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Letting the Door Hit You in the Tax on the Way Out: IRS Issues Relief Procedures for Certain Persons Who Relinquished US Citizenship But Wish to Complete Tax Compliance

In September of 2019, the IRS Issued Relief Procedures for Certain Persons Who Relinquished Their United States Citizenship But Who Were Out of Tax Compliance.

The Foreign Account Tax Compliance Act (“FATCA”) was enacted in 2010 with a stated purpose of combating tax evasion by U.S. persons holding accounts and other financial assets offshore. Casting a wider net than that, it also add extra reporting requirements for people who aren’t avoiding taxes and, by imposing withholding requirements on foreign financial and non-financial foreign entities if they do not comply, it required certain foreign financial and non-financial entities to report assets held by their account holders. Not only did this reportedly cause some foreign financial institutions to cease serving some US-citizen clients to avoid the hassle and expense of the additional paperwork, the enactment of FATCA appeared to be the precipitating factor in a relatively enormous surge in renouncements of US Citizenship. Per Treasury data (see https://www.americanexpatfinance.com article here) the renunciations from 2000 through 2009 varied between 278 and 768 people each year (totaling 5,110 renunciations), but from 2010 through 2019 was as shown below:

2010 – 1,534

2011 – 1,781

2012 – 933

2013 – 2,999

2014 – 3,415

2015 – 4,279

2016 – 5,411

2017 – 5,133

2018 – 3,983

The total in just 2016 exceeded the entire 10-year period preceding FATCA. In the 9 years since (including 2010), the total renunciations was 29,468. Even assuming 2019 has half the renunciations that 2018 did, the post-FATCA decade will have increased US citizenship renunciations by a factor of more than 6.

The Expatriation Tax: Hitting You With Tax on Your Way Out.

Section 877A of the Internal Revenue Code (Title 26 of the United States Code) covers the tax responsibilities of expatriates. That section was enacted June 17, 2008 and amended in 2014 and 2018. A summary of the tax rules applying to those who expatriated on or after June 17, 2008, can be found on the IRS’s website (click here). Per those guidelines, “covered expatriates” includes those with net worth of $2 million or more as of expatriation, or you didn’t certify compliance on Form 8854 US tax compliance for the 5 years before expatriation, or your average net income tax for the 5 years before expatriation was over $150,000 (accounting for inflation, this was $151,000 in 2012 and $160,000 in 2015). This tax is clearly intended to catch two categories of people: those who can pay a lot of tax and those who were not in tax compliance.

For those who were not in tax compliance but don’t want to be caught in the net of Section 877A, the IRS has provided procedures to rectify the lack of compliance for certain persons. These procedures can be found on the IRS’s website as well (click here). The preface to the procedures on the IRS’s web page is long, but at the bottom, the following key information is provided:

Under the Relief Procedures for Certain Former Citizens (“these procedures”), the IRS is providing an alternative means for satisfying the tax compliance certification process for citizens who expatriate after March 18, 2010. These procedures are only available to U.S. citizens with a net worth of less than $2 million (at the time of expatriation and at the time of making their submission under these procedures), and an aggregate tax liability of $25,000 or less for the taxable year of expatriation and the five prior years. If these individuals submit the information set forth below and meet the requirements of these procedures, they will not be “covered expatriates” under IRC 877A, nor will they be liable for any unpaid taxes and penalties for these years or any previous years.

These procedures may only be used by taxpayers whose failure to file required tax returns (including income tax returns, applicable gift tax returns, information returns (including Form 8938, Statement of Foreign Financial Assets), and Report of Foreign Bank and Financial Accounts (FinCEN Form 114, formerly Form TD F 90-22.1)) and pay taxes and penalties for the years at issue was due to non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.

Following that section there is a series of 23 FAQs with answers (and, non-answers). For example FAQ1 advises that there is no termination date with the offer of these procedures, except insofar as the IRS will make an announcement prior to terminating them. So, they don’t know, but they will keep us updated.

FAQ2 provides that the following taxpayers are eligible to use the procedures:

Only taxpayers whose past compliance failures were due to non-willful conduct may use these procedures. All the following criteria must be met.

  1. You have relinquished your U.S. citizenship after March 18, 2010.
  2. You have no filing history as a U.S. citizen or resident;
  3. You did not exceed the threshold in IRC 877(a)(2)(A), related to average annual net income tax for the period of 5 tax years ending before your date of expatriation;
  4. Your net worth is less than $2,000,000 at the time of expatriation and at the time of making your submission under these procedures;
  5. You have an aggregate total tax liability of $25,000 or less for the five tax years preceding expatriation and in the year of expatriation (after application of all applicable deductions, exclusions, exemptions and credits, including foreign tax credits, but excluding the application of IRC 877A and excluding any penalties and interest).
  6. You agree to complete and submit with your submission all required Federal tax returns for the six tax years at issue, including all required schedules and information returns. See FAQs 11, 12, and 16 for information on how to complete these returns.

Only taxpayers whose past compliance failures were due to non-willful conduct may use these procedures. All eligibility criteria must be strictly met to use these procedures.

The “non-willfulness” requirement will look familiar to tax practitioners with experience in the Streamlined Disclosure procedures for domestic taxpayers who failed to file FBARs, as does the six-year compliance period. Just like for the formerly-available Offshore Voluntary Disclosure and the Streamlined Disclosure procedures, it will be important to review the detailed information in all 23 (or more, as they arise) FAQs to make sure a taxpayer is eligible and that the submission package meets all the criterion. Nonetheless, as with those programs, this program could benefit thousands of taxpayers if they act before the IRS withdraws the procedures or adds further restrictions.

The author of this blog post, Daniel W. Layton, is a former IRS attorney and former attorney in the U.S. Department of Justice in the Tax Division of the Los Angeles U.S. Attorney’s Office. He has his own tax law firm in Newport Beach, California.

Posted 09/24/2019 by Daniel Layton.

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