On September 6, 2019, the IRS introduced an enhanced streamline program for certain U.S. citizens who have relinquished their U.S. citizenship or will do so in the future. The Relief Procedures for Certain Former Citizens relieves taxpayers of their back tax obligations including income tax, penalties and the exit tax associated with expatriation. Notwithstanding, such individuals must still file six years of tax returns. It is not uncommon for U.S. citizens who have always lived abroad not to have a social security number. Consequently, unlike prior IRS programs, individuals can take advantage of this program even without having a social security number.
All U.S. citizens are required to file U.S. tax returns reporting their worldwide income. In addition to the tax return, such taxpayers could have an obligation to file one of countless information forms reporting the existence of their foreign assets, including but not limited to bank and investment accounts, connection to foreign entities, gifts or inheritances. In order to file any of these documents, the taxpayer must have a U.S. social security number. Most practitioners who have represented such taxpayers are intimately familiar with the difficulties and time associated with helping such taxpayers obtain a social security number. It's interesting to note that many of these individuals were able to get U.S. passports despite not having a social security number. This occurred because representatives at U.S. Embassies instructed them to write all zeros in place of the social security number.
As the IRS began to crack down on unreported foreign assets over the past decade, many U.S. citizens residing abroad learned that they were obligated to file U.S. tax returns by virtue of having U.S. citizenship. The final nail in the proverbial coffin delivering the message that the IRS was serious about compliance was the introduction of the Foreign Account Tax Compliance Act (FATCA). According to Internal Revenue Code (the Code) Section 6039G, each quarter the Treasury must publish the names of all taxpayers who have expatriated in accordance with Section 877A. Since the advent of FATCA and the enhanced focus on compliance, . Two recent articles highlight the difficulty U.S. taxpayers residing abroad are having maintaining their foreign accounts: (i) and (ii).Therefore, FATCA has had a direct result on the number of U.S. citizens residing abroad who have elected to expatriate. However, not everyone who has expatriated has complied with the Code. This results from the fact that to expatriate, an individual must voluntarily and with intent to relinquish U.S. citizenship, (i) appear in person before a U.S. consular or diplomatic officer, (ii) in a foreign country at a U.S. Embassy or Consulate; and (iii).This approach contrasts with Section 6039G, which also requires an individual who has given up his or her U.S. citizenship with immigration to file Form 8854, the Initial and Annual Expatriation Statement, .
The IRS finally took steps to help ameliorate the financial cost and difficulties many Accidental Americans have encountered when trying to become compliant with the Code. relieves certain U.S. citizens of having to pay tax, interest, penalties and the exit tax upon relinquishing their citizenship. In exchange, these taxpayers need to file six years of tax returns along with all required information returns. The six years is really five years of back tax returns with the sixth comprising the final return for the year of the expatriation. This sixth year must also include Form 8854.
The Expat Relief is designed to address two distinct but interrelated issues: (i) a taxpayer’s noncompliance with U.S. income tax return filing requirements as well as (ii) a taxpayer’s failure to file Form 8854. While the failure to file tax returns leaves the statute of limitation open indefinitely in which the IRS could assess and collect the tax, the failure to file Form 8854 keeps an individual who relinquished his or her U.S. citizenship for immigration purposes liable for U.S. income tax indefinitely. The interesting aspect of the Expat Relief is that in some ways it is more limited than the existing options that are available through the Streamlined Foreign Offshore Procedures and Section 877A.
To Whom Does the Expat Relief Apply?
The Expat Relief is only available to individuals. It does not apply to any U.S. entities or to long term permanent residents (i.e., those with green cards). Only a certain group of U.S. citizens who expatriated after March 18, 2010, will be eligible to satisfy the eligibility criteria. Moreover, such individuals must meet these requirements:
- No U.S. income tax returns were filed as a U.S. citizen or resident (i.e., no Forms 1040). If an individual filed a Form 1040NR with the good faith belief that he/she was not a citizen, the Expat Relief is still available.
- Their average annual net income tax for the five years prior to expatriation must not exceed the annual threshold in Section 877(a)(2)(A). For 2019, the threshold is $168,000. Notwithstanding this amount, the Expat Relief states that the individual’s aggregate income tax liability after applying all deductions, exclusions, exemptions, and credits for all six years of income tax returns being filed, must not exceed $25,000. Therefore, there does not appear to be any reason to reference the Section 877(a)(2)(A) amount, which is completely irrelevant when the total aggregate tax must not exceed $25,000.
