December 2, 2019
IRS EXPANDS AMNESTY PROGRAM FOR CERTAIN EXPATRIATING U.S. CITIZENS
The IRS has broadened the amnesty program for certain expatriating U.S. citizens that we initially described in our September 12, 2019, International Tax Alert entitled “IRS Announces Relief Procedures Forgiving Taxes for Certain U.S. Citizens Renouncing U.S. Citizenship”. The program forgives prior U.S. taxes for certain U.S. citizens renouncing U.S. citizenship (expatriating) who have never filed U.S. resident tax returns. However, the initial announcement did not directly address any relief for certain other expatriating U.S. citizens who did file prior U.S. income tax returns but failed to file IRS Form 8854 “Initial and Annual Expatriation Statement”.
The extended program applies to U.S. citizens who expatriate after March 18, 2010, with a net worth of less than US $2 million on the date of expatriation (and at the time of making the submission in the amnesty program), whose average annual U.S. income tax liability for the 5 years did not exceed the threshold described in IRC §877(a)(2)(A), and who did not file Form 8854. If you have not filed IRS Form 8854, you are classified as a “covered expatriate” with all the potential adverse results that may follow. See "WHY IS IT PERILOUS TO BE A COVERED EXPATRIATE?" below.
ADDITIONAL RELIEF CLARIFIED BY IRS ON OCTOBER 22, 2019
The additional relief procedures vary depending upon whether the individual was in full U.S. tax compliance at the time of expatriation, other than the failure to file IRS Form 8854.
Individuals Who Were in Full Compliance
Individuals who were in full compliance at the time of expatriation are simply required to complete and sign IRS Form 8854, attach a reasonable cause statement and send it to the IRS at:
Internal Revenue Service
3651 South I-H 35
Mail Stop 4301 AUSC
Attn: Relief for Certain Former Citizens
Austin, TX 78741
Write in red ink at the top of Form 8854 “FAQ 24”. You must attach a reasonable cause statement, signed under penalties of perjury, explaining all the facts and circumstances relating to your late filing of Form 8854. You will not receive a response from the IRS acknowledging receipt, nor a denial letter.
Individuals Who Were Not in Full Compliance
Individuals who were not in full compliance at the time of expatriation should follow the normal procedures for filing amended tax returns. If you believe you have reasonable cause for the errors, or omissions, attach a reasonable cause statement to each filing, signed under penalties of perjury.
After filing the amended returns, including IRS Form 8854, you should also send a copy of Form 8854 to the address mentioned above. Attach the reasonable cause statement signed under penalties of perjury to the copy of Form 8854, and on the top of Form 8854 in red ink write “FAQ 25”.
You will not receive a response from the IRS acknowledging receipt, nor a denial letter.
WHY IS IT PERILOUS TO BE A COVERED EXPATRIATE?
Among other circumstances, you will be a covered expatriate if you did not file IRS Form 8854 with your final U.S. income tax return as a U.S. citizen. If you are a covered expatriate, some of the potential results may be as follows:
- For U.S. income tax purposes, you will be treated as having a deemed disposition at fair market value of your worldwide assets with potential exceptions for certain pensions (see 2 below) as of the day before the expatriation date,
- For U.S. income tax purposes, you may be treated as having a deemed disposition at fair market value of your worldwide pension assets, and other deferred compensation assets, as of the day before the expatriation date, and
- If you make a future gift, or bequest, to a U.S. citizen, or U.S. resident (i.e., an individual domiciled in the U.S.), that recipient may be subject to a 40% U.S. tax on the value of the gift or bequest.
For more information on covered expatriates, please refer to our May 25, 2017, International Tax Alert entitled “U.S. Expatriation Tax Implications of Renouncing U.S. Citizenship or Surrendering a Green Card”. As discussed in that alert, an individual whose net worth is US $2 million or more at the date of the expatriation, or whose prior tax liabilities exceed the threshold under IRC §877(a)(2)(A), will normally be a covered expatriate even after filing IRS Form 8854.
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