Author Topic: Complicated UK US tax issue  (Read 1137 times)

ukusmustache

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Complicated UK US tax issue
« on: July 10, 2018, 12:01:11 AM »
I am a long-time lurker and big fan of the blog. I am fairly frugal and due to reach financial independence in the next few years from my own savings.

I am a UK citizen, currently living in the US on a green card. I recently had the surprising news that I am the beneficiary of a trust back home in the UK, and that in the next year or so I am due to receive a significant amount of assets from the trust (comparable to my FI amount). This is incredibly lucky on my part - I really did nothing to deserve this money, and to be honest I am glad I didn't get in (or learn of its existence) when I was younger as it would likely have had a negative effect on me. At this stage however, I hope that I can be a good steward of this money, and eventually use it to help others.

After learning about this trust, I did some reading and found out that in addition to a pretty significant tax burden in the UK, this "foreign trust" is likely to have a huge US tax burden - simply by nature of the trust not being based in the US. I am now looking into options for how to reduce the tax burden.

One option I was wondering about is as follows: I could request to be written out entirely as a beneficiary of the trust, and all of what was planned to go to me could instead be passed on to a relative (who is also a beneficiary of the same trust). Then, after all assets are passed onto the beneficiaries and the trust is dissolved, that relative could give the portions of assets intended for me as a gift. It seems that (provided nothing horrible and unlikely happens and the relative dies in 7 years) there would be no tax on the gift either in the UK or the US.

Are there any foreseeable problems with this potential option? Are there any alternative options which are better? Are there important details which I should find out about the trust before being able to identify which is the best option?

(Some potentially relevant details of the trust are that there are no US based trustees, there are multiple beneficiaries, most of whom are UK based, and that there are current discussions about exactly which beneficiaries will receive what from the trust. The trust is a discretionary trust. I have seen very little actual paperwork regarding the trust - I didn't really know it existed until quite recently. There are tax people working with the trustees in the UK, and I will certainly discuss options with someone here in the US too soon, but would like to get a feel for things and options before approaching a professional.)


ukusmustache

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Re: Complicated UK US tax issue
« Reply #1 on: July 10, 2018, 09:51:24 PM »
Bumping this in the hope that someone informed will see it!

Raenia

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Re: Complicated UK US tax issue
« Reply #2 on: July 11, 2018, 09:35:31 AM »
I'm not an expert in any of the tax or trust issues, but I can say that my first instinct in this case would be to move back to the UK.  Since you're not a US citizen, voila, no more US tax burden!  Is that something you've considered, or are you tied to remaining in the US?

Sibley

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Re: Complicated UK US tax issue
« Reply #3 on: July 11, 2018, 01:06:56 PM »
Agreed, just FIRE and move back to the UK before you get the money. Otherwise, you need to find specialized tax assistance to determine your options.

Also - don't trust your relative. Even the most stable, reasonable people can go off the rails when large amounts of money are involved. Exhibit 1: there's an inheritance thread somewhere on the forum.

StarmanJones

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Re: Complicated UK US tax issue
« Reply #4 on: July 11, 2018, 08:56:38 PM »
Congrats;  A couple of thoughts, as I'm also a UK transplant;

Before discarding your green card (if you were considering this), and as you mentioned you are close to FI; first confirm you are not a Covered Expatriate; https://www.irs.gov/individuals/international-taxpayers/expatriation-tax depending on your total global assets and tax history, you would be subject to severe exit taxes if you revoke your GC (Frying Pan ->Fire)

I have no expertise in this space, but I wouldn't be surprised if IRS treats this windfall as a single income event, and taxes accordingly. If the UK is doing the same (i.e taxing on the full amount), then you may escape US tax due to reciprocal tax agreements. If however UK regulations allow you to withdraw gradually from this trust and minimize tax, then you may benefit from more creative approaches

Better than my uninformed guesses though: This is a great forum for these types of questions; suggest post there - nun, Lansbury and others can often provide insightful responses
https://britishexpats.com/forum/usa-57/

AMandM

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Re: Complicated UK US tax issue
« Reply #5 on: July 12, 2018, 11:27:19 AM »
Another non-expert chiming in here:
Are you sure the trust distribution would be taxable in the US? Foreign gifts and bequests generally aren't as I understand it.  See:
https://www.irs.gov/businesses/gifts-from-foreign-person

ukusmustache

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Re: Complicated UK US tax issue
« Reply #6 on: July 14, 2018, 03:01:18 PM »
Thanks a lot for the comments so far!

