IRS offers tax relief to expats who renounce U.S. citizenship

source: https://www.irs.gov/individuals/international-taxpayers/relief-procedures-for-certain-former-citizens

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The IRS announced procedures for certain persons who have relinquished, or intend to relinquish, their United States (U.S.) citizenship and who wish to come into compliance with their U.S. income tax and reporting obligations and avoid being taxed as a “covered expatriate” under section 877A of the U.S. Internal Revenue Code (IRC).  Please read all information for these procedures including the Frequently Asked Questions and Answers (FAQs) to determine eligibility. Relinquishing U.S. citizenship and the tax impacts of relinquishing U.S. citizenship are serious matters that involve irrevocable decisions. Consider consulting legal counsel before making any decisions about relinquishing U.S. citizenship.

The Department of the Treasury, the Department of State, the Internal Revenue Service, and the Social Security Administration have prepared a brief “frequently asked questions” document on obtaining social security numbers, expatriation, and tax implications of expatriation.

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The 14th Amendment to the United States Constitution provides that “all persons born or naturalized in the United States” are citizens of the United States.  With very limited exceptions for individuals born in the United States with diplomatic agent level immunity, all persons born in the United States acquire U.S. citizenship at birth. A person born abroad to a U.S. citizen parent or parents acquires U.S. citizenship at birth if the parent or parents meet conditions specified in the U.S. Immigration and Nationality Act (Section 301 and following sections).

Some U.S. citizens, born in the United States to foreign parents or born outside the United States to U.S. citizen parents, may be unaware of their status as U.S. citizens or the consequences of such status.  By law, U.S. citizens, regardless of whether they live in the United States or abroad, are required to report and pay to the Internal Revenue Service (IRS) all applicable taxes on their worldwide income, including on their income from foreign financial assets.

With the passage of the Foreign Account Tax Compliance Act (FATCA) on March 18, 2010, foreign financial institutions are generally required to determine whether their customers are U.S. citizens and, if so, report certain information about the customer’s account. Depending on when the account is opened, the customer may be identified by the financial institution as a U.S. citizen based on certain indicia, such as a place of birth in the United States. A customer who is identified as a U.S. citizen based on U.S. indicia must provide to the financial institution either his or her Social Security Number (SSN), or if the customer is no longer a U.S. citizen, documentation to rebut the determination, such as proof of loss of U.S. citizenship. A customer opening a new account with a foreign financial institution is generally required to provide a self-certification upon account opening, which includes the customer’s name, address, and SSN.

An adult U.S. citizen may relinquish U.S. citizenship consistent with requirements under Section 349 of the Immigration and Nationality Act, 8 U.S.C. 1481. See U.S. Citizenship laws and policies. The process of relinquishing U.S. citizenship abroad is administered by the Department of State. Citizens wishing to relinquish their U.S. citizenship abroad must commit one of the potentially expatriating acts, listed at 8 U.S.C. 1481(a)(1)-(5), voluntarily and with intent to relinquish U.S. citizenship.  One such expatriating act is taking an oath of renunciation of U.S. citizenship under 8 U.S.C. 1481(a)(5).  In accordance with the relevant statutes and regulations, such persons must appear in person before a U.S. diplomatic or consular officer at a U.S. Embassy or Consulate in a foreign country to complete the required steps.  The persons renouncing their U.S. citizenship must then take the prescribed oath of renunciation before the U.S. diplomatic or consular officer. See Renunciation of U.S. Nationality Abroad.

Set by the Department of State, the U.S. consular fee for “Administrative Processing of Request for Certificate of Loss of Nationality” is $2,350, and the fee cannot be waived.  Compliance with all U.S. income tax filings or obtaining a Social Security number is not a pre-condition to relinquishing citizenship under the Immigration and Nationality Act.

