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Collection: Expatriation with No Tax, Interest or Penalties: New Relief Procedures for Certain Former Citizens

This article was originally published in the Journal of Tax Practice and Procedure, August – September 2019 edition.

Introduction

On September 6, 2019, the Internal Revenue Service (IRS) announced the new “Relief Procedures for Certain Former Citizens” (IRS Relief Procedures) who relinquished their United States (U.S.) Citizenship after March 18, 2010.1 Under the new IRS Relief Procedures, eligible individuals who meet the IRS requirements will pay no tax, no penalties, and no interest. So far, the IRS is offering this relief with no specific deadline to apply, but will announce a closing date before the procedures expire.

I. FATCA Aftermath

On March 18, 2010, the Foreign Account Tax Compliance Act (FATCA) was passed. Among other things, FATCA generally requires foreign banks to investigate whether any of their customers are U.S. citizens. If a bank determines that a customer is a U.S. citizen, then the bank is generally required to report certain information regarding the customer’s account to the U.S. government. In response, some banks gently (and in some cases, not so gently) asked U.S. citizens to move their accounts elsewhere and no longer provide services to U.S. citizens.2 This made it difficult for U.S. citizens living abroad to transact business such as pay bills, obtain loans, and go about their daily lives.3

Even worse, some individuals were not aware that they had U.S. citizenship. Even if they were aware of their U.S. citizenship, many were not aware that the U.S. government taxes U.S. citizens on their worldwide income, no matter where they reside, not to mention requires them to submit certain information about their foreign bank accounts or foreign assets.4 Eventually, the IRS acknowledged that “[s]ome 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.”5

Once these “accidental” U.S. citizens became aware of their status and the filing and reporting requirements that go with it, it appears that many decided to renounce their U.S. citizenship. The year that FATCA was passed, only 1,006 individuals renounced their U.S. citizenship.6 Once FATCA was in full effect, however, that number increased drastically. For example, in 2015 a record 4,279 individuals renounced their U.S. Citizenship,7 5,133 individuals in 2017, but 2018 saw a decrease to 3,983 renunciations.8

II. Relinquishing U.S. Citizenship

Section 349 of the Immigration and Nationality Act, codified as 8 USC 1481, provides the methods for relinquishing U.S. Citizenship.9 One method involves taking an oath of renunciation of U.S. citizenship in person before a U.S. diplomatic or consular officer at a U.S. Embassy or U.S. Consulate in a foreign country.10 Once renunciation is complete, the decision is irrevocable.11 However, relinquishing U.S. citizenship is only the beginning. There are major U.S. tax consequences associated with expatriation.

III. U.S. Tax Consequences of expatriation

Code Sec. 877A generally sets forth the U.S. tax responsibilities associated with expatriation. Under Code Sec. 877A:

[I]ndividuals 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.

Most individuals seek to avoid being treated as a “covered expatriate” due to the tax consequences associated therewith. Under Code Sec. 877(a)(2), an individual is treated as a covered expatriate if:

  1. Average Annual Net Income Tax Liability Test—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);
  2. Net Worth Test—The individual has a net worth of $2 million or more as of the expatriation date; OR
  3. Certification Test—The individual cannot certify, under penalties of perjury, that the individual is compliant with all Federal tax obligations for the five tax years preceding the tax year that includes the expatriation date.12 The IRS Relief Procedures provide an alternative means for satisfying the Certification Test for U.S. citizens who expatriate after March 18, 2010.13

IV. Eligibility for Relief

To be eligible for the new IRS Relief Procedures, an individual14 must generally meet all of the following requirements:

