On September 6, 2019, the IRS published the new “Relief Procedures for Certain Former Citizens” who wish to come into compliance with their U.S. income tax and reporting obligations without being taxed as a “covered expatriate” under section 877A of the U.S. Internal Revenue Code (the “Code”). The procedures cover certain persons who have relinquished, or intend to relinquish, their U.S. citizenship. The target of the program is “Accidental Americans,” such as U.S. citizens born in the U.S. to foreign parents or born outside the U.S. to U.S. citizen parents. The program covers individuals. Other types of taxpayers (e.g., estates, trusts, corporations, partnerships) are not eligible for relief.
Relief Available Under Program
Under existing law, 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 prior tax years. In the year of expatriation, an individual must include Form 8854, Initial and Annual Expatriation, reporting various information and certifying under penalties of perjury that the individual complied with all tax obligations for the 5 preceding tax years.
Under the new program, a taxpayer neither will owe taxes, penalties, or interest to the U.S., nor will the taxpayer be considered a “covered expatriate” for purposes of Section 877A’s exit tax. After expatriation and acceptance of the submission, a taxpayer need not file a U.S. tax return unless required as a resident or nonresident alien.
To be eligible for relief, a taxpayer must: (1) be an individual U.S. citizen who has no filing history as a U.S. citizen or resident (except Form 1040NR filings if the taxpayer had a good faith belief that he or she was not a U.S. citizen); (2) at the time of expatriation and the time of application, has a net worth of less than $2 million (see IRC 877A(g)(1)(b)); (3) relinquish their U.S. citizenship, including those who expatriated any time after March 18, 2010 (the date of enactment of the Foreign Account Tax Compliance Act (“FATCA”)); (4) during the year of expatriation and the prior 5 years, have an aggregate total income tax liability of $25,000 or less, after application of all available deductions, exemptions, and credits; and (5) the past compliance failures must have been non-willful (i.e., due to negligence, inadvertence, mistake, or a good faith misunderstanding of the law). Since minors under age 18 generally have no ability to expatriate, they are ineligible to use the new program until they reach majority.
Procedures to Participate
To participate, a taxpayer should file outstanding U.S. tax returns (including all schedules and information returns) for the five years preceding and the year of expatriation. For the year of expatriation, the taxpayer must submit a dual-status return including Form 1040NR with all required information returns, such as Form 8854, Form 1040 attached as an information return reporting worldwide income up to the date of expatriation, and all other information returns such as Form 8938. In addition, the taxpayer must submit proof of identification (e.g., a valid passport or a birth certificate plus government issued identification) and proof of expatriation (e.g., “approved” Certificate of Loss of Nationality of the U.S., Form DS-4083, or a court order cancelling citizenship). The package must be marked “Relief for Certain Former Citizens” in red ink. No payment is required.
Although FBAR filing is not required, the procedures suggest that applicants file required FBARs before or contemporaneous with making a submission. In return, the IRS will not assert FBAR penalties.
The new program offers benefits to a class of non-resident U.S. citizens who formerly had limited options to come into compliance and comply moving forward. Although non-resident taxpayers may use the IRS’s Streamlined Filing Compliance Procedures without penalty, it is more onerous and would require such non-residents to continue filing U.S. tax returns and paying U.S. income tax indefinitely, even if they had permanently moved to a foreign country. These new procedures offer non-resident U.S. taxpayers the ability to come into compliance with minimal consequences, expatriate at a lower cost, and eliminate any go-forward obligation to comply.
There are, however, some risks to participation. For U.S. citizens, expatriation is irrevocable and carries with it legal consequences. A taxpayer who expatriates in reliance on these procedures but is later determined to be ineligible will be liable for all taxes, penalties, and interest associated with the submission. There is no “closing agreement” and thus no protection from criminal prosecution, nor is there protection from examination if selected under normal procedures. If relief is denied for whatever reason, the taxpayer could be exposed to exit tax, willful FBAR penalties, information return penalties, and U.S. income tax, penalties, and interest.
Attorneys at Gensburg Calandriello & Kanter, P.C. are available to discuss this new relief program and other options for taxpayers to come into compliance with U.S. tax laws. Taxpayers should carefully weigh their options to make an informed decision before applying for any IRS program