Avoiding US/UK Tax Penalties | Ask an Expert with Senior Cross-border Advisor Ishali Patel (We’re The Brits In America S1:E39)

An accountant moves to the US in the 1980s with a portfolio of non-U.S. mutual funds (classified as PFICs under US tax law). Decades later and the portfolio has grown significantly, but is never reported under the US PFIC rules. Assuming it was taxed like a standard investment, the accountant has blindly walked into an 80% penalty, lost to taxes and interest. This cautionary tale highlights the critical need for early, specialised cross-border tax advice. Thankfully, we’ve got it here. Richard Taylor is joined for this week’s Ask An Expert by Ishali Patel, Senior Director at Trowbridge Professional Corporation.

They explore key issues like informational returns (FBAR, Form 3520), the PFIC regime for non-U.S. investments, and double-taxation risks when working across states. If you do a couple of days work a week in another state you could be taxed twice! It’s bonkers, but need-to-know stuff. Ishali also shares insights on avoiding costly penalties and managing UK pensions under US rules.

We’re the Brits in America is affiliated with Plan First Wealth LLC, an SEC-registered investment advisor. The views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views or positions of Plan First Wealth.

Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Plan First Wealth does not provide any tax and/or legal advice and strongly recommends that listeners seek their own advice in these areas.

About Richard

Richard Taylor is a British expat, dual citizen (UK & US). Originally from Bolton, he now lives in Greenwich, CT, where Plan First Wealth has its head office.

As the firm’s leader, Richard launched Taylor & Taylor, now Plan First Wealth, and continues to fuel the firm’s growth. Richard is a Chartered Financial Planner (UK – CII) in addition to holding the IMC (CFA UK) and Series 65 (US – FINRA).

Connect with Richard on LinkedIn

About Ishali

Ishali Patel is the Senior Director at Trowbridge Professional Corporation.

Trowbridge Professional Corporation is a well-established global accounting firm offering a comprehensive array of personal and corporate tax services. It specializes in international tax solutions for expatriates, globally mobile employees, and businesses seeking to expand their operations beyond domestic markets.

Connect with Ishali on LinkedIn

Transcript:

Richard:

[00:00:15 – 00:01:57]

Welcome to the We’re The Brits in America podcast, a Plan First Wealth podcast dedicated to helping ambitious expatriates and first generation immigrants thrive in America.

I’m your host, Richard Taylor and Plan First Wealth is the business I founded and run today.

And we work with successful American and international families living across the US Helping them to make the most of their opportunity living and working in America. However, while Plan First Wealth LLC is an SEC registered investment advisor, the views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views and positions of Plan First Wealth. Information presented is for educational purposes only. All right, let’s get back to this week’s show.

Welcome to our Ask an Expert show where I invite a fellow professional in the US UK Cross border space to come in and talk to me about the issues we think Brits in America need to be aware of if they are going to thrive here. My guest today is Ishali Patel. Ishali is a senior director with Trowbridge Professional Corporation. Prior to this, Ishali was a founder of Arcos Tax Advisory Services. She was a director at Blick Rothenberg and she spent well over a decade at Buzzer Cop. In other words, ladies and gents, Ishali is a well travelled, highly experienced US UK Tax advisor. And what’s more, she is my personal US tax advisor and I’ve convinced her to come on the show today to share with us everything we need to know to thrive in America. Well, look, maybe not everything, but whatever we can get into 45 minutes at least. So without further ado, let’s get into this. Hi, Ishali. Welcome to We’re The Brits In America

Ishali:

[00:01:57 – 00:02:01]

Hi, Richard. Thanks so much for having me. I’m really happy and excited to be here.

Richard:

[00:02:01 – 00:02:06]

The first item on my notes here is informational returns.

Ishali:

[00:02:06 – 00:03:00]

Yes. So that’s a really, really big one. When you’ve got people coming over to the U.S. the reporting is obviously completely different. People are very much aware potentially of, you know, okay, we’re going to be paying a different tax rate. There’s a different tax system, We’ve got a federal system. So we might be paying extra tax to our state, whichever state we’re living in. But what they’re not aware of is how much extra information the IRS want about assets that are not particularly in their reach. So you know, any assets that a US person has abroad is of a lot of interest to the irs. They don’t have any automatic way of understanding what people have outside the us so they impose these very stringent requirements in terms of information that people have to supply and attach very high penalties to those filings if they’re not done on time or if they’re not done correctly.

Richard:

[00:03:01 – 00:03:23]

Ishaani, if I had a dollar and if you had a dollar, I imagine for every time I heard, but I’ve not taken any withdrawals, you know when, when you mention to someone, ah, so you’re, you’re, you’re not reporting that to the IRS because correct me if I’m wrong, but nowhere else do we have to supply this trove of information about accounts that you might not take any withdrawals from. There might be no tax due for, for decades.

Ishali:

[00:03:23 – 00:03:26]

Yeah, absolutely. And people don’t know about them.

