Meghan Markle faces tax bill from the IRS

US-born actress Meghan Markle found her prince charming and married British royalty. Now, the couple are discovering an intrusive third-party in their marriage: the US Internal Revenue Service, or IRS.

The United States, unlike most countries, taxes citizens on worldwide income－even if they live abroad. This puts little beyond the reach of the tax collector and requires extensive disclosure to comply with the law. Today (Monday) is the deadline for filing 2018 tax returns.

"I think the law is so complex because the IRS assumes we're all tax felons waiting to commit a crime," Philip Hodgen, a tax lawyer in Pasadena, California, told China Daily. "The assumption is that if you have a foreign bank account, you are using it to evade taxes."

Markle's decision to marry a foreign national creates another layer of complexity and what is a routine task for an US couple living in the US becomes intricate.

"Filing jointly, as about 95 percent of married couples do, would force Prince Harry to disclose everything," Robert Wood, a tax attorney in San Francisco, told China Daily. "That could open the British royal family to IRS scrutiny."

Markle built a successful career as TV and movie actress before marrying Prince Harry and is believed to have a net worth of several million dollars. Under US tax law, her assets must be disclosed no matter where they are held. This could be complicated because Markle was born, worked and resided in Los Angeles, worked extensively in Toronto, Canada, while filming the cable TV series Suits and now lives in London.

Markle may follow the example of Boris Johnson's dispute with the IRS and renounce her US citizenship. Johnson, the former mayor of London and now a member of Parliament, was born in New York and retained his US citizenship while building a career in Britain. This was not a problem until he sold his house in London. Proceeds from the sale of the house were tax-free in England, but taxable in the US despite the fact Johnson had not lived in the US since he was a child. Johnson railed against the law, paid the tax bill and then renounced his US citizenship to avoid future problems.

Buckingham Palace has said Markle, now known as Her Royal Highness the Duchess of Sussex, intends to become a British citizen, but the process will take at least three years. Giving up her US citizenship will simplify future taxes, but she'll be charged an administrative fee of about $2,500 to hand in her US passport－and that's just the beginning of her financial liabilities.

"If Markle renounces her American citizenship, she must certify five years' compliance with IRS rules and pay what amounts to an exit tax," Wood said. "The tax is computed as if she sold all assets the day before she handed in her passport. Essentially, it's a capital-gains tax on real estate, jewelry and other assets."

Nevertheless, Markle must report all sources of income and gifts. A tiara from the Queen, for example, must be reported to the IRS but would not be taxed because a gift is not income, Wood said.

The IRS is interested in assets as well as income and the 2010 Foreign Account Tax Compliance Act requires Markle to file yet another disclosure form annually. This means Markle and her husband must hold separate bank accounts to protect the royal family's confidentiality, Wood said.

Markle and Prince Harry are expecting their first child, creating a bundle of tax headaches. The child will have dual citizenship at birth because Markle is an American citizen.

The child will be subject to US tax law and Markle therefore must file with the IRS each year. A "kiddie tax" would apply on income from investments in excess of $2,200 a year and any account in excess of $10,000 must be reported. Gifts and money held in a trust fund also must be reported. In most instances, a child's US tax liability will be offset by British taxes paid.

The IRS requires detailed reporting and failure to comply with the law can result in a 50 percent penalty on the value of any unreported bank account. Under IRS rules, the royal child can escape the tax entanglement by renouncing his US citizenship as a young adult.

Occasionally, there is talk about revising the US tax code to one based on physical presence rather than citizenship, but so far Congress has not acted.

"If an American living in Nebraska had to file the same paperwork that an American living in, say, Norway must file, we'd vote every (one of them) out of Congress," Hodgen said.