London Mayor Refuses to Pay the IRS

As first reported by The Guardian, the Mayor of London refuses to pay the IRS. Is he willing to fight for his principals? We’ll see.

Here’s the setup: Boris Johnson was born in New York, holds U.S. and U.K. citizenship, and hasn’t lived in the U.S. since he was about 5 years old. The Internal Revenue Service wants $160,000 from him because he sold his London home at a profit.

Mr. Johnson lives in the U.K. and pays extremely high taxes there. However, Uncle wants a taste because the Mayor holds a blue passport. America is one of the only nations on earth that taxes its citizens on their worldwide income, regardless of where they live.

According to The Guardian, when asked if he would pay the IRS, Borris said, “No is the answer. I think it’s absolutely outrageous. Why should I? I think, you know, I’m not a … I, you know, I haven’t lived in the United States for, you know, well, since I was five years old … I pay the lion’s share of my tax, I pay my taxes to the full in the United Kingdom where I live and work.”

Having been down this road many a time, I suspect he’s is talking tough now but is likely in for a rude awaking or sudden change of heart. You don’t poke the bear. Bet on his shutting up and paying up soon.

Nothing makes the IRS more hostile than bad press. After all, they rely on fear to collect trillions in taxes. This fear is created by what they view as “positive” press. When someone goes to jail for failing to file a form or paying their taxes, that’s good press.

Just ask Wesley Snipes who was essentially convicted of owing taxes while famous (3 misdemeanors sent him to jail for 3 years).

Bring “bad” press upon the IRS (stories about those who successfully defy the great collector), and all hell will rain down upon you. If the IRS decides to attack Mr. Major, you can bet his legal fees will be several times more that the $160,000 he refuses to pay. And, if he is willing to fight the good fight in a U.S. courtroom, he faces an uphill battle. The IRS has a 90% conviction rate!

Taxation of Americans Abroad

Here are the basics of the U.S. system.

If you are a “U.S. person,” you are required to pay taxes on your worldwide income. A U.S. person is anyone who who is a U.S. citizen, a green card holder, or anyone who is not a citizen but lives in the U.S. for more than six months of the year.

If you’re not a citizen, you pay U.S. taxes while you are in this country. If you are a U.S. citizen, you pay Uncle no matter where you live.

Anyone who holds a U.S. passport is a citizen for tax purposes. It doesn’t matter if you’ve ever set foot in America. Holding that travel document can cost you big.

So, Mr. Johnson must pay U.S. taxes on his worldwide income. However, he gets two big deductions.

First, the Foreign Earned Income Exclusion allows him to exclude up to $100,800 in salary from his U.S. Taxes. Though, he’d better be careful. the FEIE can be lost if he fails to file his forms and the IRS finds out.

Second, he gets to deduct taxes paid to the U.K. on his U.S. return. That means he (basically) gets a dollar for dollar credit against his U.S. taxes for payments to the United Kingdom.

Because his U.K. tax rate is probably higher than his U.S. rate, he shouldn’t have to pay on his salary…especially when the Foreign Earned Income Exclusion is taken into consideration.

• If you’re an American living in a low tax country, and you earn more than the Foreign Earned Income Exclusion, you will be paying the IRS. The Collector is going after expats with a vengeance these days.

So, you’re wondering, why does Mr. Johnson owe the IRS? He sold his London home and wasn’t required to pay capital gains tax in the U.K.

With no foreign tax credit available, in comes the American tax man demanding his share. The U.S. capital gains rate at the time was about 20% and you can bet all manner of interest and penalties have accrued since.

The only permanent solution for the Mayor is to give up his U.S. passport. When asked why he didn’t do so, Johnson responded, “It’s very difficult to give up.” You can read that as expensive and time consuming.

Assuming Mr. Johnson has earned more than $157,000 for the last few years, or his net worth is over $2 million, he would pay an exit tax, and agree to be audited by the IRS, before he could turn in his U.S. citizenship. If he doesn’t go through this formal process, he remains a part of the U.S. tax machine.

The exit tax basically requires him to pay U.S. taxes on his worldwide holdings. He would calculate the purchase price and current fair market value of all capital assets (including real estate) and pay taxes on the accrued gain as if these assets were sold the day of his expatriation.

The exit tax can be especially expensive and hard to swallow because there might be no foreign tax credit available. As a deemed sale, no U.K. tax would be allowed for.

When he did finally sell the properties, he would be double taxed…by the IRS at the time of expiration and again by the UK at the time of sale.

For more on my thoughts on the IRS machine, take a read through: IRS Criminal Investigations on the Rise.