Hendre

I married my American wife in the UK, and moved with her to the US 15 years ago. I considered using an expat CPA for my personal taxes, but decided I’d be best off with an international tax attorney. I started working with a top firm in the Northeast before my green card was issued and have stayed with them since. So imagine my shock when my wife does some research for our retirement investments and tells me she’s read that an ISA with mutual funds I held onto all these years is toxic because they’re PFICs. I told the attorney from the outset I had an ISA and we've been filing an FBAR and 8938 for it every year. A few years ago, I even reminded him I had the ISA and he said, we’ll worry about reporting when you sell it off. His response now: Oh, I thought it was stocks (not a good excuse, as I gather those can be PFICs too.). And he suggests I send him the statements to file all the 8621 forms for multiple PFICs in arrears. I’ve done some research on my own and it looks like I’ll be on the hook for north of $50K. I also gather the filing expenses, glossed over by my atty, are going to be costly. He’s encouraging me to file under the streamline program with penalties. Anyone out there with similar experience dealing with a tax attorney-what recourse did you have when you had bad advice (or lack of any)?

MidAtlantic

First of all my sympathy for the mess you find yourself in. I will leave it to others to comment on any action/claim you may have against the attorney. I suspect that depends on being able to prove that you gave him all the facts.

I would start with a competent tax professional, not an attorney. I suggest having an initial conversation with Pete Newton here: https://www.britishexpatstax.com and see what he suggests as the way forward. I have no connection with him at all but he was often highly recommended here some time ago. Reference to him declined when he stopped taking new business. It looks like he may be open again.

Hendre

MidAtlantic, thanks for your swift reply, it's much appreciated. I'll report back for the benefit of others when I have a clearer picture. I trusted the atty to advise me on issues, as I had my hands full growing a business, but realize belatedly how great this forum community is about sharing expat tax info. I'm sorry I didn’t tune in sooner.

Glasgow Girl

If you have been filing your FBARS and 8938 then your “only" concern now is the tax due when you sell your funds. The streamlined process is for those that have been delinquent in declaring their foreign investments and paying taxes and are potentially subject to criminal penalties. It sounds like you are current on everything, given that you have not sold anything yet, so you do not have that concern.

I would take a look at filling the 8621s yourself. It will be extremely time consuming for all those years and multiple funds which is why you do not want to have to pay a professional to do it. Once you have done one and got the gist of it will become easier, but nauseating. Or, you could perhaps have your professional do a couple of years for one fund and learn from that. If you have statements for all the years with the dividends etc, it will be a little easier but still extremely time consuming. If you do not have statements then you can usually find information on each fund to estimate that dividend payout and that is what the IRS would expect you to do. Or, you could contact the fund and see if they can supply prior year statements, some will, some won’t. Or likely your tax returns would have that information.

The tax will be calculated individually for every year that you held the funds, regardless of whether you were subject to US taxes or not. The rate will be the highest personal rate for that tax year, not your marginal tax rate, about 37% for the most recent years, and I think 39% in the early 2000’s. To add insult to injury you will have to pay compound interest on the tax due in each year at the published IRS tax rates. Not fun.

The above is the default method for calculating tax. I believe you can also use a Mark to Mark or QEF method which can result in a much better outcome. If I recall correctly, I think the QEF must normally be declared way back when the funds are purchased, UNLESS you have a reasonable reason to believe that the funds were not PFICs. In your case you could perhap[s make the case that because it was in an ISA you believed it was protected. Worth a shot I think, when you file.

I think you can also apply the MTM method retrospectively in certain circumstances, but I dont recall the details off the top of my head. It might be worth researching those two and if applicable to you figure out which way results in the best outcome. Google "PFIC taxation QEF, and Mark to Mark”.dit

Edit: If QEF works out better with you, I think you should state that since you purchased the funds before you arrived the in the US then you had no knowledge of PFICs and could not possibly be expected to file a QEF election at that time. It would be hard for anyone to argue against that.

Hendre

Glasgow Girl, This is amazing, thank you so much, I’ve got some catching up to do, but hope I can return the favor by re-posting some helpful info on this as it unfolds…. I love Glasgow BTW. Cool city.

leuler

Glasgow Girl's info is good and accurate. I found myself in the same situation a few years ago, did all the research myself and filed myself. I've also inadvertently manage to acquire some other PFICs since, so all the research has been useful ongoing. FBAR and 8938 (if over limits) need to be filed each year and streamline is for non-filing of these. You're good on this. ISA is not recognized by the IRS as tax-free as there are no age limits on taking money out. A cash ISA is not a PFIC, but a stocks and shares ISA is. The only filing needed and tax due is when you sell. If you're returning to the UK, do nothing with the ISA and it will be tax-free again when you return and not subject to IRS.

Use 8621 to file tax due. You're only taxed on the gain since being in the US (not the total gain). Tax will be about 50% of the gain! You won't be able to elect a QEF (have to produce documentation similar to US), but you can elect for it to become Mark to Market, first year you'll pay large 8621 tax but each year afterwards you'll only pay short term capital gains each year (very useful if you're in a lower tax bracket). PFIC tax is offsettable against AMT if you pay AMT.

