The IRS announced procedures for certain persons who have relinquished, or intend to relinquish, their U.S. citizenship and who wish to come into compliance with their U.S. income tax and reporting obligations and avoid being taxed as a “covered expatriate” under Section 877A of the U.S. Internal Revenue Code (IRC). Being categorized as a “covered expatriate” can have severe and undesirable tax consequences. Many individuals affected by these rules are persons who lived outside the United States for most of their lives and were unaware that they were subject to U.S. tax reporting. With some exceptions, IRC 877(a)(2) will treat an individual as a “covered expatriate” if:
- The individual has an average annual net income tax liability of the five years preceding the year of expatriation that exceeds a specified amount adjusted for inflation (for example, $161,000 for 2016; $162,000 for 2017; $165,000 for 2018; and $168,000 for 2019) (average income tax liability test).
- The individual has a net worth of $2 million or more as of the expatriation date (net worth test).
- The individual cannot certify, under penalties of perjury, on Form 8854, Initial and Annual Expatriation Statement, that the individual is compliant with all federal tax obligations for the five tax years preceding the tax year that includes the expatriation date (certification test).
The relief procedures specifically address the third requirement and provide the alternative means of meeting this test assuming the net worth test is met. At the same time, the procedures introduce the more stringent tax liability test, requiring an aggregate tax liability of $25,000 or less for the taxable year of expatriation and the five prior years (after application of all applicable deductions, exclusions, exemptions, and credits, such as foreign tax credits, but excluding the application of IRC 877A and any penalties and interest). These procedures may only be used by taxpayers whose failure to file required tax returns and pay taxes and penalties for the years at issue was due to nonwillful conduct.
Eligible individuals wishing to use these relief procedures are required to file outstanding U.S. tax returns, including all required schedules and information returns, for the five years preceding and their year of expatriation.
If these individuals submit the required information and meet the requirements of these procedures, they won’t be “covered expatriates” under IRC 877A, nor will they be liable for any unpaid taxes and penalties for these years or any previous years.
If you have any questions about these new procedures, please give us a call.