A few people suggested simply moving back to the UK, and a few others cautioned that doing so may actually be very difficult to do (since the US charges a huge "exit tax" on some green card holders when they lose green card status).

My understanding of the green card exit tax is that it applies if you have been in green card status for more than seven years and if you have worldwide assets of 2 million or more dollars. I am not in this position. However, I actually really love my job and I am more of an FI and simple/frugal lifestyle seeker than someone who wants to FIRE. The job that I do here is pretty unique and getting a similar job in the UK is unlikely at least in the next few years.

So I think for now I am still looking for options of how to minimize tax liability while remaining in the US. Something I really don't understand is how foreign trusts are taxed in the US. I also don't understand whether or not a foreign trust which I am a beneficiary of can give me a gift - would such a gift be taxed the same way as a foreign individual giving me a gift (which I think would not be taxed in the US)?

Exflyboy

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Re: Complicated UK US tax issue
« Reply #7 on: July 14, 2018, 05:34:22 PM »
Pay some money and talk to KPMG who are international tax experts.

For a few hundy for a consultation this has to be well worth it.

MustacheAndaHalf

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Re: Complicated UK US tax issue
« Reply #8 on: July 15, 2018, 04:26:54 AM »
A saw a photo this week of two people holding a shared lottery check - one of them smiling widely and the other a scowl.  The aunt's parting words to her newphew: "See you in court", since she never agreed to split the winnings.

People can change their minds, and lottery winnings in their bank account could be one of those times.  Don't expect a relative to "gift" you millions.  Even if you claim it's your money that's in their bank account.

Maybe the reporting requirements can be handled by a tax attorney in the U.S.?
Or if you want to dissolve the trust, you could talk to a UK based attorney?

But I'd avoid this situation:
"My relative was supposed to gift me back my trust and all I got was this lousy t-shirt"

SeattleCPA

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Re: Complicated UK US tax issue
« Reply #9 on: July 15, 2018, 08:21:14 AM »
Pay some money and talk to KPMG who are international tax experts.

For a few hundy for a consultation this has to be well worth it.

OP? You should definitely consult a CPA who specializes in international tax. I doubt the situation is as bad you worry. But there are giant risks to bungling this. (Often the penalties for violating foreign interest and foreign income reporting are assessed in $10,000 increments. Note I'm not saying the penalty may be $10,000... I'm saying the penalty may be assessed in $10,000 chunks. And then total penalty can eat up a giant chunk--even all--of the asset value.)

KPMG and other big international firms won't take you on, unfortunately, you surely aren't "big" enough. Also, whatever you pay won't be a few hundred dollars. It'll be a few thousand probably. $2K? $3K?

BTW, you could probably consult a tax attorney that knows international tax. But I'm saying consult a CPA since your tax return the year you receive proceeds will include a 3520 and that's not a DIY project.

ukusmustache

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Re: Complicated UK US tax issue
« Reply #10 on: July 16, 2018, 09:47:32 AM »
Pay some money and talk to KPMG who are international tax experts.

For a few hundy for a consultation this has to be well worth it.

OP? You should definitely consult a CPA who specializes in international tax. I doubt the situation is as bad you worry. But there are giant risks to bungling this. (Often the penalties for violating foreign interest and foreign income reporting are assessed in $10,000 increments. Note I'm not saying the penalty may be $10,000... I'm saying the penalty may be assessed in $10,000 chunks. And then total penalty can eat up a giant chunk--even all--of the asset value.)

KPMG and other big international firms won't take you on, unfortunately, you surely aren't "big" enough. Also, whatever you pay won't be a few hundred dollars. It'll be a few thousand probably. $2K? $3K?

BTW, you could probably consult a tax attorney that knows international tax. But I'm saying consult a CPA since your tax return the year you receive proceeds will include a 3520 and that's not a DIY project.


I will definitely work with a professional at some stage (it is annoying that will cost a few thousand to do!). I think it is a good idea to have a basic understanding of how the process works before initiating those discussions though, to increase how much I can take away from them.


