Why do Americans in the UK have to file US tax returns?
Well, the simple answer is that the US tax system is based primarily on citizenship rather than residency. The Internal Revenue Service (IRS) expects US citizens to report their worldwide income on a federal tax return every year, no matter where they live.
Do all US citizens living in the UK file US taxes?
The truth is, many US citizens living in the UK, especially Accidental Americans, simply don’t know about their US tax filing obligations… or the penalties for not filing.
Many US citizens have been living in the UK since they were children, and some have never set foot in the United States, but citizenship has passed to them either way, and that means US tax obligations have too.
Others who are aware of their filing obligations but don’t file, simply hope they stay under the radar and never get caught by the IRS. This has been a successful strategy for decades and worked well for many until around 2013.
3. What changed?
FATCA changed things significantly – think of it as a worldwide fishing net.
The US government discovered that they were losing billions of dollars in tax revenue per year thanks to US taxpayers holding cash and investments in overseas banks and other financial institutions. To combat this, the US created FATCA.
FATCA stands for the Foreign Account Tax Compliance Act.
The US Treasury spent hundreds of millions of dollars designing and implementing FATCA to ensure U.S. citizens abroad followed US tax rules.
On an annual basis, non-US banks and other financial organisations are required to report information on financial accounts held directly or indirectly by US individuals.
The UK government signed the FATCA agreement in September 2012, requiring all UK financial institutions to follow suit and report account data held by US citizens, dual nationals, and Green Card holders.
This means the US is storing data about US people living outside of the US and those investing outside of the US.
I want to know more about US taxes abroad
It sounds like this is just a crackdown on multimillionaires and tax evaders, doesn’t it?
The sad truth is that an everyday person in the UK with US citizenship is also caught in the net.
A simple Stocks & Shares ISA used to legitimately save money in the UK can cause havoc for the average American.
Want to put a little extra into your pension? Stop right there; that’s going to be expensive.
How about selling your home in the UK? Surely that can’t be taxed by the IRS? Oh yes, it can.
It doesn’t end there.
Starting your own business in the UK is a minefield of complication and expense.
So, what can the average American do about this?
Simply put, comply or get out.
Those with citizenship in the UK or another country besides the US, could give up US citizenship by renunciation.
What if that’s not an option?
Step one is to get US tax compliant via the IRS Streamlined Tax Amnesty program. It’s by far the easiest, cheapest, and safest option to become US tax compliant.
The second step is to learn how to get along in the UK without making US tax mistakes.
There are ways to navigate around all sorts of US tax pitfalls.
The more you learn and make adjustments, the simpler and cheaper your US tax compliance becomes.
What is the Streamlined Tax Amnesty Program all about?
In a nutshell, you have to file 2020, 2021, and 2022 US tax returns, plus your bank account reports for the last 6 years.
Once you’re through the program, you’re fully US tax compliant.
It is complicated, but all the hard work is done by your tax professional.
By using this amnesty program, you can forget about previous years, the IRS promises not to look back any further than 2020 as long as you promise to keep filing each year going forward.
On top of that, they promise no fines or penalties.