Individuals who seek to renounce or relinquish U.S. citizenship should be aware that expatriating may have U.S. tax consequences. To comply with existing tax law and to avoid significant tax liability under the U.S. Internal Revenue Code, U.S. citizens who renounce or otherwise relinquish their citizenship must comply with Federal tax requirements for the year of expatriation and for the five tax years prior to their expatriation, which includes using their SSN as their identification number on Federal Tax Returns.  IRC 877A contains a special set of rules for U.S. citizens who relinquish their U.S. citizenship, whether by taking an oath of renunciation or otherwise.  Under IRC 877A, individuals who are “covered expatriates” are treated as having disposed of all worldwide assets on the day before their expatriation date, are required to pay a mark-to-market exit tax on the gain (subject to an exclusion amount) resulting from the deemed disposition of their worldwide assets, and are subject to additional tax consequences with respect to certain deferred compensation items and trust distributions. With some exceptions that are not applicable in the context of these procedures, IRC 877(a)(2) will treat an individual as a “covered expatriate” if:

  1. The individual has an average annual net income tax liability of the five years preceding the year of expatriation that exceeds a specified amount adjusted for inflation (for example, $161,000 for 2016, $162,000 for 2017, $165,000 for 2018, and $168,000 for 2019) (“average income tax liability test”),
  2. The individual has a net worth of $2 million or more as of the expatriation date (“net worth test”), or
  3. The individual cannot certify, under penalties of perjury, on Form 8854, Initial and Annual Expatriation Statement, that the individual is compliant with all Federal tax obligations for the five tax years preceding the tax year that includes the expatriation date (“certification test”). 

To meet the requirements of the certification test, individuals must file a Form 8854, Initial and Annual Expatriation Statement, with their tax return for the year of expatriation and certify compliance for the prior five tax years. Certifying compliance for the prior five tax years requires that all Federal tax returns for the five tax years before the year of expatriation were properly filed, complete, and accurate. For more information, see Expatriation Tax and Instructions for Form 8854.

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Relief Procedures

Under the Relief Procedures for Certain Former Citizens (“these procedures”), the IRS is providing an alternative means for satisfying the tax compliance certification process for citizens who expatriate after March 18, 2010. These procedures are only available to U.S. citizens with a net worth of less than $2 million (at the time of expatriation and at the time of making their submission under these procedures), and an aggregate tax liability of $25,000 or less for the taxable year of expatriation and the five prior years.  If these individuals submit the information set forth below and meet the requirements of these procedures, they will not be “covered expatriates” under IRC 877A, nor will they be liable for any unpaid taxes and penalties for these years or any previous years.

These procedures may only be used by taxpayers whose failure to file required tax returns (including income tax returns, applicable gift tax returns, information returns (including Form 8938, Statement of Foreign Financial Assets), and Report of Foreign Bank and Financial Accounts (FinCEN Form 114, formerly Form TD F 90-22.1)) and pay taxes and penalties for the years at issue was due to non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

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Relief Procedures FAQs

The following Frequently Asked Questions and Answers (FAQs) explain how the Relief Procedures for Certain Former Citizens will work.  These procedures are effective immediately for those individuals who qualify.

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Q1. How long will these procedures be available?

Q2. Who is eligible to use these procedures?

Q3. Does “filing history as a U.S. citizen or resident” include filing a Form 1040NR under the good faith belief that I was a nonresident?

Q4. How does the $2,000,000 “net worth” threshold apply to these procedures?

Q5. Are estates of individuals, trusts, corporations, and partnerships, and other entities eligible to use these procedures?

Q6. What if I renounced my U.S. citizenship a couple of years ago but was not tax compliant and did not come into tax compliance? May I still use these procedures?

Q7. For submissions under these procedures, will penalties be asserted? For example, will the “delinquency penalties” under IRC 6651(a)(1) and (a)(2) be asserted? Will information return penalties, such as those relating to late Forms 8938, be asserted?

Q8. What will happen if I do not meet the eligibility criteria in Q2 and make a submission under these procedures?

Q9. Can you illustrate how the eligibility criteria will be applied?

Q10. How do I renounce my U.S. citizenship?

Q11. What documents do I need to submit under these procedures?

Q12. Do I have to send in a check for the amount shown on the returns?

Q13.  What if I have some U.S. tax withheld for tax years included in my submission?

Q14. Where do I send my submission?

Q15. Do I need preclearance or prior approval to use these procedures?

Q16. What if I don’t have a Social Security Number (SSN)?

Q17. Will filing under these procedures automatically place me under examination?

Q18. Do I need to file FBARs as part of these procedures?

Q19. Will I receive a notification from the IRS indicating I have complied with these procedures?

Q20. How long will it take to receive a notification from the IRS indicating I have complied with these procedures?

Q21. What are my U.S. tax filing obligations after my expatriation?

Q22. Can I change my mind after making a submission?

Q23. Who do I call if I have a question about making a submission to these procedures?

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