On Friday, September 6, the IRS announced new procedures that would allow certain “accidental Americans” who have relinquished, or intend to relinquish, their U.S. citizenship to come into compliance with their U.S. income tax and reporting obligations and avoid being subject to the “exit tax.”
Under U.S. tax law, an individual who renounces or relinquishes his or her U.S. citizenship is required to file all U.S. federal tax returns and pay all U.S. taxes for the year of expatriation and the five prior years. In order to file Federal tax returns, the U.S. citizen must have a Social Security Number. An expatriating U.S. citizen who does not comply with the above requirement is treated as a “covered expatriate” and is treated as having sold his or her worldwide assets on the day before their expatriation date, and is required to pay a mark-to-market exit tax on the gain (subject to an exclusion amount) resulting from the deemed disposition of their worldwide assets. An expatriating U.S. citizen with a net worth of $2 million or more or an average annual Federal net income tax liability for the five preceding years of more than 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) is also treated as a covered expatriate subject to the exit tax.
Some U.S. citizens born in the United States to foreign parents or born outside the United States to U.S. citizen parents may be unaware of their status as U.S. citizens. These “accidental” U.S. citizens generally don’t have a Social Security Number and have not been compliant with their U.S. tax obligations. Upon learning of their U.S. citizen status, usually as a result of their foreign bank implementing FATCA, many of these U.S. citizens try to expatriate, only to learn that they need to obtain a Social Security Number, file six years of U.S. Federal tax returns and pay any tax owed and may, depending on their net worth or income level, also be required to pay an exit tax. It is to lessen the burden on at least some of these accidental U.S. citizens that the IRS is providing these new procedures.
In order to be eligible for the new procedures, a U.S.citizen must meet all of the following criteria:
He/she must have relinquished their U.S. citizenship after March 18, 2010
He/she must have no filing history as a U.S. citizen or resident (having filed a Form 1040NR as a non-resident alien under a good faith belief that one was not a U.S. citizen does is not a problem)
He/she did not exceed the applicable average annual net income tax threshold for the 5 years prior to the expatriation
He/she has a net worth of less than $2,000,000 at the time of expatriation and at the time of making the submission under these procedures, and
He/she has an aggregate total U.S. Federal tax liability of $25,000 or less for the year of expatriation plus the five preceding years (after application of all applicable deductions, exclusions, exemptions and credits, including foreign tax credits, but excluding the exit tax and excluding any penalties and interest)
In addition, only taxpayers whose past compliance failures were due to non-willful conduct may use these procedures.
What are the Benefits?
A U.S. citizen who is eligible to use and uses these procedures will not be subject to the exit tax and will also not be liable for any unpaid U.S. taxes and penalties for the year of expatriation or any previous years. Moreover, a U.S. citizen without a Social Security Number will not be required to obtain one. Instead, the U.S. citizen writes in red ink “Relief for Certain Former Citizens” on the top of the first page of each tax or information return filed pursuant to these procedures and leaves the box requesting a Social Security Number blank.
What Documents Need to be Submitted Under this Procedure?
To take advantage of these new procedures, an expatriating U.S. citizen must submit the following documents to the IRS:
A Certificate of Loss of Nationality (CLN) of the United States, Form DS-4083, or a copy of a court order canceling a naturalized citizen’s certificate of naturalization, dated after March 18, 2010. The CLN must be stamped “Approved” by the Department of State;
A copy of (a) a valid passport OR (b) a birth certificate AND a government-issued identification;
A Form 1040NR for the year of expatriation with all required information returns attached, including but not limited to:
Form 8938; and
Form 1040 reporting worldwide income up to date of expatriation; and
A Form 1040 with all required information returns for each of the five tax years preceding the tax year of expatriation.
How Long will these Procedures be Available?
The IRS is offering these procedures without a specific termination date and will make an announcement prior to terminating these procedures. However, we recommend eligible U.S. citizens take advantage of these procedures as quickly as possible.
If you are a U.S. citizen who meets the eligibility requirements described above but has avoided expatriating due to an unpaid U.S. tax liability of $25,000 or less or because you do not have a Social Security Number, then this is your chance to escape the U.S. tax system tax-free. Our tax professionals regularly advise U.S. citizens on the U.S. tax consequences of relinquishing their U.S. citizenship. To see how we can help you, call our office and we will be happy to schedule an appointment to discuss your particular situation.