nun

I looks like the non-compliance fall across the wealth spectrum. A very small number have been actively hiding large sums, but the majority have been in non-compliance through ignorance. They will have little or no US tax due, but the penalties they face are nasty. The IRS is probably right to be suspicious that US tax payers with foreign accounts aren't filing correctly, however, the approach to getting compliance is very heavy handed. The system was complex before 8938, all the new form does is make us aware of that complexity and of our responsibilities. This should not be an issue for those who get their taxes done professionally, however, I bet that many regular professionals who don't specialize in international taxes get this stuff wrong.

theOAP

As usual, you are correct. The prime motive for 8938 is to stop tax evasion, although if you read the response to FATCA legislation from the Japanese banking industry you'll find they really don't believe that will happen. They believe the heavyweight evaders will simply avoid compliant FFIs. A secondary motive for 8938 could be to bring the 'unaware' non-evaders into compliance, thereby increasing revenues for the Treasury. The question I have (and ACA has) is will the majority of the revenues come from increased tax collection, or increased collection of penalties for non-compliance or inaccurate reporting? That takes me back to my original question: is the average taxpayer sufficiently knowledgeable to be able to complete all your above mentioned forms accurately, whether they use pencil and paper or tax software?

I think you may have answered this while I was typing.

iwavetexas

I think you've hit the nail on the head, I had no idea there was a requirement to report them, nor do I have any idea how to do it! A big part of the problem is the terminology, my assets are all life insurance endowment policies which have no tax reporting implications in the UK, but as far as I know there's no equivalent in the US, therefore I wouldn't know how to report them anyway.

nun

Offshore insurance wrappers are classic ways to avoid US taxation. The offshore schemes marketed to US citizens are organized to comply with IRS regulations. A first step for you might be to find out if your insurance endowment policies meet the IRS definition.

I'm unsure how some of my US investments will be taxed by HMRC when I return to the UK, but I'll find outl before I move. I have some US retirement accounts that are not explicitly covered in the treaty so I called HMRC. The HMRC international guy tried to help, but conceded that he didn't know how to answer my question as he'd never heard of a US 457 plan. So he asked me to write a letter to a specialist and I'd get a ruling. I did that a week ago.....

The bottom line on all this is that international finances and taxation takes planning, particularly if the US is involved. It's also a highly personal thing dependent on citizenship, residence, your marriage status and that's before we even talk about your sources of income and assets. You can do lots of things to simplify your life, but you have to have a plan of what to do and when to do it! Tax filing can become ridiculously complicated if you don't take pro-active steps to avoid the common pitfalls. An example would be to sell your stocks and shares ISAs and UK unit trusts before moving to the US thus avoiding US PFIC regulations. Of course there's not much you can do about pensions, but the US tax filing isn't so bad, just fill in 8938 if appropriate and file 8833 for gains or enter the pension amount on line 21 if you are getting income.

iwavetexas

Yeah, I think I'm going to have to file for an extension and get some professional help.

iwavetexas

Do you know what the general principle is for reporting endowments? Are they trying to get at the yearly capital gain/loss associated with the underlying investments, similar to mutual funds? If that's the case, I wouldn't know how to calculate it, other than taking the valuation difference from the previous year and subtracting the payments.

nun

Unfortunately, not knowing something is no excuse in the eye's of the IRS. As a US resident or citizen those endowment policies have to be dealt with. I haven't looked into endowment policies myself, but some quick Googling produced this

http://www.taxationweb.co.uk/forum/e...us-t16098.html

However, be very careful of the web as there's lots of bad information. To understand how to deal with your endowment policy you'll have to find out if it complies with IRS insurance regulations, and if it doesn't you'll need to know the underlying structure to determine if its a PFIC or a non-qualifying insurance fund, in which case I bet it's a foreign trust. UK endowment policies have some similarities with US annuities so maybe that's an avenue to investigate too.

I advise you post a question on the tax forum at

http://uk-yankee.com

and maybe one of the excellent professionals on there can help. I'd also seek professional help of your own.

nun

As far as the endowment policy is concerned I see two issues.

The calculation of the taxable portion of any payout and the reporting of gains in the fund prior to payout if the IRS does not recognize the UK tax sheltering. I'd be surprised if the IRS would given the situation with ISAs

iwavetexas

Thought I'd come back and report on what I'd discovered in a week of digging.

Firstly, Pete Newton doesn't return phone calls! Second, local CPAs are almost totally clueless about anything related to foreign taxation (I've spoken to several). Thirdly, the IRS help line REFUSES TO ANSWER QUESTIONS ABOUT FORM 8938, the specific quote was "that form is beyond the scope of the help line". Unbelievable.

Anyway, when it comes to endowments, I got two opinions that agreed with each other. The first was from a local CPA (I chose a guy from Hong Kong hoping he'd have some experience), I explained what an endowment was and he said there was no tax due until it pays out, at which time I'd have to figure the capital gain and pay 15% on that. The IRS help line said exactly the same thing, she even found a document that referred specifically to endowments and said there's no need to report them on the 1040 until I receive income from them, and the same with my frozen pension plan. Incidentally, the CPA said there's no need to file the treaty-based exemption thing for the pension, and he said filing that is asking for an audit.

So, I'm going the scary route. I'm going to list everything on the 8938, but not list any of the endowments on the 1040 or any other form until I receive income from them.

It's enough to make you want to move back to Blighty!

nun

For income from pensions the 8833 is not necessary because the UK/US tax treaty Article 17 is rendered moot by the saving clause. I've also read that 8833 isn't necessary to claim tax exemption for contributions so I can see that it could go for gains too.

I'll defer to the CPAs wrt the endowment policy, but I'm surprised. Your reference to capital gains payments in the CPA advice and then income for the IRS advice concerns me as they are very different things. In the UK when an endowment policy matures you pay capital gains tax on it, but did you CPA see if your UK endowment policy complies with US regulations. Also it seems that the IRS advice might be treating it like a pension where distributions are taxed as income. I'd keep trying Pete Newton.

nun

Sorry, how it is taxed depends on the sort of policy, qualifying or non-qualifying. I think an endowment policy where you pay monthly premiums is a qualifying plan and tax on it paid at source during the term so there's no UK tax due when it matures.

iwavetexas

The wording was just my ignorance. Income/capital gains, it's all income to me, although I realize there are differing rates of taxation. The IRS said that there's no reporting requirement until there's a distribution, at which point you pay CG. I didn't know that endowment distributions were taxable in the UK, either, that makes me feel better about paying it over here instead!

The CPA was speaking only in general terms, he wasn't aware of the new 8938 and he insisted initially that it was a Homeland Security thing, not the IRS. Even when I'd disabused him of that misconception, he continued to believe that it was more about catching terrorists than increasing revenue. It seems pretty clear to me that the entire FATCA effort is directed at reducing avoidance, I read a document yesterday on the IRS website that seemed to suggest that the IRS is forcing overseas finance houses to produce 1099-DIV & 1099-INT documents similar to US companies, starting in 2013.