But I'd avoid this situation:
"My relative was supposed to gift me back my trust and all I got was this lousy t-shirt"

I am not that worried about a scenario in which one of my close family members would agree to something concrete like this and then change their mind, especially when the timescale is immediate. I think that it is very unlikely this would be a problem, but maybe there are strange non-obvious sets of circumstances that could occur which would cause it to be complicated (if the relative got simultaneously sued for all of their money or something). If it is a case of 100% chance of losing 30% of the windfall, versus 1% chance of losing 100% of the windfall, I would likely go with the latter.

SeattleCPA

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Re: Complicated UK US tax issue
« Reply #11 on: July 17, 2018, 07:50:26 AM »

But I'd avoid this situation:
"My relative was supposed to gift me back my trust and all I got was this lousy t-shirt"

I am not that worried about a scenario in which one of my close family members would agree to something concrete like this and then change their mind, especially when the timescale is immediate. I think that it is very unlikely this would be a problem, but maybe there are strange non-obvious sets of circumstances that could occur which would cause it to be complicated (if the relative got simultaneously sued for all of their money or something). If it is a case of 100% chance of losing 30% of the windfall, versus 1% chance of losing 100% of the windfall, I would likely go with the latter.

The risk of failing to comply with the rules for disclosing foreign accounts is IRS discovers your noncompliance and then they fine and penalize you to extent you lose 50% or 100% of the money or more...

The US tax laws in this area are confiscatory... I've personally seen taxpayers pay $2,000 of tax on $1 of income and then lose half their money...

Here are some blog posts CPAs at our firm (me and others) have done to explain some of the basics:

Do You have a Foreign Trust to Report to the IRS?

Primer on FBAR and FATCA Rules and Penalties

Reporting Foreign Business Investment

I would recommend you learn more and exercise extreme caution...

Sibley

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Re: Complicated UK US tax issue
« Reply #12 on: July 17, 2018, 12:58:14 PM »
I am not that worried about a scenario in which one of my close family members would agree to something concrete like this and then change their mind, especially when the timescale is immediate. I think that it is very unlikely this would be a problem, but maybe there are strange non-obvious sets of circumstances that could occur which would cause it to be complicated (if the relative got simultaneously sued for all of their money or something). If it is a case of 100% chance of losing 30% of the windfall, versus 1% chance of losing 100% of the windfall, I would likely go with the latter.

Let me say this again, since clearly you didn't understand the first time.

DO NOT TRUST ANYONE TO DO THE RIGHT THING WHEN LARGE AMOUNTS OF MONEY ARE INVOLVED.

I don't care how sweet they are, or how much you think it won't happen. Just don't. It's not even an option. Money brings out the worst in people. History is absolutely littered with evidence of perfectly nice, trustworthy people ripping other people off when enough money is at stake. Whatever you do, there needs to be a clear legal trail of "that is USUK's money". No wriggle room.

ukusmustache

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Re: Complicated UK US tax issue
« Reply #13 on: July 17, 2018, 07:28:15 PM »
Thanks for the feedback!

The risk of failing to comply with the rules for disclosing foreign accounts is IRS discovers your noncompliance and then they fine and penalize you to extent you lose 50% or 100% of the money or more...

The US tax laws in this area are confiscatory... I've personally seen taxpayers pay $2,000 of tax on $1 of income and then lose half their money...

Here are some blog posts CPAs at our firm (me and others) have done to explain some of the basics:

Do You have a Foreign Trust to Report to the IRS?

Primer on FBAR and FATCA Rules and Penalties

Reporting Foreign Business Investment

I would recommend you learn more and exercise extreme caution...

Thanks for pointing me toward these resources. The process of looking through them and other pages has led me to a more immediate issue: I did not realize that I was supposed to report to the IRS a retirement account I have in the UK (it is a cash ISA account with about $50k in it). I am now going through the process of trying to learn about how to best come into compliance for this. It seems to be pretty complicated, and could be costly too - US taxes are a bit of a nightmare!

Paul der Krake

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Re: Complicated UK US tax issue
« Reply #14 on: July 17, 2018, 08:45:01 PM »
Thanks for the feedback!