  1. Relinquished U.S. citizenship after March 18, 2010;
  2. No filing history as a U.S. citizen or resident;
  3. Did not exceed the Code Sec. 877(a)(2)(A) threshold related to the Average Annual Net Income Tax Liability Test as described above;
  4. The net worth of the individual is less than $2 million on the expatriation date and the date of submission under the IRS Relief Procedures;
  5. Have aggregate total tax liability of $25,000 or less for the five tax years preceding the expatriation date and in the year of expatriation, excluding any penalties and interest;
  6. Agree to complete and submit with the IRS Relief Procedure submission all required Federal tax returns for the six tax years at issue, including all required schedules and information returns; and
  7. Past compliance failures were due to nonwillful conduct, generally defined as 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.15

Importantly, even if the individual renounced their citizenship a few years ago and did not come into tax compliance, that individual will still be eligible for the IRS Relief Procedures.16

V. Submissions Under the IRS Relief Procedures

An individual’s submission should include the following documents mailed to Internal Revenue Service, 3651 South I-H 35, Mail Stop 4301 AUSC, Attn: Relief for Certain Former Citizens, Austin, TX 78741:

  1. Certificate of Loss of Nationality (CLN) of the United States, Form DS-4083, or copy of a court order canceling a naturalized citizen’s certificate of naturalization;
  2. Copy of (a) valid passport, or (b) birth certificate and government issued identification;
  3. “Dual-status” return for the year of expatriation including Form 1040NR with all required information returns (e.g., Form 8854, Form 1040 attached as an information return reporting worldwide income up to the expatriation date, etc.); and
  4. Forms 1040 for all five tax years preceding the year of expatriation, with all required information returns.17

The IRS suggests that individuals write “Relief for Certain Former Citizens” in red ink at the top of the front page of each document.18

Conclusion

For individuals who renounced their U.S. citizenship after March 18, 2010, or who plan to renounce citizenship in the near future, the new IRS Relief Procedures are a welcome relief. However, all individuals considering renunciation or completing a submission under the IRS Relief Procedures should contact competent counsel to assist with the myriad of rules and consequences associated with such a decision.

  1. “IRS announces new procedures to enable certain expatriated individuals a way to come into compliance with their U.S. tax and filing obligations,” Internal Revenue Service, September 6, 2019, www.irs.gov/newsroom/irs-announcesnew-procedures-to-enable-certain-expatriatedindividuals-a-way-to-come-into-compliancewith-their-us-tax-and-filing-obligations, last accessed 09.13.19.
  2. See www.cnbc.com/2018/06/27/more-americans-are-considering-cutting-their-ties-withthe-us-heres.html, accessed 09.13.19; see also www.bbc.com/news/35383435, last accessed 09.13.19.
  3. See id.
  4. “Relief Procedures for Certain Former Citizens,” Internal Revenue Service, www.irs.gov/individuals/international-taxpayers/reliefprocedures-for-certain-former-citizens, last accessed 09.13.19.
  5. Id.
  6. See www.bbc.com/news/35383435, last accessed 09.13.19. Code Sec. 6039G requires the U.S. Department of the Treasury to publish, on a quarterly basis, the names of each individual who lost citizenship during that quarter. The IRS satisfies this requirement by publishing those names in the Federal Register every quarter.
  7. See id.
  8. See www.forbes.com/sites/robertwood/2018/05/14/fewer-americans-renouncecitizenship-but-taxes-still-drive-them/ #a6e5a93119f1, last accessed 09.13.19.
  9. 8 USC 1481, et seq.
  10. 8 USC 1481(a)(5).
  11. “Relief Procedures for Certain Former Citizens,” Internal Revenue Service, www.irs.gov/individuals/international-taxpayers/relief-proceduresfor-certain-former-citizens, last accessed 09.13.19.
  12. Id.
  13. Id.
  14. 14 The IRS Relief Procedures are only available to individuals (not estates, trusts, corporations, partnerships, etc.).
  15. “Relief Procedures for Certain Former Citizens,” Internal Revenue Service, www.irs.gov/individuals/international-taxpayers/relief-proceduresfor-certain-former-citizens, last accessed 09.13.19.
  16. Id.
  17. Id.
  18. Id.

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