Richard:

[00:03:26 – 00:03:38]

Number one, people don’t know about it and number two, people have no idea of the potential consequences. And when they do find out the potential consequences, they are understandably horrified because it’s so draconian.

Ishali:

[00:03:38 – 00:04:07]

It’s extremely draconian. They’re flat penalties. Normally people are familiar with the idea or the concept that okay, if I owe some tax and I pay it late or I don’t pay it on time, there might be some penalties and interest that I have to pay based on a percentage of what I owe. The penalties around these information reports are just flat fees for not filing, for filing late, for filing incorrectly. And they can be really, really hefty, some would argue disproportionate to actually the information that they’re actually providing and reporting on.

Richard:

[00:04:07 – 00:04:34]

I’m one of those people who claims are disproportionate and unfair. Draconian is a word I use and I stand by it. It’s just absolutely. I’m plugged into both the US like a tax network on LinkedIn but also UK for obvious reasons and I hear people getting all up in arms and upset about 100 pound UK HMRC automatic penalties. And I just think you, you guys don’t know. You’re born like.

Ishali:

[00:04:34 – 00:04:34]

Yeah.

Richard:

[00:04:34 – 00:04:37]

Our equivalent of 100 pound automatic penalty is 10,000 dol.

Ishali:

[00:04:38 – 00:04:46]

Yeah, absolutely. That’s the pretty baseline penalty. That’s the starting point. That’s typically a non willful level penalty. Not even. Yeah, you know as well.

Richard:

[00:04:46 – 00:05:04]

Right, so, so the 10, $10,000 is a number that’s always banded around. But those numbers adjusted for inflation. So they’re actually. If someone got a $10,000 penalty today, would it be more like, say, $16,000? Because it’s. It’s $10,000 when that statute came into place. So is that right? So it’s actually way higher.

Ishali:

[00:05:04 – 00:05:09]

Yes. So, for example, I think the foreign bank account penalty is, is more like 13,000 now.

Richard:

[00:05:09 – 00:05:39]

Oh, man. Oh, man. Let’s just be clear about what we’re talking about here. So a common example for us is a Brit moves to. To America. They’ve got UK bank accounts. They may or may not have, you know, ISAs. That’s something we’ll come back to, I guess. But they almost certainly have UK pensions or UK retirement accounts, and suddenly they are required to report these on multiple forms. It’s not just one form, it’s multiple forms. And each form has its own requirements and penalties.

Ishali:

[00:05:40 – 00:07:15]

That’s right. One of the reasons, particularly with pensions, that it’s a problem is because there are two sets of rules that are into play with pensions. So you obviously have the pension rules and the tax treaty between the US and the uk, which is pretty robust, generally speaking, in terms of getting it right for Americans living in the UK and for Brits living in the us, who have retirement savings. But there are also another set of rules in the US around foreign trusts. And unfortunately, sometimes the UK pension arrangements, very typical and benign and accepted practices and arrangements in the UK would fall foul technically of these trust rules in the us. And so you end up with two sets of rules which don’t sit very neatly together. And so you end up in a situation where you treat a pension like a foreign trust from a reporting perspective, but then you use the treaty to help with income, etc. Generated from that pension. So the penalties for not filing trust information forms are extremely high. And so almost by virtue of the fact that these two sets of rules don’t fit neatly together, UK pensions, for example, get called into that definition. And then as practitioners, because the penalties are so high for not filing those forms, even though a lot of people, especially years ago, people were fighting very hard about, you know, in order to not have to file these, for example, UK SIPs or UK pension plans, the risk of not doing so is not. It’s not worth it, ultimately, because the penalty regime is so cranial. I will use your word, because it really, really is.

Richard:

[00:07:15 – 00:07:30]

Yeah. I mean, what are we talking about? We’re talking. So if you, if you do a transfer into a trust which you don’t report on 3520, which for our purposes, could be a rollover. Right. A UK pension into a, into a SIP. Is potential penalty 35%.

Ishali:

[00:07:30 – 00:07:32]

Yeah, 35%.

Richard:

[00:07:32 – 00:07:34]

And then ongoing 5% of the value.

Ishali:

[00:07:34 – 00:07:35]

Yeah.

Richard:

[00:07:35 – 00:07:39]

And then distributions as well. If you take it, you know, if you’re taking distributions, are the penalties on distributions?

Ishali:

[00:07:39 – 00:07:41]

There shouldn’t be penalties on the distributions.

Richard:

[00:07:42 – 00:07:44]

But if you’re not filing it on 3520.

Ishali:

[00:07:44 – 00:08:03]

Well, you would. A distribution would most likely be reported on the return because it would either be. It would either be taxable or treaty excludable, depending if you have had a distribution from a foreign trust. There is information on the 3520 form which you need to complete.

Richard:

[00:08:03 – 00:08:20]

So 3520s are a. Hot. Are a hot topic right now because of the IRS’s willingness and I believe it’s like automatic penalties on 3520s. Have you seen people penalized for not filing it for four sips?