The risk of failing to comply with the rules for disclosing foreign accounts is IRS discovers your noncompliance and then they fine and penalize you to extent you lose 50% or 100% of the money or more...

The US tax laws in this area are confiscatory... I've personally seen taxpayers pay $2,000 of tax on $1 of income and then lose half their money...

Here are some blog posts CPAs at our firm (me and others) have done to explain some of the basics:

Do You have a Foreign Trust to Report to the IRS?

Primer on FBAR and FATCA Rules and Penalties

Reporting Foreign Business Investment

I would recommend you learn more and exercise extreme caution...

Thanks for pointing me toward these resources. The process of looking through them and other pages has led me to a more immediate issue: I did not realize that I was supposed to report to the IRS a retirement account I have in the UK (it is a cash ISA account with about $50k in it). I am now going through the process of trying to learn about how to best come into compliance for this. It seems to be pretty complicated, and could be costly too - US taxes are a bit of a nightmare!
Oh man, hope you come out okay on this one. I'm surprised you haven't heard of this, it made the news when the rules were tightened a few years ago. Between that and your surprise trust, you need to engage the services of a professional quickly. I have a hard time seeing the IRS bringing down the hammer on a silly cash ISA, but I'm just a tax nerd reading between the lines, not a professional.  There is a wiiiiide penalty range, and the longer you wait the more wilful your reporting failure starts to look.

Reach out to your regional consulate and ask if they have names to recommend. You seem to have a decent understanding of your situation, call a few and see what they say.

ukusmustache

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Re: Complicated UK US tax issue
« Reply #15 on: July 17, 2018, 10:01:29 PM »
I guess it just wasn't really on my radar - I have only been a resident for tax purposes for 4 or 5 years. I guess I thought that the US and the UK had good tax-treaties and didn't imagine that any assets, especially tax-protected ISA accounts in the UK would be taxed in the US.

Exflyboy

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Re: Complicated UK US tax issue
« Reply #16 on: July 17, 2018, 10:34:00 PM »
Thanks for the feedback!

The risk of failing to comply with the rules for disclosing foreign accounts is IRS discovers your noncompliance and then they fine and penalize you to extent you lose 50% or 100% of the money or more...

The US tax laws in this area are confiscatory... I've personally seen taxpayers pay $2,000 of tax on $1 of income and then lose half their money...

Here are some blog posts CPAs at our firm (me and others) have done to explain some of the basics:

Do You have a Foreign Trust to Report to the IRS?

Primer on FBAR and FATCA Rules and Penalties

Reporting Foreign Business Investment

I would recommend you learn more and exercise extreme caution...

Thanks for pointing me toward these resources. The process of looking through them and other pages has led me to a more immediate issue: I did not realize that I was supposed to report to the IRS a retirement account I have in the UK (it is a cash ISA account with about $50k in it). I am now going through the process of trying to learn about how to best come into compliance for this. It seems to be pretty complicated, and could be costly too - US taxes are a bit of a nightmare!
Oh man, hope you come out okay on this one. I'm surprised you haven't heard of this, it made the news when the rules were tightened a few years ago. Between that and your surprise trust, you need to engage the services of a professional quickly. I have a hard time seeing the IRS bringing down the hammer on a silly cash ISA, but I'm just a tax nerd reading between the lines, not a professional.  There is a wiiiiide penalty range, and the longer you wait the more wilful your reporting failure starts to look.

Reach out to your regional consulate and ask if they have names to recommend. You seem to have a decent understanding of your situation, call a few and see what they say.

If you are married the reporting threshold is $400,000*.. I.e if it is less than that you don't have to report it. Also if you couldn't reasonably know by "readily accessible means" what the value of the foreign trust/pension is then you value it at $zero. As $zero is less than $400k* you are not required to report it.

I went through this nightmare with my own UK company pension. In my case I was never sent the value of the pension (just what the payments were projected to be when I retired). In order to get a valuation I physically had to write to the company that held the pension and even then I was not aware it actually had a total value so to speak.

I found out in 2015 that indeed the pension did have a value and I was supposed to be reporting it since 2011.. double yipes!

As they did not post the value on their website back in those days I satisfied myself that I could not "readily know" what that value was.

What you want is the instructions for form 8983 and go thru the exceptions line by line.. There are a number of "get out of jail free" excuses listed.

