Earlier this September, the IRS announced new relief procedures, aptly named the “Relief Procedures for Certain Former Citizens,” for U.S. expats with histories of non-willful income tax noncompliance. Former U.S. citizens who qualify under the new procedures may obtain relief from federal exit tax liabilities imposed on “covered expatriates” under 26 U.S. Code § 877A. In addition, program participants may be able to reduce penalties and interest charges associated with unpaid U.S. income taxes (i.e. “back taxes”), up to certain limits. Unfortunately, many taxpayers fail to meet one or more of the new program’s numerous eligibility criteria (which our international tax law attorneys will review in this article). The good news is that alternative strategies, such as IRS streamlined disclosures for taxpayers living outside the U.S., may remain useful for certain expats. If you have renounced your U.S. citizenship, or are planning on expatriating in the near future, talk to an experienced tax compliance attorney about your options for dealing with the IRS – and protecting yourself from unnecessary penalties and interest.
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Who is Eligible for the IRS Expat Relief Program?
The new procedures provide relief to former U.S. citizens who have inadvertently failed to comply with requirements to file and/or pay federal income taxes. According to the IRS’ September announcement, taxpayers who qualify “will not be assessed penalties and interest” on back taxes, such as penalties for delinquent filings or payments. Moreover, participants may be relieved of liability for the exit tax (though, it should be noted, careful exit planning can also help you avoid the exit tax before expatriating from the U.S., under certain circumstances).
Unfortunately, there is a catch: in order to be eligible, taxpayers must meet the following requirements, among additional criteria (which are outlined in the IRS Relief Procedure FAQs):
- The taxpayer cannot have a net worth exceeding $2 million.
- The taxpayer cannot have expatriated on or before March 18, 2010.
- The taxpayer’s total tax liabilities cannot exceed $25,000 in aggregate, taking into consideration the five years leading up to expatriation.
- The taxpayer must be willing to submit six years of federal income tax returns: the return for the year of expatriation, plus returns for the five years prior. This includes Forms 1040 (U.S. Individual Income Tax Returns), Forms 1040-NR (U.S. Nonresident Alien Income Tax Returns), and assorted information returns, as applicable to the situation. For example, taxpayers with certain foreign assets exceeding $50,000 in value may be required to file Form 8938 (Statement of Specified Foreign Financial Assets) under the Foreign Account Tax Compliance Act, or FATCA. This requirement applies broadly to citizens, resident aliens, and certain non-residents.
What Are My Alternatives if I Don’t Qualify for the New IRS Expat Relief Procedures?
If you cannot meet all IRS criteria, you will lose eligibility for relief under the new procedures. However, you may be able to obtain similar benefits – including relief from penalties – by making a streamlined disclosure. On the other hand, taxpayers should keep in mind that a streamlined disclosure does not provide relief from income tax liabilities, nor from any interest that may have accrued.
To make a streamlined disclosure, you must meet various IRS requirements. It may be possible to meet these criteria even if you do not qualify for the new expat relief procedures. First, you must be classified as a non-resident for tax purposes. Additionally, you must have a history of one or more compliance failures relating to unreported foreign income and assets – for instance, failures to file FBAR. If you are eligible, you must file three years of U.S. income tax returns to make the disclosure successfully. You are also required to file an FBAR for the past six tax years, where applicable.
Critically, all compliance failures must be categorized by the IRS as non-willful, meaning negligent or accidental as opposed to deliberate. This applies to both streamlined disclosures and expat relief procedures. Willful tax violations render the taxpayer ineligible for penalty relief, because acting willfully is tantamount to committing tax fraud – apparent indicators of which will likely lead to a criminal tax audit or IRS criminal investigation. As the Internal Revenue Service stated in its September announcement, the new relief procedures are primarily directed not toward tax evaders, but individuals who “have lived outside the United States most of their lives and may have not been aware that they had U.S. tax obligations.”
International IRS Tax Attorneys for Expats + Former U.S. Citizens
There are serious tax consequences to expatriation. If you are planning on leaving the United States and relinquishing your citizenship, start by creating a solid tax strategy with help from an award-winning tax lawyer.
At the Tax Law Office of David W. Klasing, we are expat tax lawyers with decades of experience helping current and former U.S. citizens resolve complex expatriate tax issues, including failures to file FBAR, failures to comply with the Foreign Account Tax Compliance Act (FATCA), and failures to file U.S. income tax returns and/or information returns. Our firm also provides international tax and estate planning services for business entities, trusts, and individuals. To set up a reduced-rate consultation regarding an offshore tax matter, contact the Tax Law Office of David W. Klasing online, or call 24 hours at (800) 681-1295.
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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