Section 877A and Tax Relief Procedures for Certain Former U.S. Citizens
Each year, many U.S citizens choose to renounce their citizenship and move or remain abroad. Some of these people were born dual citizens, while others simply moved to another country and loved it so much that they wanted to stay. If for whatever reason, you have recently chosen to renounce (or plan to renounce) your citizenship in the near future, you should be aware of the potential tax consequences that can come with your decision. At the Tax Law Offices of David W. Klasing, our Tax Attorneys and CPAs can help you navigate the tricky waters of expatriation and taxes and help you enroll in an appropriate tax relief procedure or program if you qualify.
Section 877A of the IRS code relates to certain tax assessments to be made against those going through the process of expatriation or renouncing or giving up their citizenship. When it passed through Congress in 2008, Section 877A created a “mark-to-market” exit tax regime. What this means is that if you qualify as a “covered expatriate,” you must pay taxes on any property or other assets that would be taxable as part of your estate for federal estate tax purposes, in the same manner as if the expatriate had died on the day before the expatriation date. For purposes of calculating the exit tax, the built-in gain or loss of each asset is computed by subtracting the asset’s adjusted basis from the fair market value of the asset.
The statute lists three ways that a taxpayer can qualify as a covered expatriate for the purposes of the exit tax. Note that some exceptions to these rules exist, and it is always best to consult with an experienced Tax Attorney who can figure out if they apply in your case. The first way to qualify as a covered expatriate is if you have an average annual net income tax liability in the five tax years ending before the date of expatriation of more than a specified amount, which is adjusted each year for inflation and currently stands at $171,000 for 2020. This is often referred to as the “tax liability test.” The second, called the “net-worth test,” is if you have a net worth of $2 million or more as of the expatriation date.
The third way that you can qualify as a covered expatriate is when you cannot certify that you complied with all U.S. federal tax obligations for the five tax years preceding the tax year that includes the expatriation date. This is known as the certification test. Before expatriating, you have to sign a document under penalty of perjury certifying that obligations to pay all relevant tax liabilities, interest, and penalties have been met. If you certify this falsely, you could face severe civil and criminal penalties down the line, including possible jail time. If you cannot certify it, however, you will have to pay the exit tax even if you otherwise would not qualify as a covered expatriate. You will also need to work with a skilled Tax Lawyer to help bring you back into compliance for the years that you failed to make complete and accurate disclosures.
Of the many other taxes and fees, you need to pay as you renounce your citizenship, the exit tax under section 877A can be the most brutal, especially if you own large amounts of property or other assets. As such, the IRS announced in September 2019 a program to provide tax relief to certain former citizens or citizens planning on shortly relinquishing their citizenship. It applies only to those who relinquished or plan to relinquish their citizenship on or after March 18, 2010. This program is, generally speaking, for those who cannot complete the certification test, but due to innocent mistakes or oversights rather than willful violations or attempt to violate tax laws.
Aside from the fact that your conduct in filing false or incomplete returns must not have been willful, other requirements to be eligible for the program include a net worth under $2 million, and an aggregate tax liability of $25,000 or less for the year of expatriation and the five prior years. If you meet the program’s requirements and submit the necessary documentation, you will not be a covered expatriate under 877A, and you will no longer have to pay the exit tax as if you had passed away the day before your expatriation.
Expatriation comes with a plethora of consequences, but the tax ones can be some of the most severe, especially if you do not do things right and end up facing further penalties, including the potential of criminal tax liability in some cases. At the Tax Law Offices of David W. Klasing, our skilled tax attorneys have years of experience working with clients who have recently renounced or are planning to renounce their citizenship. We help them follow all the legal requirements with the IRS without having to pay bank-breaking exit taxes. If you qualify for relief for certain former citizens, we will work to get you enrolled and limit your exit tax liability. Call us today at (800) 681-1295 to schedule a consultation.
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