US Tax Return Preparation for Expats: Equalisation Gaps
US tax return preparation for expats on tax-equalised assignments: what your employer's programme never covered, and how to fix the years you missed.
Your employer filed. You did not.
If you were sent to London on a tax-equalised assignment, your employer's programme almost certainly filed your US and UK returns for the assignment years only. Everything outside that window — trailing equity, personal investment income, FBAR, and the years after repatriation — remained your legal responsibility. That gap is where US tax return preparation for expats most often fails.
At Jungle Tax we are repeatedly instructed by senior executives and partners who spent three to five years in the United Kingdom under a corporate assignment policy, believed their tax affairs were fully handled, and discovered years later that the Internal Revenue Service and HM Revenue & Customs both hold open, unfiled years in their name. The pattern is remarkably consistent. The programme was competent. The programme was also narrow — and nobody at the company was contractually obliged to tell you where it stopped.
What tax equalisation actually is — and what it deliberately is not
Tax equalisation is a compensation-neutrality mechanism, not a tax service. Its purpose is to leave you in approximately the same net position you would have occupied had you never left the home country. The employer deducts a hypothetical tax from your gross pay each period — an estimate of the US federal, state and payroll tax you would have borne at home — retains that amount internally, and then pays the actual US and UK liabilities that the assignment generates.
Note the wording carefully. The programme pays the tax the assignment generates. It does not pay the tax your personal life generates. The distinction sounds academic until you look at a settlement statement and find that the private equity distribution, the rental property in Connecticut, the inherited ISA-adjacent portfolio your spouse holds, and the Roth conversion you executed in year two were all excluded from equalisation — but were nevertheless reportable on returns somebody had to sign.
How the hypothetical tax deduction works on a London payslip
In a typical UK inbound assignment the mechanics run as follows. Hypothetical tax is withheld from gross pay and is generally treated as a pre-tax reduction for shadow payroll and UK reporting purposes. The employer operates a UK payroll — frequently under a modified PAYE arrangement agreed with HMRC — on the grossed-up value of cash and non-cash assignment benefits. Actual UK income tax and, where applicable, National Insurance are settled by the employer. At year end, the assignment tax provider reconciles hypothetical tax withheld against the hypothetical tax properly due on equalised income, and a settlement flows either to you or, more often, from you.
Because the hypothetical amount is a bookkeeping construct rather than a remittance to any tax authority, it appears on no tax authority record. Your Form W-2 and your UK payroll records will not agree with each other, and neither will agree with what you actually received. That reconciliation problem is the first practical obstacle in any catch-up engagement.
Is the employer's gross-up taxable income to me?
Yes — and this is the single most misunderstood feature of an equalised package. When your employer pays your UK income tax, that payment is itself a benefit conferred on you. It is compensation. It is therefore taxable, which generates further tax, which the employer also pays, which is again taxable. The iterative calculation that resolves this is the gross-up.
The consequence for a US filer is that your reported US taxable income during the assignment is materially higher than your cash compensation — often by a very large margin in a high-tax host country. Executives who look at their W-2 for an assignment year and conclude it must be wrong are usually looking at a correct figure that includes grossed-up employer tax payments, housing, cost-of-living allowances, tuition, home leave, and relocation. Under UK rules, HMRC's guidance in Helpsheet HS212 addresses how grossed-up earnings and employer-borne tax are reflected on a Self Assessment return, including the requirement to supply a supporting schedule analysing the employment income figure.
US and UK treatment compared: where an equalised assignment diverges
| Issue | US / IRS treatment | UK / HMRC treatment |
|---|---|---|
| Basis of taxation | Citizenship-based; worldwide income reportable regardless of residence | Residence-based, determined by the Statutory Residence Test; scope depends on residence and, historically, domicile |
| Hypothetical tax | Not a tax payment; a contractual reduction of pay, not creditable anywhere | Same — a private arrangement between employer and employee, not recognised as tax paid |
| Employer-paid host tax | Taxable compensation to the employee; requires gross-up | Taxable earnings; typically settled via grossed-up PAYE, often under a modified arrangement |
| Relief for the other country's tax | Foreign tax credit or foreign earned income exclusion, subject to limitation and election mechanics | Foreign tax credit relief under the US–UK double taxation convention |
| Filing deadline | 15 April, with an automatic extension for taxpayers abroad and a further extension available on request | 31 January following the end of the 5 April tax year for online filing |
| Foreign account reporting | FBAR (FinCEN Form 114) and Form 8938, with distinct thresholds | No direct equivalent; disclosure arises through offshore income and gains rules and information exchange |
| Who signs the return | You do — the employer's provider prepares, you remain legally liable | You do — the same principle applies to Self Assessment |
What the assignment programme covers versus what stays personal
Assignment policies vary, but the boundary is drawn in a broadly consistent place. Equalised: base salary, bonus, assignment allowances, housing, relocation, and the tax arising on those items in both countries. Not equalised, in most policies: personal investment income, capital gains on personally held assets, rental income, spousal income, private business interests, trust distributions, inheritances, and gambling or windfall receipts.
