New IRS Procedures Offer Significant Relief for Certain Expatriates

Eli Noff, Esq., Partner
Mary F. Lundstedt, Esq., Associate

On September 6, 2019, the Internal Revenue Service (IRS) announced new relief procedures, "Relief Procedures for Certain Former Citizens," allowing eligible, non-willful individuals, who relinquished their U.S. citizenship, to come into compliance with U.S. tax and filing obligations and obtain relief for back taxes.[1] The IRS has not yet provided a date for which this opportunity will no longer be available; thus, affected individuals should act quickly.

Background

Adult U.S. citizens may relinquish their citizenship per the requirements in the Immigration and Nationality Act.[2] Individuals who choose to do this may experience significant U.S. tax consequences.

Specifically, Internal Revenue Code (IRC) §877A provides that individuals who are "covered expatriates:": (1) are treated as having disposed of all (worldwide) assets as of the day before their expatriation date, (2) must pay a mark-to-market exit tax on gain resulting from the deemed asset disposition, [3] and (3) are subject to additional tax consequences related to certain deferred compensation items and trust distributions.

Generally, IRC §877(a)(2) treats an individual as a "covered expatriate" if:

  • For the five years preceding expatriation, the individual's average annual net income tax liability exceeds a specified amount adjusted for inflation (for example, in 2019 this amount is $168,000);[4]
  • The individual's net worth is more than $2 million; or
  • The individual neglected to certify under penalties of perjury that he or she complied with the IRC for all five years preceding expatriation.[5]

New Relief Procedures

According to the announcement, the new procedures will only apply to individuals who relinquished their U.S. citizenship after March 18, 2010 and meet the following requirements:

  • They have not filed U.S. tax returns as U.S. citizens or residents;
  • Their past non compliance was non-willful;
  • They owe a limited amount of back taxes for the six tax years at issue-no more than $25,0000; and
  • They have net assets of less than $2,000,000.

The IRS clarified that eligible individuals who want to use the relief procedures must file their outstanding U.S. tax returns for the five years preceding expatriation. The IRS stated that individuals who qualify for the new procedures are relieved from paying back taxes and are relieved from penalties and interest.

For now, there is no termination date for utilizing the procedures; however, the IRS will announce a closing date before eliminating them. The IRS emphasized that the procedures are only available to individuals; thus, estates, trusts and other entities are precluded from using them. The IRS also noted that it will host an on-line webinar soon to provide additional information about the procedures. For now, one may glean information in the form of Q&As by visiting:  https://www.irs.gov/individuals/international-taxpayers/relief-procedures-for-certain-former-citizens

Conclusion

Individuals should note the IRS's reminder in the announcement that:

Relinquishing U.S. citizenship and the tax consequences that follow are serious matters that involve irrevocable decisions. Taxpayers who relinquish citizenship without complying with their U.S. tax obligations are subject to the significant tax consequences of the U.S. expatriation tax regime. Taxpayers interested in these procedures should read all the materials carefully, including the FAQs, and consider consulting legal counsel before making any decisions [emphasis added].

If you have questions or concerns about the new Relief Procedures available or regarding expatriation, contact Eli Noff at Frost & Associates, LLC today at (410)-497-5947.


[1] IR-2019-151 (Sept. 6, 2019).

[2] 8 U.S.C. 1481, §349.

[3] Note that IRC 877A(a)(3)(A) provides an exclusion amount for certain gain.

[4] Rev. Proc. 2018-57, §3.37.

[5] This certification is made on Form 8854, Initial and Annual Expatriation Statement.