An IRS relief procedure for certain former citizens was introduced in September 2019 to allow certain Americans to renounce their U.S. citizenship without paying taxes and fines.
The program's specific target group is referred to as "Accidental Americans," that is, people who are eligible for U.S. citizenship by birth but who have always lived abroad.
Many of these people have struggled to obtain banking and other financial services in their country of residence in recent years due to the foreign account tax compliance act and their nominal U.S. citizenship.
However, to renounce U.S. citizenship, you need to be aware of your U.S. tax return, which, if you've never filed it before, could mean you face late penalties and taxes for not filing before you can renounce.
Citizenship-based taxation
Taxes based on U.S. citizenship, which means that all U.S. citizens, including anyone eligible for U.S. citizenship through their parents (or because they were born in the U.S.), are subject to U.S. tax returns of their income around the world, irrespective of whether you live in the U.S. or abroad.
In contrast, most countries only tax their residents' income or non-residents if earned in the country.
When Americans living abroad file their taxes in the United States, they can apply for IRS provisions, such as the foreign earned income exclusion, and the foreign tax credit to avoid double taxation. However, they still have to file an income tax return. The U.S. taxes annually to enforce these provisions.
Americans living abroad are often required to report their bank accounts, investments, and business interests abroad.
Who are the IRS relief procedures for certain former citizens for?
IRS relief procedures for certain former citizens only concern a certain group of people, namely:
Anyone who has renounced U.S. citizenship since March 18, 2010, or intends to renounce U.S. citizenship
And has a net worth of less than $ 2 million
And has a general tax debt of less than $ 25,000 per year in the five fiscal years preceding the expatriation and the year of expatriation.
And has an average annual net tax debt after credits for the five years ending before your expatriation year below an appropriate annual limit ($ 171,000 for 2020).
They have not been filing their U.S. tax return because they didn't know or fully understand the requirement, rather than intentionally avoiding their responsibilities.
As mentioned earlier, most Americans living overseas can turn to the Internal Revenue Service (IRS) when they file claims that lower the U.S. tax bill often to zero; therefore, the annual eligibility criteria mentioned above will not be relevant for most applicants.
This means that the group that the program is useful for are accidental Americans with a net worth of less than $2 million, like other Americans who seek to renounce U.S. citizenship are usually those with high net worth.
How does the IRS relief procedures for certain former citizens work?
To qualify for the program, Americans must meet the following criteria:
They have renounced their U.S. citizenship since March 18, 2010, or wish to do so now.
You must file your last six U.S. tax returns.
They must submit a voluntary declaration indicating that they have not previously deliberately evaded their responsibilities.
They must also file the last 6 Foreign Bank Account Reports (FBARs) for each year. The cumulative balances of the foreign financial accounts on which they have a signatory authority of control exceeded $10,000 to avoid missed FBAR penalties.
Therefore, they will avoid all penalties and, for most people, even back taxes; however, they will still have to pay a renunciation fee of $ 2,350.
Are IRS Relief Procedures for certain Former Citizens the only way to achieve compliance?
For accidental Americans who have never filed before and have a net worth of less than $2 million, who want to be completely relieved of their responsibilities in the United States, IRS relief procedures for certain former citizens is a good option.
For most Americans living abroad who are behind in filing U.S. tax returns, other IRS amnesty programs may be more appropriate, such as streamlined procedures. Renouncing is a serious and irreversible decision.
Dealing with foreign taxes in the United States is complex, and it is always a good idea to seek expert help.
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Elliot Kravitz, ATP