In September 2019, the Internal Revenue Service (IRS) announced new Relief Procedures for Certain Former Citizens that will enable certain individuals who relinquished (or are relinquishing) 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; nor will they have to pay any penalties or interest! The criteria for meeting the special relief are quite stringent, but if an individual can meet them, it is well worth the effort to use this procedure. Full details are at my US tax blog post in the hyperlink above.
What About Green Card Holders?
Unfortunately, as they now stand, the relief procedures do not apply to long-term permanent residents (LTR) that are treated as expatriating when they surrender their green card. Remember, hope springs eternal and in fact, all is not lost for such individuals! The IRS has indicated it will be providing relief for them as well; more detail follows in this post.
Giving Up the Green Card
Relinquishing a green card is often a tricky matter from a US tax perspective. Even if the individual is not complying with the terms of maintaining the green card for purposes of the US immigration laws, continuing to hold the card still counts for US tax law purposes. Many clients who come to see me are under the mistaken belief that simply because their green cards have “expired” they are no longer US tax subjects. This is incorrect. The tax law is very precise on this topic. Under the US tax rules, once “resident” status is acquired, it is deemed to continue unless it is rescinded or administratively or judicially determined to have been abandoned. This means the individual is still on the hook for US income tax on his worldwide income until the green card is properly and officially relinquished.
The United States Tax Court has very clearly acknowledged this in Topsnik v. Commissioner, in a September 2014 holding. In Topsnik, the Tax Court determined that a German national who held a green card was subject to tax on his worldwide income, even though he had sold his US residence, and made very infrequent visits to the United States during the tax years in question. The court determined that for US tax law purposes, as distinguished from US Immigration law purposes, the taxpayer could not “informally” abandon his tax status as a lawful permanent resident. He was required to follow the appropriate procedures under the tax laws in order for his US resident status to be treated as terminated for purposes of the US income tax rules. Since the taxpayer had not done this, he was taxed as a US resident for the years in question – meaning he was taxed on his income from all over the world, which in this case included rental income from an inn in Germany, income from a winery in Thailand and installment sale gain on certain stock.
Please note, this post is not examining the US tax issues involved when a green card holder uses a “treaty tie breaker” provision in a treaty with the United States. Use of such a provision is treated from a US tax perspective as if the individual has expatriated (even if he has not formally relinquished the green card).
A Forthcoming IRS Relief Procedure for Green Card Holders
Here’s the scoop about the anticipated IRS relief for green card holders:
In a webinar hosted by the IRS on October 10, 2019, (“Relief Procedures for Certain Former Citizens,”) the IRS stated that more guidance on its new tax relief procedures will address individuals who surrendered their green cards but failed to file Form 8854. Lara Banjanin from the Office of Associate Chief Counsel (International) who presented at the webinar said that the IRS will be issuing forthcoming guidance on this matter. According to Ms. Banjanin, it is anticipated that such guidance will address green card holders whose net worth is below $2 million, whose average income tax liability for the 5-year lookback period is below the income tax liability threshold for a “covered expatriate”, and who has been compliant with US tax obligations for the five years prior to expatriation.
With regard to the income tax liability threshold, this threshold is indexed annually for inflation. For example, if an individual expatriated in 2018 and for the five tax years prior to 2018, that individual had an average annual income tax liability of $165,000 or more, then that individual would be treated as a “covered expatriate”. For 2019, the “average annual net income tax” for the five taxable years prior to expatriation cannot exceed the threshold of US$168,000; for 2020, the threshold is US$171,000.
Let’s Talk About Tax Compliance
Based on information from the IRS webinar (a verbatim extract is below), the only “permissible” missing piece is that the LTR failed to file the Form 8854 to certify full US tax compliance. The individual will have to submit a reasonable cause statement explaining why he or she failed to file the Form. For many persons who mistakenly thought they no longer had US tax obligations because their card “expired”, it may be very difficult (if not impossible) to certify US tax compliance.
It does not sound as if the contemplated procedure will include a method for attaining “late” tax compliance for those who were not already tax compliant in the 5-year period prior to giving up the card.
So for example, the procedure might not help the individual who gave up the green card and who mistakenly believed that since the green card had “expired”, he had no further US income tax obligations. Here is an example: Assume T’s green card expired in 2015 and he has been living overseas since then. T mistakenly believes that since the green card had “expired”, he had no further US income tax obligations and he stops filing US tax returns. T turns in the green card to a US Consulate in 2017. T never files Form 8854.
The contemplated procedure apparently would also not help a T who has not yet formally turned in the “expired” green card but who has not been tax compliant for a number of years since he mistakenly believes he had no further tax duties since the card is expired and he has been living abroad. This individual is not given the same relief benefits as the US citizen who gave up citizenship as set out in the IRS September “Relief Procedures for Certain Former Citizens”. He might have to use the “Streamlined Procedure” to attain tax compliance but will be required to pay taxes and interest on those filings.
I have written to the IRS staff who conducted the IRS webinar and pointed out these problems. I have requested they consider providing relief in these types of situations. I will keep my readers posted.
Excerpt from the IRS Webinar
A verbatim excerpt from the IRS webinar is below:
“Lara, some practitioners have noted that the relief procedures don’t apply to long-term permanent residents that are treated as expatriating when they surrender their green card. What if an LPR surrendered his or her green card? Let’s assume the LPR filed all past returns but was unaware of the requirement to file an 8854, so didn’t file one in the year of expatriation. Is there any provision for people like that?
BANJANIN: Yes. Thanks, Dan, for asking the question. It’s a question we get a fair bit. The IRS does anticipate providing additional guidance that would address the narrow circumstance where a taxpayer fails to timely file a Form 8854, which can, raise a concern as to whether that individual has failed to certify tax compliance and therefore is treated as a covered expatriate but it’s a, you know, significant consequence. So the anticipated guidance will address the situation as you put, posit a Green Card holder who, at the time expatriation, was under the two million net worth threshold, was under the average income tax liability test threshold and had been compliant with our tax obligations for the five years prior to expatriation. So, the only failure was the failure to timely file a Form 8854 and certify that the tax, that they had been tax compliant, then that individual would be eligible to file their 8854 late by attaching a reasonable cause statement to explain the lateness of the filing and filing that with the IRS at this address actually. So, look out for that additional guidance which will be forthcoming.”
For those of you with an interest, a list of the available IRS webinars can be found here.
Posted December 12, 2019
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