Each year, anywhere from several hundred to several thousand U.S. citizens renounce their citizenship, becoming expats in countries like Vietnam, Switzerland, and Mexico. In 2013, the estimate surged to around 3,000 – an unprecedented high – prompting questions about the factors driving these trends. Many expats, explaining their reasons for renunciation, pointed to the United States’ unusual, often burdensome tax regulations, which, in contrast to most of the world’s tax systems, are based on citizenship rather than residence. However, while renouncing U.S. citizenship might simplify certain tax issues, the expatriation process triggers tax consequences of its own, enumerated under 26 U.S. Code § 877A. If you are a “covered expatriate” under this statute, you must comply with certain tax requirements – or face costly penalties. However, the IRS recently announced a new relief program, which allows eligible expats to resolve outstanding tax compliance issues (such as failures to file Form 8854) while simultaneously reducing interest, penalties, back taxes, and exit tax liabilities. Our expat tax lawyers explain what the program involves, who qualifies to participate, and how taxpayers enter the program.
What is the New IRS Relief Program for Expats?
On September 6, 2019, the Internal Revenue Service unveiled a new set of relief procedures, which the IRS is calling the “Relief Procedures for Certain Former Citizens.” The program is designed for (1) former U.S. citizens (i.e. expatriates), and (2) current U.S. citizens who “intend to relinquish” citizenship in the near future, who may be out of compliance with federal income tax reporting requirements.
As the IRS explains, participating in the program enables certain taxpayers to “avoid being taxed as a ‘covered expatriate’ under” federal statute 26 U.S. Code § 877A, which you may recall being mentioned few moments ago. But why would a taxpayer want to avoid covered expatriate status in the first place? In short, a covered expatriate pays costly taxes. Specifically, he or she is liable for a mark-to-market exit tax, meaning the covered expatriate’s property (and other “worldwide assets”) are treated as if they were sold on the date preceding renunciation. The resulting gains are subject to the tax, depending on certain criteria. For more information about this subject, see our article explaining how exit taxes work and who is considered a “covered expatriate.” Otherwise, continue reading to learn more about the new IRS relief procedures for expats.
See our 2011 OVDI Q and A Library
See our FBAR Compliance and Disclosure Q and A Library
See our Foreign Audit Q and A Library
Who Qualifies for the IRS Expat Relief Procedures?
Only certain taxpayers are eligible to participate in the program. You may qualify for the expat relief procedures if you meet the following IRS criteria:
- The date of your expatriation occurred after March 18, 2010.
- You are making your submission as an individual. The relief procedures are currently off-limits to business entities, trusts, and estates.
- You can demonstrate that your failure to comply was non-willful (i.e. accidental). Keep in mind that, as the next section explains, you will be required to file six years of returns (the year of expatriation and five preceding years), along with various information returns.
- Your net worth is less than $2 million – not only currently (“at the time of making your submission under these procedures”), but also on the date you renounced your citizenship.
- Your total, combined tax liability for all five years preceding renunciation may not be greater than $25,000 (“excluding any penalties and interest”).
The foregoing list highlights just a few of the main criteria for participants. For a complete summary, refer to the IRS Relief Procedure FAQs.
How Do Former U.S. Citizens Enter the Program?
If you believe you may be eligible for the new IRS expat relief program, you should discuss your situation in detail with a competent international tax attorney. Even if you are technically eligible, there may be superior options available to you depending on your specific tax situation. With that in mind, eligible taxpayers who wish to participate must submit various documents to the IRS for review, including but not limited to the following:
- Income tax returns (i.e. Forms 1040) for the five tax years preceding renunciation
- IRS Form 8854 (Initial and Annual Expatriation Statement)
- IRS Form 8938 (Statement of Specified Foreign Financial Assets), which is mandatory for certain taxpayers under the Foreign Account Tax Compliance Act (FATCA), discussed in greater detail here
- S. Department of State Form DS-4083 (Certificate of Loss of Nationality of the United States), dated after March 18, 2010
International Tax Compliance Attorneys + CPAs for U.S. Expats
At the Tax Law Office of David W. Klasing, we are international tax attorneys with more than 20 years of legal, tax, and accounting experience helping expats navigate the complex requirements affecting former U.S. citizens. We have dedicated a substantial portion of our practice to civil and criminal offshore tax matters, such as FBAR (FinCEN Form 114) and FATCA compliance – in the process, cementing a reputation as the go-to firm for foreign account disclosure, offshore tax evasion defense, and international tax planning services.
If you are a U.S. expat, or plan on relinquishing your citizenship in the future, talk to our trusted international tax lawyers and CPAs about the new IRS relief procedures. If you have unresolved tax compliance issues, participating in the program may be beneficial to you. However, you should weigh the decision carefully before proceeding. Contact us online to arrange a reduced-rate tax consultation or call the Tax Law Office of David W. Klasing at (800) 681-1295 today.
Also, we’ve expanded our offices! In addition to our offices in Irvine and Los Angeles, the Tax Law Offices of David W. Klasing now have offices San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland and Sacramento.
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