New Procedures Provide U.S. Tax Relief to Some Expatriates by Arthur Dichter, JD, LLM
Posted on November 25, 2019
The IRS recently rolled out Relief Procedures for Certain Former Citizens (expat relief procedures), which is intended to help some former U.S. citizens who renounced or intend to renounce their U.S. citizenship come into compliance with their outstanding U.S. tax and filing obligations without incurring additional liabilities.
Background on Expatriation Exit Tax
There are tax consequences when U.S. citizens relinquish citizenship or when long-term U.S. residents give up their green cards or makes treaty elections to be nonresidents. In general, expatriates must comply with U.S. tax laws in the year of expatriation and for the five tax years prior to expatriation. At the time of expatriation, the U.S. considers all worldwide property of a “covered expatriate” to be deemed as sold for fair market value on the day before the expatriation date. Certain gains arising from the deemed sale are reportable as income on Form 8854 and subject to tax on the taxpayer’s final U.S. tax return. Failure to meet these requirements can result in additional taxes, interest and stiff penalties.
So who is considered a covered expatriate? In general, although there are certain exceptions, covered expatriates subject to the exit tax include 1) individuals with a net worth of $2 million or more on their expatriation date, 2) individuals whose average annual net income tax liability of the five years preceding the year of expatriation exceeds a specified amount ($168,000 for 2019) that is adjusted annually for inflation, or 3) individuals who cannot certify that they are in full compliance with their U.S. tax filing obligations for the five years preceding the year they expatriated.
Relief Procedures for Certain Former Citizens
Under the recently introduced relief procedures, individuals commonly referred to as “Accidental Americans” who meet specific requirements will not be considered covered expatriates and will not be liable for any unpaid taxes, interest or penalties for the year of expatriation and the five years prior. More specifically, the expat relief procedures apply only to individuals who relinquished or intend to relinquish their U.S. citizenship after March 18, 2010, and who meet the following criteria:
- They have no history of filing U.S. income or gift tax returns as U.S. citizens or residents;
- Their failure to comply with U.S. tax laws was not a willful act;
- Their net worth was less than $2 million at the time of expatriation and at the moment in time when they seek relief; and
- They have an aggregate tax liability of $25,000 or less for the year of expatriation and the five years prior to that date (after applying all applicable deductions, exclusions, exemptions and credits, including foreign tax credits, but excluding penalties, interest, and the exit tax of Sec. 877A).
In addition, relief from penalties is available only to individual taxpayers who agree to complete and submit all required federal tax returns for the six tax years at issue, including all required schedules and information returns. The expat relief procedures do not apply to estates, trusts, corporations, partnerships or other entities.
It appears that the expat relief procedures are more beneficial to relevant taxpayers than the IRS’s existing streamline filing procedures. For one, taxpayers qualifying for expat relief can avoid a required payment of taxes for the five years before expatriation as well as the 5 percent penalty based on the value of the taxpayer’s unreported assets applicable to individuals in the domestic streamline procedure program. In addition, taxpayers relying on the new relief procedures will receive a letter from the IRS confirming their eligibility for relief; such notification is not available to taxpayers who use the existing streamline procedures. Finally, there does not appear to be any provisions that would allow a taxpayer who would otherwise be eligible for expat relief but who previously filed a streamlined submission to become compliant to file under these procedures to obtain a refund of U.S. tax paid.
Currently, there is no end date for taxpayers to rely on Relief Procedures for Certain Former Citizens. However, the sooner covered expatriates begin planning and applying for relief under the guidance of experienced tax advisors, the better position they will be in to qualify for this assistance.
About the Author: Arthur Dichter, JD, LLM, is a director of International Tax Services with Berkowitz Pollack Brant Advisors + CPAs where he works with multi-national businesses and high-net-worth foreign individuals to structure assets and build wealth in compliance with U.S. and foreign income, estate and gift tax laws. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at email@example.com.
Information contained in this article is subject to change based on further interpretation of tax laws and subsequent guidance issued by the Internal Revenue Service.