Ishali:

[00:08:20 – 00:09:03]

I have, actually, yes. It’s been where the IRS have argued that the return was late. The due date for a 3520 is October 15th. So typically the IRS, if you send the document and you’ve got proof of posting on the day of the deadline, the IRS accept it to be timely filed. So we had done that in this particular case, they got the document on the 17th and they’re not accepting that it was A timely filed 3520. So they have automatically applied a penalty. So it’s not really because it was a sip. It’s understand it was because they think.

Richard:

[00:09:03 – 00:09:36]

It’S like, you know, it gets me all wound up. This, the thing is, we talk about the IRS do this, the IRS do that, but you forget these are human beings making these calls. Like someone has looked at this case and thought, yeah, this, this is deserving of a penalty. Oh, there’s these mitigating circumstances, which is not even in a mitigating circumstances. It’s. No, no, this, this, this is on time. And if someone thought, no, I’m just going to disregard that. I just, I think there’s something culturally wrong there. But this is. That’s a different podcast topic.

Ishali:

[00:09:37 – 00:09:38]

Yeah, yeah, no, absolutely.

Richard:

[00:09:38 – 00:09:41]

And how to fix the culture at the irs.

Ishali:

[00:09:41 – 00:10:05]

Yeah, I think it has been unfunded for a long time and a lot of the representatives generally are very domestic focused, so they don’t tend to be very aware of foreign issues. I think there isn’t. In fact, there is an international team now which, where people are more aware of issues that are facing anyone who’s got foreign assets. Really, but it’s taking time.

Richard:

[00:10:05 – 00:11:25]

There is a real tax evasion problem. That whole, I don’t know, it was years ago. But the whole Swiss banks thing, I know people that was, that was naked tax evasion. People were hiding accounts and, and not reporting income. So maybe, maybe it’s a, it’s, it’s the long tail of that like they uncovered real, actual systemic tax evasion. And I, and, and I’ve also just, I’ve just finished reading a book on Bernie Madoff’s Ponzi scheme which was really fascinating 15 years on. But there’s, there’s a lot of the, the talk is about the, there are a lot of mega, mega wealthy investors like literal invest and they knew better and they absolutely knew what was going on. That’s the thesis of this book. And I buy into it. What also came out is how absolutely committed to tax evasion these billionaires seem to be like. And when you, when you think that the richest people in this society have got a reputation that in some respects may seems legitimate for not paying their fair share of taxes and going out their way actually to, to, to, to not pay it, does that cascade down? Is that, is that, is that trick trickle down economics American style, where the rest of us who are trying to pay our feds, Jerry, not trying to hide anything are kind of tarnished with the same brush?

Ishali:

[00:11:25 – 00:13:11]

Yeah, absolutely. And I mean I think, I think people with, who don’t sit in the cookie cutter kind of traditional profile of a U.S. citizen living, living and working in the U.S. they get, you know, the IRS are just very, very nervous. You know, I think the whole UBS thing, as you said, that was the conduit of fatca. And I think the European banking system really got a shock as a result of that. That the amount of money that they anticipated, that the tax gap, I think back in this is 10 years ago now, the tax gap that they were banding about was billions. And if you think about that, you know, either how could you, how would you go about collecting that revenue? You know, okay, you either invest a huge amount of money in IRS inspectors and auditors and all that, or you push the obligation onto the taxpayer. Right. And use penalties and scary forms and things to force compliance. And I think that’s probably the way that they decided to go. What’s kind of counter to that really is the streamlined program which has been around since 2014. That’s a disclosure program which allows someone who hasn’t been filing to catch up. And that still gives you protection from the 3,520 penalties or the foreign bank account report penalties. So the IRS has still kept some kind of avenue open for people to get back in the system in quite a benign way. But I think after the whole Swiss bank situation, I think the whole premise of FATCA is let’s push the responsibility to the institutions and therefore to the individuals. And also there are, in fact, repairer penalties. So we’re also on the hook for filing fraudulent or frivolous tax returns.

Richard:

[00:13:11 – 00:13:47]

So let’s just. So faca, this is a piece of legislation. Stands for what? Foreign Account Tax and Compliance act. Yeah, what 2012, 2011, Obama era, following this whole Swiss. And it’s this act that’s led to so many of these additional requirements and forms that we’ve been referring to. 89, 38, 35, 20s, 86, 21s, all the stuff that we’ve either specifically mentioned already or we’ve alluded to. There’s other stuff as well, though, outside of these forms. So the Bank Secrecy act is FBAR and PFIC regime predates all this. I understand you practiced as a tax advisor pre FATCA.

Ishali:

[00:13:47 – 00:13:50]

Oh, yes, yeah. 10 years. Pre FATCA.

Richard:

[00:13:50 – 00:13:53]

What was it an easier time? Was it. What was it like?

