Uncle Sam is gearing up to get his slice of Americans’ tax pie

Tens of thousands of Irish people and foreign nationals who have worked and lived in the UK or US and still have investments, property or pension funds there, are particularly vulnerable to those countries’ tax regulations.

Soon, one group in particular – the nearly 12,000 American citizens living in Ireland (with or without dual citizenship) and the unknown number of Irish citizens who have dual citizenship or are holders of US green cards but reside here – will begin to discover just how vulnerable they are.

From July 1, their banks and other financial institutions are obliged to begin reporting them to the American tax authorities under FATCA – the Foreign Account Tax Compliance Act 2010.

Americans (and US green card holders) who live outside the US and have relatively modest assets have always been obliged to file annual US tax returns, even if they didn’t have any tax to pay.

Only income under $10,000 (€7,350) for a single unmarried person under age 65 or $21,200 (€15,580) for married persons over 65 and filed jointly, have been exempt from the filing of IRS Form 1040. However, under a 1972 FBAR (Foreign Bank Account Report) regulation, Americans or green-card holders with foreign deposit accounts holding just $10,000 (€7,350) were required to file every year.

Few foreign-based Americans or green-card holders – who number in the millions – have been aware that their citizenship, and not their residency, determined their tax status and obligations. (Americans employed abroad in US multinationals or agencies can depend on their companies to ensure compliance.)

Advisers here say that awareness is low among Americans who are long-time residents, Irish nationals with US citizenship by birth or marriage or returned émigrés who have kept their green cards.

Up to now, without sufficient resources, it was also impossible for the IRS to globally enforce their own tax rules, but that also explains the periodic tax amnesties it has arranged for non-compliant Americans living abroad and green-card holders.

The last amnesty occurred in 2013 said tax adviser Declan Dolan of Dublin accountants, DCA, who deal with foreign resident clients, including Americans citizens and Irish who have lived and worked in America.

“In the case of last summer’s amnesty,” he said, “US residents here who filed up to three previous years declarations and paid any tax, were then considered to be tax compliant by the IRS.” Penalties and surcharges were waived.

However, since 2010 and the passing of FATCA, to which Ireland was one of the earliest signees, compliance has now shifted. Financial institutions have been obliged to identify their American customers with offshore accounts to the IRS, starting with large institutional investment customers.

From this July, retail customers with foreign bank accounts and investments with an aggregate value as low as $200,000 (€147,000) for single people and twice that for married couples filing jointly, must be reported. Financial institutions and banks that do not cooperate with FATCA themselves face onerous, annual tax withholding charges on their US assets.

Once the identities of the FATCA account holders are known, the onus is on the IRS to pursue their citizens and green-card holders for any monies due. A FATCA alert, the theory goes, could trigger a wider IRS audit.

This is an enormous task for the American tax authorities and FATCA itself is only expected to raise about $900m per annum.

However, between income tax obligations, reporting deposit holdings under FBAR and banks and other institutions reporting customers under FATCA, US citizens, dual citizens and Irish green-card holders are potentially open to not just back tax bills but penalties and surcharges.

The tax position of Irish or British residents who are holders of UK financial accounts and assets is not as onerous or intrusive as it is for Americans, according to financial adviser Marc Westlake of GoldCore Wealth Management, who specialises in advising foreign nationals on investment strategy.

Double taxation agreements (which also apply between Ireland and the US) ensure that people don’t pay tax on British assets twice, but “UK tax is a very complex subject full of pitfalls for the unwary,” said Mr Westlake.

“For example, thousands of Irish people own investment property in the UK. Up to now there was no UK capital gains tax upon disposal for non residents, but that will change from next year when British CGT will apply as well as Irish CGT.”

Another common tax anomaly arises when long-time Irish residents in the UK return to Ireland but keep their individual savings accounts (ISAs). “These accounts are only tax-free upon disposal to UK residents. If encashed after the owner leaves, they are subject to both UK and Irish capital gains tax.”

Inheritance tax can also be problematic where foreign assets are concerned, said Westlake.

If the owner of UK or US-based assets dies, and that person is neither a resident nor a citizen, a different set of estate tax rules will apply, he explained.

“First, the tax-free transfer between spouses does not apply in the case of non-resident aliens, or NRAs, the term that is used in the United States. Normally, a US estate is tax-free up to a value of $5m. But in the case of a surviving NRA spouse who is living here in Ireland, and is not a US citizen, the tax-free threshold is just $60,000 and a tax of 35 per cent is liable on the balance.

“In the UK, the non-resident surviving spouse will pay 40 per cent tax on any chargeable assets worth over £325,000. Only spouses who reside in the UK enjoy a tax-free inheritance from their late husband or wife’s estate.”

Westlake warns that “holding assets in foreign jurisdictions adds a significant layer of complexity to personal finances” and shouldn’t be undertaken lightly.

“Before anyone invests abroad, purchases assets, or takes out foreign citizenship, they should get proper financial, tax and legal advice,” recommends Declan Dolan.