If you move to Scotland from the US, can you wave goodbye to the Internal Revenue Service (IRS)? Sorry, but no.
As a US citizen, you have a permanent relationship with the IRS. No matter where you live, you must still fill in an annual Form 1040 and other forms for the IRS and US Treasury Department
As an ex-patriot US citizen or green cardholder, you may be unaware of these obligations, but that won’t get you off the potential penalties of thousands of dollars.
There are penalties for failing to file an annual Form 1040 – 5% of taxes owed each month to a maximum of 25%
There are penalties for failing to pay any tax owed – 0.5% of taxes owed. (No maximum.)
There are penalties for failing to notify of foreign bank accounts – If deliberate, up to $100,000 per account per year: If careless or otherwise omitted by mistake, you only pay up to $10,000 for each account per year.
There are penalties for failing to notify of any interest you have in certain financial instruments such as pensions or corporations – $10,000 per account per year.
If the IRS judges your non-filings to be wilful criminal prosecution is possible and this could lead to a custodial sentence
What are your obligations?
It is YOUR job to know what the US authorities need from you; they don’t know your circumstances, so they won’t tell you to send in Form X or Form Y. However, the tax code runs to thousands of pages so keeping up with your obligations can be next to impossible. For busy Americans working in Scotland or other parts of the UK it makes sense to use an online filing service that has expertise in US expat taxes – Let the experts take the strain.
Just staying on top of your federal obligations isn’t enough because some states will hound you for state taxes on your income, even if you now live 3,000 miles away and have no intention of returning in the next ten years. Every state has its own rules regarding expat taxes, another reason you need a filing service with ALL the expertise you need.
Contrary to popular thinking, you do not have to pay US and UK income tax on your income because US legislation prevents this and more specifically because there is a UK US tax treaty. However, this does not give you carte blanche to cut all communications with US federal and state tax authorities just because your income is taxed in the UK.
You forgot to file
Ignorance is no excuse, and the sooner you put things right with the IRS, the easier it will go.
If you have no pending IRS audit, and this is the first occasion you have needed it, you can apply for the IRS Streamlined Procedures.
FBAR (Foreign Bank) notifications could cost you $100,000 if you have been in the UK for ten years, even if you only have one British bank account. IRS Streamlined Procedures can totally remove any IRS penalties, but you need to apply for these, and this route will not be available indefinitely.
Similarly, the IRS may forgive your non-completion of an annual federal tax return (Form 1040.) under the Streamlined Procedures: You will still need to pay any tax owing, but that loses its sting if there are no penalties on top of the tax you owe.
Finding a US CPA
British accountants lack the expertise and experience of dealing with the US Treasury Department and it is essential to find a US qualified and certified CPA to help and guide you through the maze of IRS expectations.
Long story short
Even if you have lived outside the US for twenty years, you MUST still fill in an annual US tax return (Form 1040) just like every American living at home. This is the case even if you have no US income and you are 100% certain that double taxation rules mean you will not have to pay US income taxes on your UK income.
The rules about notifying the IRS about any and all foreign financial holdings are complex, and mistakes can cost thousands of dollars. This is the main reason that every US expatriate should look for professional help in dealing with the IRS.