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November 21, 2014
News Analysis: Will London's Mayor Enter the OVDP?
by Ajay Gupta

Full Text Published by Tax Analysts®

The IRS's offshore voluntary disclosure program may soon have a high-profile participant. Boris Johnson, London's present mayor and the United Kingdom's possible future prime minister, disclosed November 13 that he's delinquent on his U.S. income taxes.

Johnson, who was born in New York City and lived in the United States until he was 5, holds both U.S. and U.K. passports. While visiting the United States recently to promote a new book, Johnson was interviewed on The Diane Rehm Show by Susan Page of USA Today, who was sitting in for Rehm. Responding to a caller's question about the difficulty of renouncing U.S. citizenship, Johnson went on a tirade against the United States' "incredible doctrine of global taxation."

Johnson went on to say that the "United States comes after me, would you believe it, for capital gains tax on the sale of your first residence, which is not taxable in Britain. But they're trying to hit me with some bill, can you believe it?"

After failing to dodge the question of whether he would pay the tax, Johnson indicated he would not. "Why should I?" he asked. "I haven't lived in the United States since I was 5 years old."

Although Johnson characterized the IRS notice as a "bill," it is far from clear that Johnson has been served with a final notice and demand under section 6303, which usually signals the beginning of collection activity. Although Johnson's office failed to respond by press time to Tax Analysts' request for additional details, his spokesman has told other publications that he will not comment further on Johnson's U.S. tax affairs.

Indeed, it's quite possible that what Johnson received from the IRS was merely the opening salvo of what could be a protracted process. Johnson is unlikely to have filed a U.S. income tax return disclosing the sale of his U.K. home. Under section 6020(b)(1), "if any person fails to make any return required by any internal revenue law or regulation made thereunder . . . the Secretary shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise."

Jenny L. Johnson and Guinevere M. Moore, both of Holland & Knight, told Tax Analysts that overseas citizens often become aware of U.S. tax liabilities after receiving the so-called substitute for return. Because it's prepared by the IRS based on information gleaned from third parties, a substitute for return is unlikely to accurately reflect the taxpayer's actual tax liability.

The substitute for return often exaggerates the tax due because it fails to apply the proper deductions, Johnson and Moore said. Engaging with the IRS will usually help reduce the amount, they added.

If what Johnson received was in fact a substitute for return, the IRS may very well have obtained information about his sale proceeds from publicly available records. Lacking knowledge of his cost basis, the agency probably multiplied the entire amount of Johnson's sale proceeds by the highest capital gains rate to compute his tax.

In that event, Johnson's actual tax liability is likely to be significantly smaller. It would then behoove Johnson to respond to the IRS. And he probably will, despite his threat to ignore the notice.

Johnson's bravado often belies his actions. In 2006 he famously threatened to renounce his U.S. citizenship after being prevented from using his U.K. passport to change planes in Texas; 8 U.S.C. section 1185(b) makes it "unlawful for any citizen of the United States to depart from or enter, or attempt to depart from or enter, the United States unless he bears a valid United States passport." But the BBC reported in May that Johnson had in fact renewed his U.S. passport in November 2012.

It therefore will not be surprising if Johnson responds to the IRS and begins the process of settling the IRS's claim, despite his pledge not to pay his U.S. tax bill. And while he's at it, Johnson should also consider coming into compliance with the various other reporting obligations that surely apply to him, including foreign bank account reports and Forms 8938, "Statement of Specified Foreign Financial Assets," on his "offshore" bank accounts -- obligations that he just as surely has been disregarding.

The streamlined OVDP for U.S. citizens who live outside the United States may offer Johnson the least costly means of receiving absolution from the IRS. It may also remove a potential hurdle in his path to Number 10 Downing Street.

Johnson has ambitions of succeeding David Cameron as leader of the Conservative Party, and eventually becoming prime minister of the United Kingdom. It would be best if Johnson were to come into compliance with U.S. tax laws before then. After all, it wouldn't be a good sign if, on taking office, the first affair of state he had to rule on were a request from the United States under the U.S.-U.K. tax treaty for exchange of information and administrative assistance targeted at him.

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