- Their net worth must be less than $2 million on the date of the expatriation and the date that the Expat Relief submission is filed.
- Their failure to comply with the Code was due to non-willful conduct. Similar to the manner in which it is defined in the Foreign Streamlined procedures, non-willful conduct means, "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."
What is Required to be Filed?
The following documents need to be sent to the IRS:
- Loss of Nationality: Expat Relief is premised upon the individual already having relinquished their citizenship under the Immigration and Nationality Act. Therefore, the Expat Relief is only available to individuals who have already expatriated. As such, they must provide a copy of Form DS-403, which is the Certificate of Loss of Nationality of the United States to the IRS, and the form must be stamped Approved by the Department of State. This document is only available to those who paid the $2,350 U.S. consular fee for "Administrative Processing of Request for Certificate of Loss of Nationality."
- Six years of tax returns: As noted earlier, five years of back tax returns inclusive of all information returns. The Expat Relief also indicates that unfiled gift tax returns can be filed through the submission. In the year of expatriation, there needs to be two tax returns. A Form 1040 reporting worldwide income up through the date of expatriation, and a Form 1040NR. Both returns should include all required information returns. Form 8854 must accompany the returns in the sixth year. To assist with the processing, on the top of the first page of each of these documents submitted, the individual should write in red ink, "Relief for Certain Former Citizens."
- Identification: For identification purposes, the individual must provide a copy of their valid passport or birth certificate and a government issued identification.
These documents need to be mailed to the IRS at the below address, which is the same one that was used for the numerous iterations of the Offshore Voluntary Disclosure Programs:
Internal Revenue Service
3651 South I-H 35
Mail Stop 4301 AUSC
Attention: Relief for Certain Former Citizens
Austin, Texas 78741
There is no payment required under the terms of the Expat Relief. Thus, no income tax liability, no interest, no late filing or late payment penalties. Similarly, there is no exit tax liability. IRS, however, indicates that the returns may be selected for audit under the normal section process. Additionally, IRS states that individuals who fail to meet the criteria and yet submit the above referenced documentation will be liable for all taxes, penalties and interest. Furthermore, the tax returns will be examined under normal procedures. Interestingly, unlike the terms of the Foreign or Domestic Streamlined programs, the IRS will acknowledge receipt of the submission after reviewing the submission package to make certain that it complies with the eligibility criteria.
The Expat Relief assists a certain number of noncompliant U.S. citizens residing abroad. Based upon the eligibility parameters, a successful entrepreneur or retired executive is unlikely to qualify by virtue of the $2 million net worth threshold. Similarly, an individual resident in a low or no tax jurisdiction will be unable to benefit from the foreign tax credit, and therefore exceed the aggregate tax liability of $25,000 over six years. However, such individuals could still qualify for the foreign earned income exclusion that might help reduce the taxable income to the required threshold.
For any U.S. citizens failing to qualify for the Expat Relief, but wish to receive the benefit, all is not lost. The Foreign Streamline program remains available. Although the IRS does not waive the actual tax in this program, it does waive all penalties. A taxpayer simply files three years of back tax returns inclusive of information returns and six years of FBARs. The taxpayer only pays the tax and interest due. Of course, this program is premised upon the individual’s noncompliance also being based upon non-willful conduct.
Moreover, if such taxpayer wishes to expatriate, it is possible to do so and avoid the exit tax. There are two exceptions that the taxpayer can meet so as to avoid being classified as a covered expatriate. Even if one of the exceptions is met, the individual must be compliant with his/her taxes for the past five years to successfully expatriate and avoid the exit tax. An individual can avoid being a covered expatriate even without meeting an exception. Such individual would need to have a net worth below $2 million and their average annual net income tax for the five years prior to expatriation must not exceed the annual threshold in Section 877(a)(2)(A). As noted above, for 2019, the threshold is $168,000. Consequently, the only thing the Expat Relief accomplishes that the existing Foreign Streamline program and Section 877A do not, is it saves the taxpayer the necessity of paying the income tax on the six years of filed tax returns.
Previously published in the Holland & Knight Tax Compliance Blog on September 10, 2019.