The Internal Revenue Service is offering a stellar amnesty deal to qualifying expatriates who haven’t relinquished their citizenship because of the associated tax burden. Below, we’ll review the new program and look at who qualifies.
If you’re a U.S. citizen with dual residency that doesn’t qualify for the program, give us a call. We’ve worked with countless expats and helped them comply with the law, often for pennies on the dollar.
Who is an Expatriate?
First things first: What, exactly, is an expatriate? In the simplest terms, expatriation is the act of giving up one’s citizenship in the United States. People who do it are also known as “expats.” The term “expats” also refers to people who are still U.S. citizens but live abroad.
Some expats have never actually lived in the United States. If U.S. citizens have a baby overseas, that child is automatically granted U.S. citizenship if they notify the appropriate consulate or embassy of the birth promptly. Sometimes, however, these people never end up moving stateside. They still, however, must file U.S. taxes annually. Moreover, if they want to give up their citizenship, they must pay an expensive expatriation tax.
Expatriation Tax Rules
As we mentioned above, people who renounce their United States citizenship incur a tax obligation. Moreover, U.S. citizens must pay tax on their worldwide incomes. Sure, foreign tax credits may offset what’s owed to Uncle Sam, but it’s not a dollar-for-dollar credit. Plus, even if you don’t owe any money, you still must file.
Expatriation tax rules are codified in Section 877A of the tax code.
To expatriate, applicants must fill out Form 8854, pay an expatriation fee of around $2,800, and sit for an exit interview with a consulate. Depending on their 8854 answers, officals may declare applicants “covered expatriate,” binding them to additional parting income exit taxes.
The IRS calculates exit taxes by determining the profit on the would-be sale, using mark-to-market accounting, of all worldwide assets on the day before expatriation. It can get expensive.
Luckily, not everyone has to pay the levy. It only applies to parties that:
- Meet or exceed the threshold amount for each year.
- Have a net worth of $2 million or more on the date of expatriation.
- Are up-to-date with federal tax obligations for five years preceding the expatriation date.
In addition to regular income tax obligations, expats must annually remit FBAR (Report of Foreign Bank and Financial Accounts) paperwork.
IRS’ New Expatriation Tax Program Could Help a Lot of People Get Compliant
Many U.S. citizens abroad don’t expatriate because they can’t certify that they’re up-to-date with their tax filing obligations. Luckily, the IRS has created an amnesty program for a subsection of this group.
Rules for the IRS’ New Expatriation Amnesty Program
To qualify for the expatriation tax amnesty program, applicants must:
- Have an expatriation date of March 18, 2010, or later;
- Have no filing history with IRS as a citizen or resident; anyone who has ever filed a tax return in the U.S. is disqualified unless they’ve only ever filed as a non-resident;
- Not have an income that exceeds the threshold amounts;
- Have a net worth below $2 million at the time of expatriation and at the time of paperwork submission; if the person cannot meet those standards, an aggregate tax liability of less than $25,000 for the five years preceding expatriation will also suffice; and
- Submit past due tax returns for the previous five years and year of expatriation, in addition to Form 8854;
If an applicant can meet all the criteria, they won’t have to pay an expatriation tax, even if they owe $24,999 or less. Previously, taxpayers in the same situation had to pay past due amounts, plus interest, and a 20% negligence penalty.
Currently, there doesn’t seem to be an expiration date on this program. People who qualify, however, should get started with an international tax lawyer sooner rather than later, as the process can take months.
Connect with an Expatriation Tax Attorney
If you’re an expatriate who wants to explore the IRS amnesty program described above, get in touch with the Gordon Law Group today. We regularly work with U.S. citizens living overseas with their stateside tax obligations.