Ishali:

[00:13:53 – 00:14:00]

The foreign bank account reports were not taken as seriously as they are? I mean, they have been around for a long time.

Richard:

[00:14:00 – 00:14:01]

The. The FBAR ones.

Ishali:

[00:14:01 – 00:14:02]

Yes.

Richard:

[00:14:02 – 00:14:07]

Yeah. So under bank. So just so people, that’s under the Bank Secrecy act, right? That’s from the 70s, I think.

Ishali:

[00:14:07 – 00:14:08]

Yeah, yeah.

Richard:

[00:14:08 – 00:14:30]

And just so anyone who’s unfamiliar, that’s where you have to report any and all foreign bank accounts. Bank accounts, but investment accounts, pensions, we believe just any. Any foreign account, not just a bank account, which is so often misunderstood. And another area that’s misunderstood, this is when the combined aggregate totals of all accounts together crosses the $10,000 threshold.

Ishali:

[00:14:30 – 00:14:32]

Yeah, that’s correct.

Richard:

[00:14:32 – 00:14:48]

Absolutely. If you can, if you’ve got one account, you keep it below $10,000. You don’t need to worry about this. But if you have multiple accounts, if you have pensions, if you have investment accounts, if you have just multiple bank accounts, if at any point the combined total is more than $10,000, you have to file an FBAR.

Ishali:

[00:14:48 – 00:15:08]

Yeah, that’s absolutely right. And you know, I remember when the. So the foreign bank account report legislation, as you said, was always there, they did start to expand it and they introduced them a really big, like, FBAR toolkit. Recently. Not recently, but a few years ago, there were discussions around whether an Oyster card for Example in the UK would. Would be a foreign account.

Richard:

[00:15:08 – 00:15:09]

Yeah, yeah.

Ishali:

[00:15:10 – 00:15:25]

You know, premium. Premium bonds are a foreign bank account. Life insurance, if there’s a cash surrender value, most types of pensions. The scope of what is included in an FBAR has expanded more and more over the years.

Richard:

[00:15:25 – 00:15:26]

Yeah. Wow.

Ishali:

[00:15:26 – 00:15:46]

One interesting. Really, really interesting case. And I’m sure. I don’t know whether you followed it, Richard. It went all the way up to the Supreme Court about whether the FBAR penalty should be applied to every bank account in every year that the return file wasn’t formed or whether it should just be one per year. I don’t know if you recall that, but the taxpayer won in that situation.

Richard:

[00:15:47 – 00:15:47]

Thank goodness.

Ishali:

[00:15:48 – 00:16:10]

Thank goodness. Otherwise, I think. So in just a little bit of background, there was a taxpayer who hadn’t filed these forms. He filed them late. He had about 50 accounts, I think. I can’t remember how many accounts he had. And they wanted to impose $10,000 penalty on each account for each year that he was delinquent. And it went all the way up to the Supreme Court.

Richard:

[00:16:10 – 00:16:18]

I mean, it was. It was like the difference between something like a $2.6 million fine plus interest and penalties versus a $50,000.

Ishali:

[00:16:18 – 00:16:18]

Yeah.

Richard:

[00:16:18 – 00:16:42]

So they. They wanted to charge $10,000 per for every account for five years, and that’s where they got to 2.6 million. This was a phenomenally successful guy who’d gone back to Romania, I believe. 2.6 million to $50,000. Yeah. It was remarkable. And do you know what was funny as well about that was the. The split of the Supreme Court. I found myself allied with people I wouldn’t necessarily nor agree.

Ishali:

[00:16:42 – 00:16:47]

I was surprised as well. I was really surprised at how it was.

Richard:

[00:16:47 – 00:16:49]

Close call, wasn’t it? What if I 4.

Ishali:

[00:16:49 – 00:16:57]

I saw people aligning. I don’t think I’ll ever see aligning again, let’s put it that way. Without going into politics, I’m reaching back.

Richard:

[00:16:57 – 00:17:02]

Into my memory here. I could be wrong, but I think it was the new one as well, Katanji Jackson, who. Who. Who was a deciding factor. So.

Ishali:

[00:17:02 – 00:17:04]

Yeah, she wasn’t. She. Yeah, she was.

Richard:

[00:17:04 – 00:17:13]

I think she was on the right side of that. Despite siding with people who. I’m sure she won’t side with that that often going forwards, but I think she got that one right. What was it like pre Fatca, doing your job?

Ishali:

[00:17:13 – 00:18:15]

Pre Fatca. It was. I mean, people took it seriously. Forms like, you know, the federal. They’re all around, but no one was doing them for sips, for example, you Know, no one would even consider doing a 3520 for a pension plan, for example, the corporate reports were just basic form, relatively basic forms, no tax associated. You would only see a 3520 if someone had a gift from a non US person in excess of $100,000. And actually that is something that can affect Brits living over in the US because I’ve had quite a few clients who transferred property back home or they’ve received inheritances from family and that also needs to be reported on the 3520 as well. And that’s something that a lot of clients have just got no idea that they need to do anything with that.

