK and planning my financial life as a UK resident. Do not succumb to fear. On a practical matter it is difficult for the IRS to collect from people overseas assuming there are no US assets. 

I would not wait for change alone because change could always be undone in a future administration. Renunciation is the only way to fix the problem for good.  Renounce without compliance or continue to ignore it.

Because Tom has a US place of birth he will have been reported on. The US tax authorities have data that they could use to collect tax or penalties in the future.

We don't know if Tom reported his details to the bank and even if he did, last I knew the UK Isa is exempt from Fatca reporting. There is a mountain of data being sent. There have been several articles about the chaos surrounding Fatca data. i also believe there are no known cases of anyone being contacted overseas about Fatca unless they went to the IRS first. Tom is clearly an Accidental American. Unless he has future plans or aspirations to live and work in the USA some day my advise is logical. The IRS does not have resources to pursue accidentals overseas and the UK has no collection facility.

Of course one needs to decide themselves what the best course of action is for their particular circumstances and should not rely solely on advise in forums.

I’ve been doing some research and at the moment everything seems to point to the fact that they should go down the streamlined procedure, pay taxes due and ultimately give up citizenship to stop what feels like theft by the IRS. However i’ve Seen lots on here about various calls for the US to move to CbT and suggestions that FATCA breaches gdpr etc. So am wondering whether my relative should hold tight for now rather than risk paying a huge tax bill on unrealised investment gains, only to find that the legislation driving it is suddenly repealed.

There have also been suggestions that the Common Reporting Standard, which is based on FATCA, may be in breach of GDPR.  (I've just registered on this forum, so I won't try to post the link, but if you search "Mishcon de Reya" and "A Disaster Waiting to Happen", you should come up with a Jan 2018 article discussing Mishcon de Reya's views on this.)

Now, Mishcon de Reya have announced that they have filed a complaint (see Mishcon de Reya's website).

If CRS is found to be in breach of GDPR, FATCA may also be found to be in breach, since FATCA does similar things with data. 

Of course, it may take a long time for this case to reach the court.  It may not be practical to wait and see what happens, before making a decision about renunciation.  But it's an interesting development.