Compare UK SIPP, ISA, and Brokerage Accounts for U.S. Tax
U.S. taxpayers who previously lived or worked in the United Kingdom and have a diverse range of foreign investments — and are U.S. Persons for tax purposes — may become subject to IRS tax on the income, even though they may not be subject to tax under UK laws. There are three (3) common types of securities investments that taxpayers in the UK typically have:
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SIPP
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ISA (Cash vs Stock and Shares, and
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Brokerage Accounts
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Let’s take a brief look at the differences between these types of investments and how they may be impacted for U.S. tax and reporting purposes.
SIPP (Self-Invested Personal Pension)
The first thing to keep in mind is that the United States and the UK have a very robust tax treaty when it comes to pensions. The SIPP is a very common investment vehicle that many taxpayers who work in the UK — and people acquire a SIPP for different reasons. For example, some taxpayers may create their own individual SIPP (especially early in their careers) to help plan for retirement. Other taxpayers may have had an employment-type pension or multiple pensions and rolled them all together into a SIPP. In general, since the SIPP is a pension, the growth will not be taxable until it is distributed. Likewise, even if the SIPP has various foreign mutual funds and ETFs that may qualify as PFIC, most taxpayers would rely on the PFIC/Treaty/Trust regulation that allows taxpayers to exclude filing PFIC Form 8621 for funds within certain pension plans (in treaty countries).
ISA (Individual Savings Account)
Unlike the SIPP, which is categorized as a pension, the ISA is a type of investment that is used to supplement retirement. Technically, the ISA is not considered a pension, which means it is treated for tax purposes different than the pension. With an ISA, if it is a cash ISA, then generally it is taxable as it grows, and usually the income is limited to interest income. If instead it is a stock and shares ISA, then it depends on the type of investments contained within the stock and shares ISA. If it contains foreign mutual funds and ETFs, then the dreaded PFIC Form 8621 may be required to report each fund investment within the ISA. In addition, if funds have been redeemed, switched out, or sold, there may be excess distribution calculations required as well, even though technically the distributions have not been made out of the ISA.
UK Brokerage Account
The brokerage account is typically reported on the FBAR and Form 8938, and the income associated with the investments is taxable. The only hitch in your giddy-up is whether the brokerage account contains PFICs. Similar to the explanation for the stock and shares ISA (above), foreign mutual funds and ETFs will often qualify as PFICs, which means the individual funds must be reported on Form 8621 in addition to the accounts being reported on the FBAR and Form 8938. Likewise, if any of the funds are sold, redeemed, or switched out there may be an excess distribution issue have been opened as well as if there are significantly higher dividends distributed in a current year, in which the current dividend distribution exceeds the 125% average of the prior three years (or less than three years, if the fund was open for less than three years).
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.