Richard:

[00:18:15 – 00:18:17]

So that existed pre factor.

Ishali:

[00:18:17 – 00:18:23]

Yeah. So that’s, that’s, that’s where we would see it in. In most cases before that, as a.

Richard:

[00:18:23 – 00:18:41]

U.S. person, if you receive a gift or an inheritance of more than $100,000, you have to report it on this Form 3520. It’s just one line, Right? Just reporting one line doesn’t mean there’s tax to pay. Currently, if you don’t do that, you file it late or you don’t file it at all, you can get penalised 25% of the value of the gift.

Ishali:

[00:18:41 – 00:18:41]

Yeah.

Richard:

[00:18:41 – 00:18:49]

And my understanding of it is they are aggressively levying these penalties pre factor. Were they as aggressively levied?

Ishali:

[00:18:49 – 00:19:14]

Never. Same with fbar. I mean you used to have to paper file them as well. So you just put bunch, you just bunch them in together and send them off and they, they went, I think they went into this big warehouse in the IRS that no one ever looked at again. I mean, now it goes straight the financial. That is the crime that FinCEN, which are financial Crime Enforcement Network or something like that.

Richard:

[00:19:14 – 00:19:16]

Yeah. And what do they do with them, I wonder?

Ishali:

[00:19:16 – 00:19:19]

I don’t think that I’d be surprised if they do anything with them.

Richard:

[00:19:19 – 00:19:19]

Yeah.

Ishali:

[00:19:20 – 00:19:53]

But yes, and I, the other thing that I would see a lot. The states were not as aggressive on working days. So that’s another thing. You know, if you’re sitting in, you know, Massachusetts or Connecticut and you’re working in New York, you’ve suddenly got a New York filing requirement. If you had someone who was a Brit working in the UK and just came over to the US for a few working days, I don’t think people would be worried about filing in New York or California. Whereas now very much you would be, even for one or two days.

Richard:

[00:19:53 – 00:20:02]

What you do, you do a few days work in, in, in a different state and you can Be you’re meant to be filing a return there. Yeah, we’re talking like no threshold, like.

Ishali:

[00:20:02 – 00:20:29]

Just one day, I would say pre the financial crisis when the states were not as cash hungry, I suppose we would have maybe internal limits to say, okay, if it’s less than five, there’s no need. And below certain exemptions, we wouldn’t file a New York state return or a California state return or something like that. But you know, the situation is such now that we’ve had clients who have been tracked in and out of New York.

Richard:

[00:20:29 – 00:20:32]

How on like bus tickets and train.

Ishali:

[00:20:32 – 00:20:35]

Tickets, the passport and. Yeah, so it’s.

Richard:

[00:20:35 – 00:20:49]

Wait, sorry, this isn’t. So you, you have clients who attract. You said passports. They’ve flown in from the UK and they’ve done a couple of days working in New York and then New York expects them to file a return and pay New York state income tax.

Ishali:

[00:20:49 – 00:20:50]

That is what the rules say. Yeah.

Richard:

[00:20:50 – 00:20:57]

No way. And, and, and they’ve got taken it to such an extent that they’ve tracked down their passport movement. Basically.

Ishali:

[00:20:58 – 00:21:28]

Yeah. So I mean it’s got, it’s gotten easier now. Everything’s electronic, you know. But the particular client that I’m thinking about, he also did have a rental property in, in New York. So they had another connection, but that made it easier to trace him. I’ve had a grit move from New York to Austin and he’s only been in New York for a few years. So he, he’s not domiciled or he’s not from the state and we’ve got an audit on his really return. Yeah.

Richard:

[00:21:29 – 00:21:50]

Wow. So I mean, I never go. I’m just for the record here, whoever’s listening, I’m Connecticut based. I never go into New York. But in this hypothetical situation, right. If my situation changed and I, and I, you know, worked one or two days a week in New York, say I would have to file a New York tax return. I’d get a credit in Connecticut.

Ishali:

[00:21:50 – 00:22:18]

Right, you would only get a credit in Connecticut if there is a reciprocal agreement between Connecticut and New York and most of the surrounding states, like most of the east coast states have reciprocal arrangements with New York. But if you were based in New York and you went to California or you’re based in Connecticut and you went to California. California would expect you to pay tax on days there’s, you may not get a credit if there isn’t a reciprocal agreement between.

Richard:

[00:22:19 – 00:22:32]

No way. So you get state taxed twice with, on some income without any offset. Because that must happen all the time. People from New York must go to California every single day to work.

Ishali:

[00:22:32 – 00:22:32]

Yeah.

Richard:

[00:22:33 – 00:22:34]

That’s nuts.

Ishali:

[00:22:34 – 00:22:34]

Yeah.

Richard:

[00:22:34 – 00:22:48]

What about people coming from the UK to work for a week or two or a month or two in New York? Is there a. I guess there’s no reciprocal. Obviously there’s the Federal Tax Treaty, but one presumes there’s no agreement between any state and the uk.

