Simonyg

Hello,

Firstly, thanks for reading.

I am a U.K. Citizen living in the US. I have been completing a 1040 submission for the past 2 years via a local international tax CPA. However, he advised me before my first tax return that there was no requirement to include rental income (minus depreciation, expenses, etc) on my US tax return as article 6 If the treaty between the countries states that tax should only be paid in the country in which the property is situated. I took his advice and simply declared the income in the U.K. on my self assessment. I didn't end up paying any U.K. tax as the net amount was below my personal allowance.

All that being said, although I can't find any specific official guidelines on this subject, I have read in many forums that I should be declaring this net income and paying US taxes.

Can someone confirm one way or the other? Also, is there anywhere official where this is covered?

The CPA also didn't make me aware of the requirement to declare U.K. bank interest ($1500 per year) and bank accounts (yes, there is a theme developing). I have an aggregate amount over the thresholds. So, I will need to amend my 1040, declare and pay tax and interest on the U.K. bank interest and complete form 8938. I will also need to file delinquent FBAR's for the 2 years.

Question is, should I file and include a reasonable cause statement on both amended return and FBAR or use the streamlined procedure, which carries a 5% penalty (about $18k)?

Thanks for the help.

nun

Wow, your CPA failed completely. Article 6 in no way excludes the UK rental income of a US resident from US taxation.

What has your CPA said about how they plan to correct their errors?

Simonyg

He still believes he is correct and is adamant that it should not be declared. The crazy thing is that he is the local international tax specialist as far as the local tax attorney is concerned. He is seen as the local expert on the treaty.

He has admitted that he should have told me about the other requirements and has agreed to write a letter supporting my submission, whichever way I jump.

It's just difficult to decide if I should do the spreamlined process or the delinquent foreign information submission process with reasonable cause.

ubernathan

US residents must report world-wide income to the IRS. They may also declare any foreign taxes paid as a deduction.

Cook_County

We do not know what kind of US visa you hold, so cannot be certain that you are US resident for US income tax purposes. If you are US resident, I suggest using IRS Streamlined Procedures and asking the CPA to pay the 5% penalty and the interest plus the cost of getting a qualified professional to correct things.

nun

There are a few circumstances where a US resident can claim a foreign tax credit, but if someone lives in the US and has foreign taxable income, the tax credit is usually claimed on the foreign tax return for US tax paid.

Simonyg

Thanks for the responses.

I am on an L1 visa so I am definitely a resident alien.

I am leaning towards using the Delinquent Foreign Informatiom Procedure as I think I have a strong reasonable cause case.

Cook_County

You are correct that "reasonable cause" is built into the statute; but if the IRS disagree you will never know until they select the returns for audit - which could be in 5, 10 or 20 years time; way too long to complain & seek recompense from the CPA. Streamlined also has no certainty. OVDP is a tad more certain...but more painful.


Have you explored formal compensation from the CPA at fault...to give yourself more peace?

Simonyg

I haven't looked into formal compensation so far as the CPA is still adamant that we should not be declaring my U.K. Rental income on US 1040. Although he has admitted that he did not make me aware of the need to declare U.K. Bank accounts and pay tax on the interest.

Has anyone on here actually gone through either the streamlined process or the delinquent foreign information submission?

Cook_County

Speaking as a tax professional, I have put hundreds of clients successfully through the IRS streamlined procedures. To my thinking, the delinquent information procedures add nothing of value to the statute.

Simonyg

The streamlined process definitely seems like the most concervative process. However, 5the only reason I am thinking about the delinquent process is that I would not immediately be hit with the 5 penalty; $20k in my case. This was entirely unwillful and my CPA should have done a much better job so I think the reasonable cause case is pretty strong.

I know I would be leaving myself open to other penalties with the delinquent process if the IRS doesn't agree with my reasonable cause statement but if they do I would avoid the penalty. Also, my understanding is that the streamlined process also carries risk of further penalties.

I really don't know which way to go.

Cook_County

That reaction is normal.


Reliance on a competent tax professional can be reasonable cause; but you do not need special IRS procedures, as this is the statute.


Given IRS bullish attitudes, the IRS might still try to argue wilful blindness. A good attorney familiar with offshore matters can guide you as to the questions to ask first of yourself and from that analysis how to approach the IRS.

Simonyg

Great feedback and I appreciate it very much.

Last question two... if I was to take the streamlined process route, could I claim penalty abatement due to the circumstances or do I need to swallow the 5% penalty no matter what?

Is my CPA liable for the penalty in any way or is he just liable for his initial costs and interest, etc?

Cook_County

What does your contract say? What does his State Board say? What does State law say?

Simonyg

I actually have no idea about any of those questions. I guess I was just looking for high level guidance.