Filing your first American returns from Britain: what catch-up really involves

It is catching up on returns you never filed, usually several years at once, and then carrying on each year afterwards. For people living abroad it normally runs through the Streamlined Foreign Offshore procedure rather than as a set of ordinary late returns.

The procedure exists for people whose failure was not wilful.

Choosing the route comes before preparing a single figure.

Fewer than most people fear. Under the Foreign route, the IRS asks for delinquent or amended returns for the most recent three years whose due dates have passed, and delinquent FBARs for the most recent six years whose due dates have passed.

The five-year figure people quote does not appear in the procedure.

The IRS page for the Foreign route sets out the years.

Because ordinary late returns carry no protection from penalties. Filing them without a procedure leaves failure-to-file and information return penalties available to the IRS, while the Foreign route removes them for people who qualify.

The paperwork is almost identical either way.

So first time filing through the procedure costs little extra and protects a great deal.

It also gives the whole exercise a clear end point, which ordinary late filing does not.

You need two things. First, a failure that was not wilful, meaning negligence, inadvertence, mistake or a good faith misunderstanding of the law. Second, for a citizen, no US abode and at least 330 full days outside America in one of the last three years for which returns were due.

Living in Britain normally satisfies the second test easily.

The first is where the certification needs care.

If you spent long periods in America, count the days carefully before relying on the test.

Because the IRS Streamlined page says every return filed under the procedures must carry a valid taxpayer number, and for a citizen that means a Social Security number. Getting one from Britain involves an interview in London and around two months of processing.

So first time filing starts with that application, not with the returns.

Prepare everything else while you wait.

For each of the three return years, your P60, final payslip, P11D if you have benefits, and any Self Assessment calculation. For each of the six FBAR years, the highest balance of every account you held, including savings, ISAs and some pensions.

Add statements for any funds, showing purchases, sales and income.

Our clients usually find the six years of bank balances the slowest part to collect.

Ask banks for annual statements rather than monthly ones. They usually show the figures you need with far less paper.

The same things an ordinary American return contains, converted into dollars: salary, interest, dividends, pension and any gains. Then the reliefs, usually a credit for British tax or the earned income exclusion, which normally reduce the tax on a British salary to nothing.

Each return is complete in its own right.

Consistency across the three years matters more than precision in any one.

A British workplace pension usually needs care rather than tax. Its growth is generally deferred under the treaty until paid out.

In the items Britain shelters and America does not. Interest inside a Cash ISA is taxable in America with no British tax to credit. British funds can fall under the passive foreign investment company rules, which carry their own form above a small de minimis, as the IRS page for Form 8621 sets out.

A plain salary rarely produces anything.

We explain the fund question in is my fund a PFIC?.

Rental income from a British property is the other common source, because depreciation and currency rules differ.

A signed statement on Form 14653, the certification for people residing outside the US, explaining why the failure was not wilful. It sets out who you are, what you did not know, when you found out and what you did next.

Specific facts persuade. Generic wording does not.

In our practice this is the document we spend longest on, because it carries the whole procedure.

Mention how you found out, whether from a bank letter, a colleague or a news story. That detail makes the account credible.

For people who qualify and comply fully, yes. The IRS says they will not be subject to failure-to-file or failure-to-pay penalties, accuracy-related penalties, information return penalties or FBAR penalties, which covers everything a first-time filer usually worries about.

Any tax shown on the returns is still paid, with statutory interest.

The Domestic route, for people living in America, is different and carries a 5% charge.

A separate procedure may apply. The IRS relief procedures for former citizens cover people who relinquished citizenship after 18 March 2010, whose failures were not wilful, whose net worth is under $2,000,000 and whose liability over six years is $25,000 or less.

Where you qualify, the IRS says it will not assert penalties.

The IRS relief procedures for former citizens list every condition.

By post, on paper. The IRS says electronic submissions are not accepted under the Foreign route, and it gives a dedicated address in Austin, Texas. Each return and information return is marked Streamlined Foreign Offshore in red at the top of the first page.

The FBARs are separate and go electronically through FinCEN's filing system.

Use a tracked international courier for the paper package.

Keep the courier's tracking record with your copy of the package.

It matters for consistency more than for the result. Returns need figures in dollars, and most people use the IRS yearly average rates for income spread through the year, while FBAR balances use a year-end rate.

Pick a method and apply it to every year in the package.

Switching methods between years is the kind of inconsistency that attracts questions.

Usually very little for a salaried person in Britain. British tax on the same income is typically higher, so the credit wipes out the American liability. Where tax does arise, it is normally small and comes from ISAs or funds.

Interest runs on any late tax from the original due dates.

We price the whole exercise in Streamlined filing cost.

Most first time filing packages we prepare show no tax on the salary years at all.

Usually nothing dramatic. The IRS processes the returns and your account moves into ordinary annual filing. Many people receive no confirmation at all, so silence is a common outcome, and it should not be read as a sign that something has gone wrong.

From then on, you file each year by the usual deadlines.

For people abroad, the return is automatically extended to 15 June.

Put the June date in your diary now. Missing the first ordinary year undoes much of the good work.

Usually two to four months from start to posting. The Social Security number is often the longest wait, followed by collecting six years of bank balances from institutions that archive older statements slowly.

Preparing the returns themselves takes far less time once the documents are in.

Starting the number application on day one is the single biggest time saver.

Keep a full copy of the package, the courier receipt and the FinCEN confirmation for each FBAR. Add the workpapers showing how you converted each figure into dollars, and the documents behind your certification statement.

Those papers answer any later question in minutes rather than weeks.

Keep them for at least six years, matching the FBAR lookback.

Then a narrower procedure may fit. Where all income was reported and only the account reports are missing, the delinquent FBAR procedures can be simpler than the full Streamlined package.

The right choice depends on what was filed and what was not.

We compare the options in delinquent FBAR procedures.

They stay outside the package unless they are also American. Most citizens married to non-Americans file as married filing separately, where the income threshold is only $5, so the filing question for each year is rarely in doubt.

Joint accounts still count in full on your own FBARs.

We cover the status choice in married to a Briton.

This order keeps the waiting to a minimum.

Take a Manchester accountant born in Chicago who learns she should have been filing. She gets a Social Security number, gathers three P60s and six years of balances, and prepares the package.

Her credits cover the salary. Her Cash ISA produces a small American liability across the three years, which she pays with interest.

She qualifies for the Foreign route, so no penalties apply, and she now files each June. This example is illustrative, not advice.

The whole first time filing project took her three months, most of it waiting for the number.

First, filing this year's return alone and ignoring the past.

Second, writing a vague certification that repeats the procedure's wording.

Third, e-filing returns meant for the Foreign route, which the IRS does not accept.

Fourth, forgetting that FBARs go to FinCEN, not in the envelope to Austin.

Fifth, leaving pensions and ISAs off the FBARs because they feel like savings rather than accounts.

We run first time filing as one project: the Social Security number, the three returns, the six FBARs and the certification, prepared together through our Streamlined filing service.

Once you are current, we can carry on with the annual return.

This article is general information, not personal tax advice. Talk to us about your own catch-up.