Ishali:

[00:22:48 – 00:22:49]

That’s correct, yeah.

Richard:

[00:22:49 – 00:22:53]

So would they get taxed twice on that income, once in the UK and once by New York without any relief?

Ishali:

[00:22:54 – 00:23:08]

Well, they would get relief for New York state tax on their UK return. They would get up to 10,000 of that as an itemised deduction on their federal return, if that’s helpful for them. But you would have to suffer that.

Richard:

[00:23:08 – 00:23:23]

This must be the thing that is the most non compliant issue in the us because I think so. Americans travel all the time for work and I can’t imagine many are filing tax returns in every state they go to for one or two days.

Ishali:

[00:23:23 – 00:23:26]

Yeah, agreed. And it is a minefield.

Richard:

[00:23:26 – 00:24:37]

So we talked about informational returns. This is such, such a big one. There’s a myriad of different forms for different accounts. Often you think you’ve, oh, I found an F by. Yeah, but you didn’t file 35, 20 or an 18 and you know, it’s, it’s a nightmare. And the penalties are horrifying even for in what I call innocent non compliance. But one of the other things I want to talk about was PFIC regime. This is another thing I think that catches out not, not just Brit, obviously I’m talking about Brits because that’s who, who we work with. But you know, anyone who comes to the US from outside the us, the, the PIC regime. For me, the PFIC regime is how non US investments are taxed in the us, not, not just taxed, how they have to be reported. And for obvious reasons, so many expats move to the US mid Korea and they have non US investments. You know, they spent 10, 20 years, whatever, working and saving and they have these oftentimes totally benign mainstream European or Austrian or whatever mutual funds, ETFs. And now they’re subject to the PIFC regime. So talk to us about the PFIC regime.

Ishali:

[00:24:37 – 00:25:24]

Yeah, so the PFIC regime essentially punishes, I would say, people who decide to invest in non US products rather than US domestic offerings. Now, the rules don’t apply if you’re investing in straight equities. So if you’ve got shares in BT or in BP or AXA or something like that, then The PFIC rules don’t apply to you, but if you’re in, if you’ve invested in UK unit trusts, for example, growth funds, that kind of thing, then the IRS sort of say that, look, these funds potentially could be rolling up income without distributing them and therefore it’s a tax shelter. So that’s the perspective of the irs.

Richard:

[00:25:24 – 00:25:41]

To be fair, Ishali, they do, right? There are accumulation units for UK mutual funds. They are rolling up the income. They’re not a tax shelter exactly. It’s a way of reinvesting dividends. But the IRS looks at and says, no, no, I don’t care what the purpose is, it’s a tax shelter.

Ishali:

[00:25:41 – 00:26:38]

Yeah, exactly. So the way that they apply the PIFC regime is that they tax you in two different ways. So the first way that they tax you is on distribution from that particular fund. Typically in the US you would get, if you got a dividend from a individual stock, you would get a lower qualifying dividend rate at 20%, 15% or 20% on that dividend. For a distribution from a fund that is deemed to be a PFIC that would be taxed at the highest rate in existence. So regardless of even your effective rate, if the top rate of tax is 37%, you’ll be taxed on that distribution on 37. In addition to that, what the IRS would do is they would look at the previous three years of distributions and if the current year distribution exceeds 125% of the average of the last three, they would levy an interest charge on that distribution on top.

Richard:

[00:26:38 – 00:26:49]

What is this called? The excess distribution regime. Right. So you’re going to get hit with the highest rate income tax rate available, 37% currently, previously 39.6%, whatever, plus interest.

Ishali:

[00:26:49 – 00:27:02]

Yeah. The cost basis is the original purchase date, but the ownership period across the interest charge is only implied from the date you become a U.S. person.

Richard:

[00:27:02 – 00:27:38]

Oh, that’s so interesting. Let me tell you a real life story and I don’t know how this played out because this guy didn’t like what you heard and went quiet. I was approached by someone, this is a few years ago, and he was an accountant and he told me he was an accountant straight up and he’d been doing managing his own investments for a number of years. I don’t know why. That he’d done his own taxes and manage his own investments for many years was because he was an accountant. That’s what he told me. Anyway, we have a conversation. It turns out he moved here in the 80s and when he moved here he had a portfolio of Pfix, you know mutual funds from the 80s. And we had this conversation, I think it was the depth of COVID So this is 2020.

Ishali:

[00:27:38 – 00:27:39]

Okay.

Richard:

[00:27:39 – 00:27:58]

This portfolio of Pfix was now worth, I think it was about a million. It was either a million pounds or a million dollars and a lot of that as you can imagine over 30 years, nearly 40 years. Oh God was gains and he’d, and he’d moved in the 80s and he had this portfolio of Pfix and he thought he was going to have to pay. He’d not reported them on any forms.

Ishali:

[00:27:58 – 00:27:59]

Oh my God.