I just started submitting form 8983 in 2015 and they never asked why I didn't report back in 2011.. So all is well I think.

https://www.irs.gov/pub/irs-pdf/i8938.pdf

It now looks like if you are married you only have to file 8938 if the total valie of pension in $400k or more (married) and $50k unmarried.

* It used to $100k (married) back in 2015.
« Last Edit: July 17, 2018, 10:36:11 PM by Exflyboy »

Exflyboy

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Re: Complicated UK US tax issue
« Reply #17 on: July 17, 2018, 10:46:32 PM »
I guess it just wasn't really on my radar - I have only been a resident for tax purposes for 4 or 5 years. I guess I thought that the US and the UK had good tax-treaties and didn't imagine that any assets, especially tax-protected ISA accounts in the UK would be taxed in the US.

You won't pay any tax unless you actually took a distribution.. like the pension actually paid you money.

Simply having the money sat in a pension fund in the UK does not mean you will pay any tax. Unless you violated the rules on 8983 of course..

Paul der Krake

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Re: Complicated UK US tax issue
« Reply #18 on: July 17, 2018, 10:51:14 PM »
Well there are two distinct reporting requirements: FBAR and FATCA. One has a much lower threshold than the other.

Let me rephrase my previous post: OP is probably going to be fine, the US government is not in the business of going after expats with pocket change in popular retirement accounts of one their closest allies. And there's an appeal process if you draw someone who somehow thinks you're an evil foreign warlord. But since OP needs a tax expert for his surprise trust monies anyway, might as well consult on that too.

Exflyboy

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Re: Complicated UK US tax issue
« Reply #19 on: July 17, 2018, 11:05:04 PM »
I guess what I am arguing is that if this retirement account is relatively small (like $50k) then just follow the rules listed on 8983.. Its really quite simple, I did it at 2am back in 2015 then I had to educate my CPA about the rules!

I was originally thinking this was a huge trust that some rich relative had left mucho $$.

What the OP is now saying os $50k in a retirement account.. If thats all it is then its really a no brainer (especially if married).

If there is a bank account back in the UK, then yes the FBAR requirements kick in and that is required to be reported at $10k.

If its just a $50k pension (especially if you couldn't readily know the value) then its really a non issue.. Just make sure you know the ins and outs of the 8983 instructions. I.e no international tax expert required.

Am I missing something??

Exflyboy

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Re: Complicated UK US tax issue
« Reply #20 on: July 17, 2018, 11:08:10 PM »
I guess what I am arguing is that if this retirement account is relatively small (like $50k) then just follow the rules listed on 8983.. Its really quite simple, I did it at 2am back in 2015 then I had to educate my CPA about the rules!

I was originally thinking this was a huge trust that some rich relative had left mucho $$.

What the OP is now saying os $50k in a retirement account.. If thats all it is then its really a no brainer (especially if married).

If there is a bank account back in the UK, then yes the FBAR requirements kick in and that is required to be reported at $10k.

If its just a $50k pension (especially if you couldn't readily know the value) then its really a non issue.. Just make sure you know the ins and outs of the 8983 instructions. I.e no international tax expert required.

Am I missing something??



Exflyboy

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Re: Complicated UK US tax issue
« Reply #21 on: July 17, 2018, 11:11:25 PM »
Of course if the trust is going to pay you a huge whack next year it will be considered to be ordinary income... The good news is that you can file a form and get the UK tax refunded if you are not resident.. But it will be subject to US taxes.

Better if the trust holds the money on your behalf and not actually pay it to you in one huge taxable lump.

ukusmustache

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Re: Complicated UK US tax issue
« Reply #22 on: July 17, 2018, 11:46:57 PM »
I guess what I am arguing is that if this retirement account is relatively small (like $50k) then just follow the rules listed on 8983.. Its really quite simple, I did it at 2am back in 2015 then I had to educate my CPA about the rules!

I was originally thinking this was a huge trust that some rich relative had left mucho $$.

What the OP is now saying os $50k in a retirement account.. If thats all it is then its really a no brainer (especially if married).

If there is a bank account back in the UK, then yes the FBAR requirements kick in and that is required to be reported at $10k.

