The IRS recently released certain relief procedures for U.S. citizens who relinquished U.S. citizenship (‘an expatriation event”) after March 18, 2010 who are delinquent in their U.S. tax filings.
The purpose of this relief is to allow eligible individuals to escape the potential income tax implications of IRS Code 877A upon expatriation as well as interest/penalties and tax payable for unfiled tax and information returns.
Readers may refer to my 2017 blog on the expatriation rules at https://lnsca.com/u-s-expatriation/ for further clarification.
Per the IRS announcement,
“Under the Relief Procedures for Certain Former Citizens (“these procedures”), the IRS is providing an alternative means for satisfying the tax compliance certification process for citizens who expatriate after March 18, 2010. These procedures are only available to U.S. citizens with a net worth of less than $2 million (at the time of expatriation and at the time of making their submission under these procedures), and an aggregate tax liability of $25,000 or less for the taxable year of expatriation and the five prior years. If these individuals submit the information set forth below and meet the requirements of these procedures, they will not be “covered expatriates” under IRC 877A, nor will they be liable for any unpaid taxes and penalties for these years or any previous years.
These procedures may only be used by taxpayers whose failure to file required tax returns (including income tax returns, applicable gift tax returns, information returns (including Form 8938, Statement of Foreign Financial Assets), and Report of Foreign Bank and Financial Accounts (FinCEN Form 114, formerly Form TD F 90-22.1)) and pay taxes and penalties for the years at issue was due to non-willful conduct. Non-willful conduct is 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.”
Is this a viable program?
For those who are currently delinquent filers and have relinquished citizenship, it appears a good deal for them where their cumulative tax liability for the 5 years plus the 6th year is no more than $25K.
Under the streamlined foreign offshore procedure where one files 3 years of past due returns or goes back another 2 years or waits another 2 years to expatriate (to get to the 5 years of filings), income tax payable is not forgiven.
Under the IRC 877A provisions, the “covered expatriate” definition would include one whose average tax liability exceeded an average of $168,000 (2019 threshold) for the prior 5 years.
IRS Form 8854 must be filed with the tax return for the year of expatriation. Late- filing this form carries a $2,500 penalty if one cannot demonstrate a “reasonable cause argument”. With this proposed relief procedure, this penalty is waived. It appears that by not all filing the 8854, one could be deemed a covered expatriate (regardless of being below the $2M net worth or 5 -year average tax liability thresholds) because one has not filed or met their IRS FILING OBLIGATIONS.
This relief program is not available to long-term residents, namely prior green card holders who gave up (“an expatriation event”) their cards who held them for 8 out of the last 15 years (or part years). Those individuals should consider filing under the streamlined procedures, at least to eliminate penalties and interest costs.