In the "Relief Procedures for Certain Former Citizens" and accompanying FAQs, the Internal Revenue Service (IRS) provides a simplified pathway for certain non-compliant U.S. citizens who expatriated after March 18, 2010, to become U.S. tax and reporting compliant.
In short, under this new procedure, U.S. citizens who expatriated, were non-willful in their failure to file U.S. income or gift tax returns and associated international information returns, owed a limited amount of back taxes (not in excess of $25,000) and had net assets of less than $2 million can remediate their non-compliance by filing outstanding U.S. tax returns, required schedules, information returns and Foreign Bank Account Reports (FBARs).
Provided a non-compliant, non-willful expatriate satisfies the eligibility requirements to utilize the new procedure and submits the necessary information for the five years prior to the year of expatriation and the year of expatriation, the expatriate will become U.S. tax and reporting compliant and will not be liable for any unpaid taxes, interest and penalties for the six years (or any previous years) and, most importantly, will not be a "covered expatriate"1 for purposes of the harsh expatriation tax provisions of the Internal Revenue Code (Code).
U.S. citizens are subject to taxation on their worldwide income based on citizenship and not residency, which is the common standard globally. The U.S. worldwide taxation regime and associated tax compliance is complicated and burdensome for U.S. taxpayers, particularly those living abroad. Thus, for many "Accidental Americans,"2 the enactment in 2010 of the Foreign Account Tax Compliance Act (FATCA),3 may have been the tipping point in their decision to expatriate. After FATCA was enacted, expatriations increased significantly.4
The IRS, cognizant of the increase in the number of expatriations, announced a new compliance campaign focusing on non-compliance in the expatriation area on July 19, 2019.
This Holland & Knight alert provides an overview of the requirements of the new procedure and its associated FAQs below.
This procedure, while limited in application, is an extremely favorable way for non-compliant U.S. citizen expatriates to come into compliance, thereby eliminating not only "covered expatriate" status but also potentially detrimental and costly taxes, interest and penalties for past non-compliance.
For additional information or guidance on the new IRS procedure, contact the authors.
1 A U.S. citizen who expatriated on or after June 17, 2008, will be a "covered expatriate" if (1) the expatriate's annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount ($155,000), adjusted for inflation; (2) the expatriate's net worth is $2 million or more on the date of expatriation; or (3) the expatriate failed to certify on IRS Form 8854 that he or she has complied with all U.S. federal tax obligations for the five years preceding the date of his or expatriation. If any of the foregoing rules apply, then generally the expatriate is a "covered expatriate" and subject to immediate and detrimental income tax consequences (principally the "exit tax," which is a mark-to-market tax); viz. the covered expatriate generally will be deemed to have sold all of his or her worldwide assets at their fair market value on the day before expatriation; in addition, there are detrimental gift and estate tax consequences if the expatriate makes gifts or bequests to U.S. persons other than his or her spouse or to a charitable institution.
2 These are citizens of foreign countries who also are U.S. citizens because (1) they were born in the United States while their foreign parents were in the U.S. but shortly after birth returned to the home country of their parents; (2) they were born outside the U.S. while their American parent(s) were living abroad; or (3) a U.S. expat became a naturalized citizen of another country and incorrectly believed that his or her U.S. citizenship ended.
3 FATCA, among other obligations, requires certain foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. Thus, through FATCA, the IRS receives third-party information to corroborate U.S. taxpayer compliance and combat offshore U.S. tax evasion.
4 A total of 742 expatriations were reported in 2009, followed by 1,534 in 2010; 1,781 in 2011; 932 in 2012; 2,999 in 2013; 3,415 in 2014; 4,279 in 2015; 5,411 in 2016; 5,133 in 2017; and 3,981 in 2018. In the first two quarters of 2019, there were 1,628. See Katie Little, "Record number of Americans are giving up their citizenship," Feb. 10, 2017; Andrew Mitchel, International Tax Blog, Aug. 14, 2019.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.
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