If its just a $50k pension (especially if you couldn't readily know the value) then its really a non issue.. Just make sure you know the ins and outs of the 8983 instructions. I.e no international tax expert required.

Am I missing something??

It is an ISA savings account - which is not a pension, it is more like a Roth IRA for the UK. You put after-tax money in and it grows tax free in the UK and you can take money out tax free too (but you can take the money out whenever you want without age restrictions). So I definitely know the value of the account which sounds like it will be a little different.

Of course if the trust is going to pay you a huge whack next year it will be considered to be ordinary income... The good news is that you can file a form and get the UK tax refunded if you are not resident.. But it will be subject to US taxes.

Better if the trust holds the money on your behalf and not actually pay it to you in one huge taxable lump.

Yes that's right this is separate from the trust money which will probably come through in around a year.

AdrianC

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Re: Complicated UK US tax issue
« Reply #23 on: July 18, 2018, 04:46:21 AM »
It's likely you should have told the IRS about the foreign account - pretty sure they'll view a cash ISA as a bank account, not as a retirement account. Terrible exchange rate right now, but it is what it is. Declare it or get it below $10K (or...keep quiet?).

https://www.journalofaccountancy.com/issues/2013/dec/20138321.html

I'm a UK expat too, and likely at some point (hopefully many years off) to inherit a fair amount in the UK. I haven't looked into the tax implications because, well, it's a bit unseemly at this point. I don't think a trust is involved.
« Last Edit: July 18, 2018, 04:53:00 AM by AdrianC »

SeattleCPA

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Re: Complicated UK US tax issue
« Reply #24 on: July 25, 2018, 07:04:46 AM »
It's likely you should have told the IRS about the foreign account - pretty sure they'll view a cash ISA as a bank account, not as a retirement account. Terrible exchange rate right now, but it is what it is. Declare it or get it below $10K (or...keep quiet?).

https://www.journalofaccountancy.com/issues/2013/dec/20138321.html

I'm a UK expat too, and likely at some point (hopefully many years off) to inherit a fair amount in the UK. I haven't looked into the tax implications because, well, it's a bit unseemly at this point. I don't think a trust is involved.

It is just a terrible idea to "keep quiet" about this stuff.

I know, I know... the US tax laws are really unfair and over-the-top concerning taxpayers with an international footprint. But you will just get killed if IRS finds you've blown off the disclosure requirements here.

No kidding... about the only other tax mistakes someone can make that create more trouble are (a) failing to remit payroll taxes owed because one employs people and (b) doing an Al Capone and evading income taxes.

Mistake "a" can lead to IRS stripping you of all your assets. Mistake "b" can lead to jail time.

Wile E. Coyote

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Re: Complicated UK US tax issue
« Reply #25 on: July 25, 2018, 08:53:28 AM »
The IRS has a brief summary of issues associates with a US person (which includes a green card holder) that has an interest in a foreign trust.  Read it carefully and if you have questions, ask.

https://www.irs.gov/businesses/international-businesses/foreign-trust-reporting-requirements

I also saw a brief article about UK ISA accounts that may be helpful.

https://www.ft.com/content/00fb483c-92a1-11e5-bd82-c1fb87bef7af

ukusmustache

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Re: Complicated UK US tax issue
« Reply #26 on: July 28, 2018, 06:33:28 PM »
I have done a little research at it seems there is something known as "streamlined filing" for people in my situation (who were unaware of the rules and did not deliberately avoid paying tax). The idea is that you (a) amend the returns and pay the correct taxes on foreign assets, and (b) pay 5% of the total as a fine.

I am pretty sure that this is what I will do. The question now is how much assistance I will need from a CPA, if any. Is there a way I can work with a CPA to a lesser extent than usual, but reduce costs by putting in more time myself?

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Re: Complicated UK US tax issue
« Reply #27 on: July 30, 2018, 02:40:42 AM »
The question now is how much assistance I will need from a CPA, if any. Is there a way I can work with a CPA to a lesser extent than usual, but reduce costs by putting in more time myself?

In the end, unless the CPA is signing your tax return as the filer, you will have little recourse if they (or you) make a mistake.  You can always minimize the billable hours by having your all your source documents ready and organized.  But I don't think this is the occasion to try to go on the cheap.