The Internal Revenue Service (IRS) announced today new Relief Procedures for Certain Former Citizens that will enable certain individuals who relinquished their US citizenship to come into compliance with their US tax and filing obligations. These lucky individuals will not have to pay the back taxes otherwise owed, or any penalties or interest! It sounds like a dream come true (but read on…..as you know by now, the devil is in the details when it comes to US taxes)! Be very careful in choosing your tax advisor when it comes to expatriation matters. I have seen mistakes being made by seasoned tax professionals in this complex area.
The IRS Relief Procedures are a welcome announcement, following rapidly on the heels of an earlier IRS announcement that “expatriation” is now one of its newest “campaigns”. Full details concerning those who have expatriated being on the IRS “hit list” at my blog post here.
“Covered Expatriate” Status Disappears
If the individual qualifies for the relief, this means he or she can escape classification as a so-called “covered expatriate” (this status would result, for example, due to tax noncompliance for the 5 year period prior to giving up citizenship). Relief from “covered expatriate” status means an escape from the very harsh tax consequences that come along with such status. Full details about “covered expatriate status at my blog post here.
Limited Number of Individuals will Qualify for Relief
Don’t get too excited – the criteria for meeting the special relief are quite stringent. The relief procedures were clearly designed for the so-called “Accidental American“. Sadly, most people coming to me for help would not meet all of the required criteria, even if they were “Accidentals”. A big stumbling block for many will be the six-year aggregate tax liability of $25,000. This is a very low number for 6 years’ worth of tax.
This cut-off will preclude many from using the procedure, but of course, the IRS had to “draw the line” someplace. The initiative will help a lot of people who are not working (e.g., the stay-at-home mom or dad) or those earning under the Foreign Earned Income and Housing Exclusion amounts. Unfortunately in many cases, the tax liability may exceed the $25,000 threshold if the US person made the mistake of jointly owning income-producing properties and assets with a non-US spouse (or living in a community property jurisdiction which will deem the assets and income as owned equally by the spouses)! See my blog post examining the mistake many couples make by jointly owning property with a noncitizen spouse; and the various blog posts detailing the pitfalls of living in a community property jurisdiction (here and here).
The Criteria are Strict
First, only taxpayers whose past compliance failures were due to non-willful conduct may use the procedures. You can read all about what “nonwillful” means at my blog posts involving the “Streamlined Procedures“. In addition to the non-willful requirement, all of the following criteria must be met:
- The individual must have relinquished US citizenship after March 18, 2010 (look at the date reflected on your “Certificate of Loss of Nationality” or “CLN”).
- The individual must have absolutely no tax filing history as either a US citizen or resident;
- The individual did not exceed the dollar threshold set out in IRC 877(a)(2)(A), related to average annual net income tax for the period of 5 tax years ending before the date of expatriation. This is called the “average income tax liability test”. The dollar thresholds, for example, are $161,000 for 2016, $162,000 for 2017, $165,000 for 2018, and $168,000 for 2019.
- The individual’s net worth is less than $2,000,000 at the time of expatriation and at the time of making submission under the procedures (so, for example, if you were a pauper at the time of expatriation, but subsequently inherited a large amount due to death of a family member or friend, tipping your net worth at $2,000,000 or more, you are out of luck and won’t qualify).
- The individual must have an aggregate total tax liability of $25,000 or less for the five tax years preceding expatriation and in the year of expatriation (after application of all applicable deductions, exclusions, exemptions and credits, including foreign tax credits, but excluding the application of IRC 877A and excluding any penalties and interest).
- The individual must agree to complete and submit with his/her submission all required Federal tax returns for the six tax years at issue, including all required schedules and information returns.
Eligible individuals wishing to use these relief procedures are required to file outstanding US tax returns, including all required schedules and information returns, for the five years preceding and for the year they expatriated. Remember, provided that the taxpayer’s tax liability does not exceed a total of $25,000 for the six years in question, the taxpayer is relieved from paying US taxes, penalties and interest.
The IRS is offering these procedures without a specific termination date. The IRS will announce a closing date prior to ending the procedures.
If You are Thinking of Relinquishing US Citizenship, these Procedures May Help You!
I believe these new procedures may apply, not only to those who have expatriated, but also to persons who are considering expatriating but who have not yet done so. I did not think of these individuals initially and my first reading of the procedures had me thinking it applied ONLY to people who had already expatriated. I can understand how persons considering expatriation were “nonwillful” in their past tax noncompliance; but now, the year they plan to expatriate, they obviously know about their tax obligations if they are considering using the IRS procedures. Technically they will still meet the procedural criteria because the expatriation year (if returns are filed timely along with Form 8854) will not involve any wrongdoing. So, nonwillfulness is not an issue.
In summary, if done correctly, I think the procedure can possibly work for those who are “considering” expatriation (assuming they meet all the other requirements). Unfortunately, if this is correct, it results in a significant inequity. “Accidentals” who had otherwise met the criteria but who had already filed their late tax returns under the IRS Streamlined procedures and paid taxes on their income, are treated worse for having rectified their tax matters “sooner rather than later”.
Do You Qualify?
If you think you may qualify for these procedures, I am happy to assist you. Relief from “covered expatriate” status is well worth the effort. This is especially true if you have US family members who may receive gifts or bequests from you in the future. If you are treated as a covered expatriate, the US recipient of the gift or bequest must turn over 40% of it to the IRS! Full details at my post here.
Posted September 6, 2019
All the US tax information you need, every week –
Just follow me on Twitter @VLJeker (listed in Forbes, Top 100 Must-Follow Tax Twitter Accounts 2017-2019).
Subscribe to Virginia – US Tax Talk to receive my weekly US tax blog posts in your inbox.
Visit my earlier US tax blog “Let’s Talk About US Tax” hosted by AngloInfo since 2011, it contains all my old posts. Some hyperlinks to my blog posts on AngloInfo may have expired. If you copy the expired URL, you can most likely retrieve the actual post by using the “Wayback Machine” which is an archiving service. Simply paste the URL into the Wayback Machine search box. It will show you the archived post was saved on a specific date. Click on that date to retrieve the post.