dwillson

I moved to the US in 2000 but I hold some PEPs in the UK and need to declare them as part of the IRS Voluntary Disclosure Program. I also have a Private Pension in the UK, how can I draw an income from this pension? Does anyone have any experience of this program and how the PEPs are treated.

JAJ

You should contact a good CPA (find one experienced in this area) and discuss the options. FIRST PRIORITY should be for you to calculate how much tax you have missed out on paying. It may or may not be much. Are you talking about hundreds of dollars - or hundreds of thousands of dollars?

Secondly, then assess whether you should simply file amended returns or use the Voluntary Disclosure Program. If the difference in tax is small, perhaps the former option may be better - the Voluntary Disclosure Program is designed for those who have evaded tax on a more significant scale.

Also discuss with your CPA your requirements to file the required information returns (including FBAR) that your investment obliges you to do.

And finally, especially if you see your future in the USA - you should consider selling your UK investment and reinvesting in a US mutual fund that won't cause these tax concerns going forward. You will pay taxes as normal but the process will be much simpler. Bear in mind that you may have a capital gain on disposal of the investment that will need to be declared for the 2011 tax year.

dwillson

Thanks for your advise JJ, much appreciated.
I have engaged a CPA and a lawyer and they advise me that I should do the Voluntary Disclosure Program (VDP).
When I entered the US when I was 63 years old on a temporary work visa and there was no plan to remain in the US. I made inquiries at that time to determine if it were possible to move my savings into equivalent saving schemes. The answer was a negative so there was no incentive to do so. So I left my pensions and saving in the UK and basically forgot about it until I needs to draw on them when I retired. My company applied for and obtained a a "Green Card".
I am now 75 and plan to retire. I now have to go through the VDP and pay $500K to the IRS. This wipes out my UK savings.
I think that this VDP program is draconian to any pensioner especially when they have never used the savings to "launder" money.
Has anyone been through the VDP program in similar circumstances. What was the outcome.
Is there any "support" group that has been formed to lobby for fairer treatment.

JAJ

$500k is a lot of money. How did your CPA arrive at this figure? How much tax did you miss out on paying each year?

You could (and should) have cashed in your PEPs and converted to US investments once you knew you were going to remain in the USA. Pension is a little different as it may be covered by the tax treaty and/or not taxable until you actually draw it down.

Bottom line is that as a US resident you have to pay US tax on worldwide income.

dwillson

Thank JAJ
I never knew about FBARS.
I made inquiries at that time came to work in the US to determine if it were possible to move my savings into equivalent saving schemes. The answer was a negative so there was no incentive to do so. So I left my pensions and saving in the UK and in my mind separated my UK savings paid the UK tax as a pensioner and basically forgot about it until I needs to draw on them when I retired.
So now that I want to retire at 75 the IRS penalty of $500K will wipe out all my UK savings. I did not declare my UK pension income $20K because that was declared to the UK tax authorities. The UK accounts were by savings not a money laundering machine.
I entered the VDP to sort the tax situation out so that I could retire it has however literally crippled what years of life I have.

JAJ

All quite unclear. Have you formally entered the Voluntary Disclosure Program and has an IRS penalty been assessed? Pension income is taxable but if you paid UK taxes then there might be no more US federal tax due, because of the foreign tax credit (although you might still owe state tax). How did the number get to $500k? That is quite high.

dwillson

Yes I have entered the VDP program. The FBAR penalty was computed on my pension and saving accounts in the UK by the CPA I hired. As I mentioned before when I came to the US to work in the US when I was 63. I left all savings in the UK and when I was 65 placed the UK state pension income and small company pensions in my bank account in the UK.
When I came to the US I made inquired to move my person pension and saving accounts to the US, this was only possible is I closed all pensions and saving accounts and loose financially, therefore I did not do it because I did not know how long I would be employed in the US. If I had then returned to the UK I still needs some financial resources in the UK. Hence I treated my UK savings and bank account to be UK resources, paid tax on the income in the UK and treated it as a totally separate entities from my US finances.
The $500K is the sum of tax penalties for not declaring the pension income and the FBAR penalties for not declaring the accounts.
I have admitted I was foolish but I am not a tax expert and trying to find an "international" tax expert locally was difficult, but I had lived all my working live in the UK and it was highly probable, and still is, that I will return to the UK, that is why I separated my UK savings and pension income and reported the UK income, paid the UK tax and kept it separate from US tax reporting.
I am now 74, I entered the VDP program in good faith because I wished to live and travel between the UK and US in my retirement.
I now know that the US tax system has created monster that favors the rich and powerful allowing them to successfully launder money for many years

celticgrid

In the 10+ years you have been in the US have you ever completed a 1040 Schedule B tax form?

dwillson

I have always completed my US tax forms.
I also always completed my UK tax forms for the pension income since I was 65.

celticgrid

So what have you been answering to Q7 on 1040 Schedule B?

Sorry, but you don't have to be a tax expert as you mention. You do keep mentioning how terrible the tax system is, but you seem to have decided, in the face of what the US paperwork asks for, that your UK income and accounts don't actually count. I'd get a second opinion on your liability - it does seem high - but please accept responsibility for the position you find yourself in.

dwillson

I agree I made a mistake that is why I entered the VDP program. I just want to be treated failrly.

JAJ

You don't need an "international" tax expert - many USA tax practitioners are capable of including foreign income on a US tax return and claiming a foreign tax credit. Secondly, the decision to transfer investments is not "all or nothing". In other words, it might have been impractical to transfer your pensions but not your other investments.

It is still not clear where the $500k comes from. You say you paid UK tax on your pension, so any US tax on the same pension income is possibly going to be quite limited. So what other tax have you not paid? You should have a good explanation from your CPA on where the $500k comes from - if not, ask for one.