To what extent do those individuals with a filing obligation with the US authorities truly understand the implications for them? Are they putting their affairs in order? Do all of them even know who they are?
The answer to the last of those three questions is “probably not”, and that will doubtless influence the answers to the other two.
Lifetime filing obligation
Fatca was ushered in back in 2010. It is a US federal law to enforce the requirement for US persons – including those living outside the US – to file annual reports on their non-US financial accounts to the Financial Crimes Enforcement Network.
Many advisers will be familiar with current UK foreign secretary Boris Johnson’s surprise at being told he owed the Internal Revenue Service some tax arising from the sale of his principle private residence.
Johnson’s response was swift and typically bombastic by essentially refusing to pay, followed by an equally quick but somewhat more subdued agreement to settle the demand in full, once he realised that being born in New York City is sufficient to create a lifetime filing obligation, which nothing short of renouncing one’s US citizenship, which has other, nasty connotations, will fix.
If Johnson was unaware of his obligation, you can be sure that there are plenty of others in ignorance of theirs.
We at HFM Columbus have been surprised by the number of people we have come across who are obliged to file US returns but had no idea that this was the case. The publicity surrounding this issue has barely filtered down to the mainstream media at all.
Meanwhile, the US Government is serious about collecting the tax owed to it, not least because, like the western world generally, it has significant pile of debt to deal with.
Determination on the part of the authorities combined with ignorance on the part of those affected is unlikely to end well for a good many “Borises” and even the best-case scenario for many individuals will be eye-wateringly expensive.
For example, we have a client who was born in San Francisco and retains US citizenship but does not consider himself the least bit “American” and hasn’t lived there since he was a small child.
He is an intelligent, professional in his fifties, working in the City of London and has a relatively straightforward portfolio of property and investments.
He had no idea, until he met with us, that he should have been filing US tax returns for over thirty years.
If he owns up now and the IRS believes he has been ignorant rather than wilfully misleading them, it is likely that it will require him to file only the last three years’ returns.
However, on the basis that his investment portfolio contains a variety of UK listed unit trusts and individual stocks, the cost of preparing the returns just for these three years, according to several leading specialists in this area, will exceed £20,000. One firm quoted £40,000. These figures ignore any tax which may be due.
It could be worse for this individual. Should he decide not to come clean to the IRS and they were to track him down, he would have to file returns all the way back to the 1970s. And since he sold his main residence for approximately £2m (€2.37m, $2.55m) six years ago, his potential grief just gets worse and worse.
So, what should private client advisers be doing about this?
This only gets worse over time so acting promptly is the order of the day.
Believing most clients to be ignorant of their obligations is a good working assumption, followed by a relatively simple three point process:
- Identify clients who may have a filing obligation (take care to check family members and trustees)
- Recommend that they bring their affairs up to date immediately
- Ensure that investment portfolios are compliant (US compliant portfolios are available outside of the US via a limited number of providers)