It seems that for many years the Embassy had been operating a scheme whereby how much the locally hired staff were paid was "under-reported" to the taxman.
According to a report in the the Washington Post yesterday, the practice caused few ripples until recently, when changes in the tax regulations in both Britain and the United States went into effect. Her Majesty's Inspector of Taxes, it appears, is now seeking some $4.5m (pounds 2.9m) in arrears. The question then arises of who should pay the bill.
Understandably, the British employees are not keen to pay, and are said to be considering a walk-out if they are asked to do so.
The embassy feels that its State Department parent should provide the money, and Admiral William Crowe, the US Ambassador, is understood to have already made representations to that effect to his superiors in Washington.
Any request for funds, however, is not likely to be kindly received: neither by the State Department - which has already been forced to make a number of painful budget cuts by the Republicans now in charge on Capitol Hill - nor by Senator Jesse Helms, the arch-conservative chairman of the Foreign Relations Committee, if the Secretary of State, Warren Christopher, goes cap in hand for more money.
Last night interested parties in both capitals were unwilling to give details about the size or mechanics of the "underreporting".
Nor was it clear precisely how the Inland Revenue discovered how it was being shortchanged. An Inland Revenue official would not be drawn on the matter, saying only that "whether it is an individual, a corporation or an embassy, we do not discuss whether we are investigating or not. That is our policy."
But the matter is said to be in the hands of tax lawyers on both sides of the Atlantic, sorting out a complicated tale which, according to the the Washington Post, may date back 30 years. First assessments however are that the US Government bears at least part of the responsibility.