Posted by Fletcher Accounting and Tax Service Inc.

IRS offers Expatriate Tax Relief: What does it mean for you?

IRS offers Expatriate Tax Relief: What does it mean for you?

Under procedures the IRS outlined Friday on its websites and announced in News Release IR-2019-151 that obtaining relief from the exit tax of Sec. 877A and other outstanding tax liabilities is now possible to certain individuals who expatriate from the United States. 

After March 18, 2010, individuals who relinquished or will relinquish their U.S. citizenship, the relief will apply to them and if they will also meet a number of other criteria listed below. Generally, voluntarily relinquishing the citizenship of any native-born or naturalized U.S. citizen for any reason and under procedures listed at 8 U.S.C Section 1481(a) may be possible.

All federal tax requirements for the year of expatriation and for the five immediately prior tax years must be complied by the expatriates -- stated under the Code. In addition, a tax on "covered expatriates" was imposed in Sec. 877A proclaiming that on the day before the day of expatriation, most properties are deemed sold for its fair market value. Included in their income for the year 2019, the resulting net gain is over $725,000. Under Sec. 877(a), a covered expatriate should be:

  • In the five tax years before the date of expatriation, the expatriate should have an average annual net income tax liability of $168,000 (for 2019) or more than the specified amount;
  • Has $2 million or more net worth; or
  • A certification that can be made with Form 8854, Initial and Annual Expatriation Statement in which the expatriate cannot certify under the penalty of perjury that he or she has met all applicable tax requirements that the IRS may require for the five preceding tax years or fails to submit evidence of compliance. 

Other expatriates can still be covered if they cannot make the certification even if they have income tax liabilities and net worth’s below these thresholds. 

The IRS stated under the relief procedure announced Friday, for purposes of Sec. 877A, individuals who meet specified requirements will not be considered covered expatriates and for any unpaid taxes and penalties for the year of expatriation and previously, they will not be liable. 

The taxpayer's non-willful conduct must be the reason for any failure to file required tax returns and pay taxes and penalties for the six tax years at issue (the five immediately prior years and the year of expatriation). FinCEN Form 114, Report of Foreign Bank and Financial Accounts, commonly known as FBAR, income, gifts, and information returns (the latter including Form 8938, Statement of Foreign Financial Assets) are included in the required tax returns. Due to negligence, mistake, inadvertence, or a good-faith misunderstanding of legal requirements are what non-willful conduct would be. 

To be eligible for relief, in addition, the individual must:

  • As a U.S. citizen or resident the individual must have no filing history (under a god-faith but mistaken belief that the individual was not a U.S. citizen, Form 1040NR, U.S. Nonresident Alien Income Tax Return is not included);
  • Ending before the day of expatriation, the individual must meet the above income tax liability limits for covered expatriates for the period of five years and when applying for the relief and at the time of expatriation, the individual must meet the $2 million-net-worth limit;
  • After applications of all applicable exclusions, exemptions, deductions, and credits including foreign tax credits, the individual must have an aggregate tax liability of no more than $25,000 for the six tax years at issue (but penalties, interest, and the exit tax of Sec. 877A are excluded); and
  • All required federal tax returns for the six tax years at issue including all required schedules and information returns must be agreed by the individual to be completed and submitted. 

If you want to know more details about the relief, you can check out the IRS website at irs.gov. The IRS provides answers to 23 frequently asked questions (FAQ) and also several examples about the relief. Or, you can consult your tax professional or financial advisor if you feel hesitant and unsure about your future decision or if you feel that you are a covered expatriate. 

It is always better to prepare all the required documents and be knowledgeable enough about what will be the best thing to do. 

Fletcher Accounting and Tax Service Inc.
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