Is Your UK Stock and Shares ISA Forcing You to Sell?

With the globalization of the U.S. economy, it is not uncommon for a taxpayer who is either a U.S. citizen, lawful permanent resident, or foreign national who meets the substantial presence test to have foreign accounts, assets, and investments. The type of foreign investment, along with the value, would determine what hurdles a US person may have when it comes to U.S. tax and reporting. In recent years, with the implementation of FATCA (Foreign Account Tax Compliance Act), hundreds of thousands of foreign financial institutions are actively reporting US taxpayers to the US government. One ancillary issue that was born out of FATCA is that some foreign financial institutions are limiting the types of investments that a US person can have, with one major issue becoming stocks and shares ISA in the UK. Many foreign institutions that house ISAs require taxpayers to divest any mutual funds or ETFs that they have in the ISA, since these are considered PFICs. Let’s briefly look at what a US person may have to do to stay compliant.

U.S. Person ISA Case Study

Scott is a lawful permanent resident who has lived and worked in the United States for many years. Scott is a UK citizen who also worked several years in the United Kingdom before coming to the United States and accumulated a sizable stock and shares ISA that continues to increase in value. The institution is now requiring Scott to divest his UK ISA, which means Scott will be forced to sell many different foreign mutual funds and foreign ETFs.

FBAR & FATCA

A UK ISA is considered a foreign account for tax and reporting purposes. This means that a US person is required to report their UK ISA on both the FBAR and Form 8938 — presumably that the threshold requirements are met. Noting that the threshold requirements for Form 8938 are higher than the FBAR and will vary depending on whether the taxpayers are US residents and whether they’re filing married or separate/single.

PFIC

Within a stock and shares ISA, there may be foreign mutual funds and ETFs (in addition to other assets and cash accounts). From a U.S. tax reporting perspective, these are categorized as PFIC (Passive Foreign Investment Company). As a result, the taxpayer is required to report the mutual funds and ETFs on a Form 8621, in addition to any other forms they may have to file.

PFIC Taxes are Not the Same as LTCG

When the taxpayer is required to divest the funds within an ISA, it is important to note that the sale of funds is not treated as long-term or short-term capital gain. Instead, when a taxpayer sells or redeems the fund, it is categorized as a PFIC excess distribution (unless an election was made earlier). Since most of the time come with the taxpayer has had the funds for several years, unfortunately, instead of obtaining long term capital gain treatment, under the PFIC excess distribution calculation, the majority of the income will be taxed in the highest income tax bracket available under U.S. tax law, in addition to having pay interest on the amount of time the funds were held within the stock and shares ISA.

Fixing Prior Year Issues Before Filing Current Year

It is also important to note that taxpayers should get into compliance for prior year reporting before filing the tax return reflecting the sale of the funds, because taxpayers want to try to best avoid a quiet disclosure. By getting into compliance with the prior year’s non-reporting before filing in the current year, they can typically avoid required disclosure issues.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures, which is typically the preferred program of the two streamlined procedures. That is because under this program, Taxpayers can file original returns, and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.

**Need Help Finding an Experienced Offshore Tax Attorney?**

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.