Richard:

[00:27:59 – 00:29:06]

And he thought when he sold them the tax was going to be you know, just regular federal and if it was, I can’t remember where he was. Federal long term cattle gains tax once became aware of the PFIC regime. First of all that you’ve got the problem of, of non compliance reporting. Second of all you’re looking at 39.6% for, for some years plus interest going back 30 odd years. We’re talking like all that game practically. I reckon I, I did, I, I can’t remember what it was but I did back of the back of a fag packet. I can say like you’re British. I did back of a packet calculation and I was like, it was like we’re 80 plus of your gains going in taxes plus interest here and I’ll never forget it. And that was. He’d been happily doing his own taxes for 30 years. Oh my God. And one conversation with someone across border not even a tax advisor cross border advisor could have, could have diagnosed that problem and got him out years and years and years ago. And there was no, there is no way out as far as I can tell there was no legitimate way out other than coming clean and just, and just taking the hit. I don’t know what he did but it’s always stuck with me.

Ishali:

[00:29:06 – 00:29:11]

All of that money has, nearly all of it has gone to the tax in interest.

Richard:

[00:29:11 – 00:29:11]

It’s horrible.

Ishali:

[00:29:11 – 00:29:13]

Yeah. 75 plus it’s horrible.

Richard:

[00:29:13 – 00:30:07]

I honestly Charlie, I think I date roughly when I started becoming a zealot about this. I am a zealot, right? I I a self admitted zealot about the need for successful Brits any expats in America to work the cross border tax advisor. Not any tax advisor but heaven forbid don’t do it yourself, please. I, I shiver, you know, I literally shoulder every time I hear the words DIY attack return. I should have but I also mean going and seeing Someone local and getting your 1041 for 1040. It’s a recipe for disaster. And I am a zealot about promoting the requirement for successful Brits with cross border affairs to work with cross border professionals. I might date it to that conversation. That realization that a conversation employing a cross border professional years ago could have saved this guy hundreds of thousands of dollars in tax and penalties and interest and I, and God and, and God knows what in anguish.

Ishali:

[00:30:07 – 00:31:10]

Yeah, absolutely. And I mean, you know, if you take advice early on enough, then there are certain elections you can make to mitigate the tax regime for Pfix, there are a couple of elections that you can look at which would mean that you would avoid those interest charges and this higher rate. So it is really important to get advice as early as possible really. I mean sometimes we say to Brits, one of my first questions is when people are going over is kind of how long do you think you’re going to be there? And obviously that is a difficult question to ask but to answer sometimes, especially at the beginning, but if a client’s saying three to five years, I might say, okay, if you’ve got funds in an ISO or something, move them into growth funds, don’t dispose of them and then when you come back sort them out again. You know, so there are things that you can do if you do take advice early to kind of think about how to manage those. If, you know, disposing of them is not an option. You know, some clients, if they’re going on fully for retirement or that kind of thing, then yes, get rid of them all and, and move on. Is, is a good, you know, place to start.

Richard:

[00:31:10 – 00:33:10]

You know, this is a perfect segue. Let’s talk about, let’s talk about pricing. Right? So I mentioned I’m a zealot. I’m a zealot for people working with cross border professionals and in this case cross border tax advice. Now one of the pushbacks I get all the time is people are scared about the price. People are scared, people are fearful, oh, it’s going to cost them a fortune. And it’s two parts. This one is me trying to, trying to get them to see because, because me just saying it doesn’t, doesn’t really try to get people to understand that yes, you might be paying $500 for your 1040 right now, but it’s a false economy. It’s a false economy if the moment I look under the hood I spot all these problems where the potential, I’m not saying you get whacked with all the percent. But the potential for penalties is staggering. Or taxes in this case. One, what you’re doing right now is a false economy and two, yeah, there’s a premium. Of course we’re talking, you go and see someone local. They only have to deal with one system, the American system. You want to see a cross border professional, you need someone who is, who understands the us who understands the UK where your non US assets are based. It’s no good just having, I don’t think it’s any good having someone who’s generically cross border because each country has its own financial instruments and, and it’s very fact specific on how it’s treated in the us. So we need someone who understands the us, who understands the UK and their product landscape and then critically who understands the interaction between the two. That is the treaty. Yeah, of course there’s a premium for that. That is highly specialist knowledge. The fact that you can barely find anyone who does it is evidence of how specialized it is. And it’s a premium worth paying. I pay it. Right. That’s why I wanted you on so much because you’re my tax advisor. I pay and it’s a very fair premium. I don’t want to, I don’t want to scare people that we’re talking ridiculous money here, but it, but I pay a premium for my tax advice and my tax preparation. A very fair premium because I understand one, the complexities involved in it and two, the repercussions of getting this thing wrong.