Options:
- Sell now and pay large tax on gain since in US and no headaches ongoing (I did this!)
- Wait and sell later when can afford tax bill
- Wait and sell when return to UK or no longer under US tax (no tax due)
- Wait and sell after market crash or gain has dropped can reinvest immediately in US (this will be a lower tax bill)
- Do not sell but declare now, pay large tax bill now and mark to market gains each year going forward (will need to file 8621 every year, mark to market gains are short term capital gains)

Good luck!

durham_lad

Only if you remain as a UKC only. After 15 years there and married to a USC you may well, with good justification, become or have already become a USC.

My wife and I both have had cash-ISAs while living in the UK but as dual UK/USCs we report and pay tax to the IRS on the interest the ISA's generate.

leuler

Thanks! Good spot. Yes, USCs and green card card holders will be beholden to the IRS and paying US taxes forever, wherever resident.

morpeth

I second that recommendation using a qualified CPA - Any PFIC an audit magnet.

As far as the attorney unless you have written documentation or an email don't think there is much you can do. Depending on the amount involved the attorney's insurance will cover it, but most likely you would have to pay 1/3 to the attorney handling the claim for you-though some would take on a contingency basis..

Glasgow Girl

The problem with tax professionals is that they charge ridiculously expensive hourly rates, and filing the 8621s is hideously time consuming. Completing 15 years of multiple funds will easily exceed 20 hours and likely a WHOLE LOT more making it a very expensive proposition to use a tax professional to complete the task. The hard work is in gathering the data, and figuring out how to complete the first one. After that it is simply a mind numbing but time consuming exercise to complete the rest.

Having a PFIC, or other foreign investments, does not necessarily mean you will be audited. In general it is believed that if you are audited, for other reasons then for sure they will look at your foreign investments, but having foreign investments in itself is rarely an audit flag unless there is something unusual or large sums are involved. In any case unless someone has something nefarious with their taxes there is no reason to fear an audit. The IRS knows that the tax code is extremely complex and is not out to get the average Joe. If you can demonstrate that you completed your tax return in good faith with the best information available they will work with you in the event you get it wrong.

Don't get me wrong, sometimes a tax professional is exactly what is required but that is normally when someone has been delinquent in filing, or paying taxes. In the OPs case they are not delinquent in any way. If you are detail oriented, can follow instructions, have the time and no dubious tax affairs then you can do a lot of it yourself and save a small fortune.

morpeth

Having a PFIC doesn't necessarily mean an audit, but I can say from tax attorneys and CPAs I have spoken to a general consensus has been it does increase the chance of an audit. As far as audit goes they can be time consuming, and depend on agent can go easy or hard, and not having professional representation can mean in case of dispute trying to get professional later on can be more costly, The IRS loses very few cases that go to tax court. Many people without representation just end up settling and the IRS knows this. I knew one person who ended up three years dealing with an audit. Dealing with any such bureaucracy can be rolling the dice.

However a lot depends on amount involved, and the IRS can be very reasonable to deal with concerning smaller amounts, I would much rather deal with the IRS than state tax agencies.

Glasgow Girl

Tax professionals like to sell their services. Talking up the possibility and worst case consequences of an audit are truly excellent for business. They also just love to fear monger over international investments again in the interests of creating business, frequently offering cookie cutter advice and services that are not in the best interests of their clients. In promoting business they deliberately scare people to death, totally unnecessarily, and that really bothers me which is why I try to help people if I can. I understand the best ones do not do this, but the vast majority do, and the best ones are out of reach of the average Joe. Always do your own research first so that you can ask the the professional about alternative courses of action, and the possibility of doing the legwork yourself.

The average Joe does not go to court with the IRS because there is no need to. When an audit identifies a mistake the IRS identify and clearly explain the error and the tax payer has to pay up. But frequently the mistake is in the other direction and the IRS ends up refunding the average Joe. Unless you are stretching the limits of the tax code or have unique circumstances the chances of an audit not ending fairly are very low.

morpeth

Unfortunately the nice situation you describe is fine and dandy but it is prudent to avoid risks; a getting qualified professional advice from those who specialize in this field is simply prudent. to avoid getting in the crosshairs of the IRS. Kind of interesting the thought the IRS is in the business of keeping ;customers' happy' and not seeking to maximise revenue.

California1967

No experience regarding incompetent tax attorney. However after 9 or so years in US I realized a similar problem with my ISAs and decided to liquidate 100% of them in 2012 dating from 1992-1999 or 2000 for both spouse and I. I completed all the forms myself tracking the "notional gain" for every year and calculating the tax due and the penalties. Submitted a stack about 2 inches thick with my 1040. Took about 2 hours a night for a week or so. Once you have completed one form, the others are simple just with different year calculations.
If I had kept the ISA for 5 more years until 2017 I calculated the penalties and taxes would have equalled the total gain.
I think i remember currency is a factor so buying a 5000 isa at usd1.7 to pound and selling a 7000 value at 1.3 is counted as $8500 buy and $9100 sell so the gain is not quite as high in USD as Sterling.
Best advice to my younger self would be sell before arrival but like everyone else we just came for 3-5 years.... 20 years ago

Hendre

Thank you all for your invaluable insights and advice — it's hugely appreciated! I'll report back more when I have more info. I'm currently knee deep in crunching the data for the 1291 calculations.

I wish I had a Tardis to go back to 2004...