- Personal investment portfolios. Dividends, interest and gains on your own brokerage accounts sit outside the programme. The tax on them is yours. Yet they must appear on the same return the provider prepares — which means the provider needs data you may never have supplied.
- Spousal and household income. If your spouse worked in the UK, ran a consultancy, or held UK accounts, that is almost always outside scope, yet it flows onto a joint return.
- Non-employment UK sources. UK rental income from a property acquired during the assignment, or UK-source interest, creates a Self Assessment obligation that continues after the employer's engagement letter expires.
- Social security. Coverage is generally determined by the US–UK totalisation agreement and a certificate of coverage, not by the equalisation policy. Gaps here are common in assignments that were extended beyond their original term.
- Estate and inheritance exposure. No mainstream programme equalises US estate tax or UK inheritance tax. For clients with meaningful wealth, this is the exposure that outlives every other item; our trusts and estate planning team addresses it separately.
What happens to your personal filings when the assignment ends?
This is where the quiet failure occurs. Most policies commit the employer to prepare returns for the assignment years and a defined tail — commonly one or two years after repatriation, and sometimes only until the assignment "no longer affects" your tax position, a phrase that is interpreted generously by companies and narrowly by tax authorities.
The sequence we see repeatedly: the executive repatriates, or leaves the company, or moves into a UK local-hire contract. The provider files a final year. No one sends a letter saying "your US filing obligation continues for life because you are a US citizen." The following January, no UK Self Assessment is filed. The following April, no Form 1040 is filed. Because nothing arrives in the post, the assumption hardens that nothing is required. Five years later a UK bank requests a US tax identification number under automatic exchange of information, or a mortgage application requires filed returns, and the position becomes visible.
If you remained in the United Kingdom after the assignment ended, you now have two live compliance streams, not one. If you returned to the United States but retained UK accounts, pensions or property, you still have two. And if your spouse is a UK national who never held US status, the interaction becomes genuinely complex — the sort of position our US-UK tax accountants handle as core work rather than as an exception.
The equity and deferred compensation tail
Restricted stock, options and long-term incentive awards granted before or during an assignment do not respect the assignment calendar. An award granted in New York, vesting while you were resident in London, and exercised two years after repatriation, will generally require sourcing across the workdays in the vesting period. Both authorities may claim a share. Relief depends on filing correctly in both, in the right order, with consistent apportionment.
Employers routinely equalise the assignment-period portion and hand you the rest. If your provider's engagement ended before the award vested, the trailing UK liability on the UK-workday portion is yours to report and pay — and HMRC's information from your former employer's payroll may not match what you file unless the apportionment is documented. Getting this wrong in either direction is expensive; getting it right is a core part of cross-border tax planning.
FBAR, Form 8938 and the accounts you opened because HR told you to
Almost every assignee opens a UK current account in week one. Many acquire a UK savings account, a workplace pension, an offshore-domiciled fund through a UK adviser, or a joint account with a spouse. Each of those is a foreign financial account for FBAR purposes. The FBAR obligation attaches to you personally; it is not an employer filing and is almost never inside an assignment policy's scope.
The reporting is not one form but two overlapping regimes. FinCEN Form 114 (the FBAR) is filed with the Financial Crimes Enforcement Network when aggregate foreign account balances exceed the reporting threshold at any point in the year. Form 8938 is filed with your income tax return under a separate set of thresholds that vary by filing status and residence. Many assignees breach both; some breach only one. Practitioners should check both independently rather than assume they move together. IRS guidance on the distinction is published at irs.gov.
Add to this the interests that assignees rarely think of as accounts: a UK workplace pension with a signature authority, a spouse's account over which you hold power, a children's junior savings account, an employee share plan nominee account. Our FBAR penalty calculator gives an indicative sense of exposure across multiple missed years, though the actual outcome depends heavily on whether the conduct is characterised as non-wilful.
The UK side: residence, split year and the return nobody filed
UK residence is determined by the Statutory Residence Test, and split-year treatment can apply in the year of arrival and departure where the relevant conditions are met. HMRC's guidance note RDR3 sets out the tests and the split-year cases in detail. Assignees frequently assume the company's provider determined their residence position definitively. Sometimes it did. Often it determined the position for the assignment years and left the arrival and departure years — precisely the two most technical years — resolved on assumptions that were never revisited when the assignment length changed.