Ishali:

[00:33:10 – 00:34:17]

It is very, very complex. Unfortunately. Anything cross border and I think a lot of clients think they can do it themselves or they can use a simple software package and get it right. But we typically use advanced sort of packages which deal with most of these forms and all the reporting. We still have to manually fix them. We work with some of the most sophisticated packages. Nothing beats really as well being able to actually just talk to someone who’s, you know, I’m, you know, I’m British. I’ve, you know, I’ve lived, lived here in the UK for most of my life and most of my clients are cross border UK US people over in London or England. You know, I think just being able to deal with simple things, okay, how does a foreign exchange rate affect my taxes? You know, how does that tie into investment advice? How does that, all those sorts of things you only really know through knowing both sides of the house. That’s sort of, that’s really where my viewpoint is on, on it. And I think a lot of clients get into a lot of problems that we end up trying to, to help them fix 100%.

Richard:

[00:34:17 – 00:35:22]

One of my favorite sayings is it’s better to prepare than it is to repair. And it’s a lot less expensive to prepare. It means, it means ponying up up front. But I promise you it’s a lot less to pony up front than it is to repair down the line. Especially, especially if at that point the IRS are already involved, then it gets really expensive. As we wrap up here, shall I almost want to bring up one thing now which was new for me when you guys offered it, which was this pricing structure that you’ve introduced at Trowbridge whereby you know, historically in the past I paid a fee for my tax preparations people and then recently you guys offered me a different setup where I could pick between three prices. One for just pure preparation only and anything that followed from that would be on the clock. The second tier where it was like the cost of the preparation and then anything that results from that, any, any queries from the irs, even up to full blown audit, if I understand correctly, would be included in that price. And then a third tier, a more expensive tier which was all that plus any and all tax advice within reason. I guess there must be some sort of limit. But practically any and all tax advice.

Ishali:

[00:35:23 – 00:36:09]

We really like that package and generally clients really like it as well because they can choose the right package for them every year. So if a client’s got a lot going on, one year they’re buying a house, they’re moving state, they’re moving country, they’re having children, getting married, whatever it is, and they think, okay, we’re going to need quite a lot of support this year, they can choose the all inclusive. But then the next year when things go back to sort of normal and they’ve got a very stable, and they could then choose the basic for that year. So I think the clients really like that ability to know what they’re getting up front. And we don’t bill on an hourly basis. So we, we really think a lot about, we do fixed fees for these packages and we really think a lot about how to price them fairly for the client as well as being representative of the value that we’re adding. But it’s nice to get good feedback.

Richard:

[00:36:09 – 00:37:08]

On it and, but I really liked it. So I picked the middle tier because for now, you know, my affairs are relatively static. You know, it’s interesting to know what you said about people who select the third tier. So if I was like moving back to the UK for example, that would be the year to do that. That’s, that’s really interesting. But I, I’m going the middle tier because like most people, I worry one day I’ll be audited. I hope I never am. Yeah. But just worry that one day that will happen. And when that happens, I imagine that costs balloon. Yeah, yeah. Your accountancy cost, you might have lawyer costs, you might time, you know, all stuff. And, and I picked that one knowing that hopefully I’m never audited, but if I am, and it might not be for 20 years, I’ll happily pay a small premium every single year for 20 years. Or even never knowing that if I’m ever audited, my accountant’s there has got my back and I don’t have to worry about those costs ballooning. I see it as a form of insurance. Honestly, I really appreciate that. So I like it.

Ishali:

[00:37:08 – 00:37:11]

Excellent. I’m really glad you like it. I’m really good.

Richard:

[00:37:11 – 00:37:17]

Right. Charlie, thank you so much for coming on with the Brits in America. If anyone wants to find you, where can they, where can they track you down?

Ishali:

[00:37:17 – 00:37:25]

So if you go to. I’m on our trowbridge website@www.trowbridge.ca and my LinkedIn as well.

Richard:

[00:37:26 – 00:37:35]

And of course, come to us. We can, we can, we can, we can make sure you find a Charlie as well. So don’t be shy to, to reach out to Plan first Wealth. Excellent. All right, thank you so much for coming on, Charlie.

Ishali:

[00:37:35 – 00:37:36]

Thank you.

Richard:

[00:37:36 – 00:38:39]

Cheers. All right, folks, that’s another episode of we’re the Brits in America under our Belt. Thank you for listening. I appreciate it and I appreciate you. If you’re enjoying the show and would like to support the mission, which is to help ambitious expats and immigrants thrive in America, I’d ask you to subscribe to the POD wherever you listen and also consider leaving a rating and review. This stuff really does matter. Please help us get this information to the people who need it. That is your fellow expats. Just a quick reminder that this show is brought to you by Plan First. Well, we are a US based lifestyle financial planner and wealth manager and we help successful American and international families living across the US to make the most of their opportunity and ultimately to retire happier. If you’d like to know more about how we might be able to help you, you can find us on our website, planfirstwealth.com or you can look me up on LinkedIn. Do get in touch. We’d love to hear from you. As always, thank you to the podcast guys for their help producing this episode and the entire show. See you next time.