Where a UK return should have been filed and was not, the remedy is a disclosure to HMRC rather than a quiet late filing. The correct route depends on whether the omission relates to offshore or onshore matters, whether the behaviour was careless or deliberate, and how many years are in scope. Penalties for offshore non-compliance are materially higher than the domestic equivalents, and the assessment window is longer. Our UK tax services team runs these disclosures alongside the US remediation so that the two positions are consistent — which matters, because both authorities exchange information.
How do you fix several missed years without triggering an examination?
The answer is almost always a structured, voluntary remediation rather than a series of individually filed late returns. For a US filer whose failure to file was non-wilful — and a genuine belief that the employer's programme covered everything is a strong non-wilfulness narrative when properly documented — the Streamlined Foreign Offshore Procedures are usually the appropriate route. The programme requires the most recent three years of delinquent or amended income tax returns, six years of FBARs, and a signed non-wilfulness certification. Where the taxpayer meets the non-residency requirement, the miscellaneous offshore penalty is waived. The IRS publishes the eligibility criteria and submission requirements for the Streamlined Filing Compliance Procedures.
Eligibility is not automatic and the certification is signed under penalties of perjury. A tax-equalised background cuts both ways: it supports the argument that you reasonably believed a professional was handling your affairs, but it also demonstrates that you had access to expert advice. The narrative must be drafted with that tension in mind. We cover the mechanics in depth through our IRS streamlined filing practice.
A worked remediation sequence for a former assignee
- Step one — establish the true filing history. Obtain IRS account and wage-and-income transcripts for every year in question and confirm what the employer's provider actually filed, including any extensions. Assumptions here are frequently wrong; providers sometimes filed extensions and never filed returns.
- Step two — reconstruct the compensation picture. Assemble assignment letters, equalisation settlement statements, hypothetical tax calculations, W-2s, P60s, P11Ds and equity vest reports. Reconcile the hypothetical deduction so that you are not taxed on income you never received, and are taxed on the gross-up you did receive in kind.
- Step three — map the accounts. Build a complete inventory of foreign financial accounts with maximum balances by year, including pensions, nominee accounts and accounts with signature authority only.
- Step four — model the relief. Test the foreign tax credit position against any exclusion election, including whether a prior election was made, revoked or never filed. On a UK assignment the credit route usually dominates, but the interaction with grossed-up income and with the timing of employer tax payments requires modelling, not assumption.
- Step five — determine the UK position in parallel. Establish residence and split-year status for each year and quantify any Self Assessment shortfall before the US submission is finalised.
- Step six — file both remediations on a coordinated timetable, with consistent figures, and retain the working papers. Foreign tax credit claims require evidence of tax actually paid, which in an equalised arrangement was paid by your employer on your behalf — a point that must be documented, not asserted.
What the settlement statement does not tell you
The annual equalisation settlement is a corporate document produced to close out the company's obligation. It is not a tax position paper. It typically will not tell you whether an FBAR was filed, whether a Form 8938 was required, whether an exclusion election was made in a way that binds future years, whether a UK return remains outstanding, or what your carryforward foreign tax credit balance is. Yet that carryforward can be a substantial personal asset for a repatriated executive with continuing UK-source income — one that is routinely lost simply because nobody tracked it after the provider's engagement ended.
Ask specifically for the closing memorandum, the final-year computation, the foreign tax credit carryforward schedule, and confirmation of which information returns were filed. If your former employer's provider cannot produce them, that itself tells you the scope of what was done.
Does a tax-equalised assignment change how much you personally owe?
On equalised income, broadly no — that is the design. On everything else, materially yes. The presence of a large grossed-up compensation figure pushes your personal, non-equalised income into higher marginal brackets, affects the availability and phase-out of various items, and changes the foreign tax credit limitation calculation in ways that can trap credits you would otherwise have used. Assignees with significant portfolio income or carried interest frequently find that the assignment years are their most expensive personal tax years, notwithstanding that the employer bore the assignment tax. For clients in that position, our high net worth practice models the personal position separately from the corporate one.
Getting this resolved, discreetly
Coming forward voluntarily is materially better than being found. The routes that waive or reduce penalties are, in both jurisdictions, available only before an enquiry opens. Once HMRC issues a notice or the IRS commences an examination, the streamlined route closes and the negotiating position narrows sharply. Information exchange between UK financial institutions and the IRS means the question is increasingly one of timing rather than probability.
If you were sent abroad on an equalised assignment and are no longer certain what was filed, in which years, by whom, we can establish the position quickly and confidentially — usually within a fortnight of receiving transcripts and settlement statements. To review your position under legal privilege where available, contact our cross-border team for a confidential consultation. Nothing is filed, and no authority is contacted, until you have seen the full analysis and instructed us to proceed. You may also find our wider library of cross-border guides useful while you gather documents.
