September 12, 2019
IRS ANNOUNCES RELIEF PROCEDURES FORGIVING TAXES FOR CERTAIN U.S. CITIZENS RENOUNCING CITIZENSHIP
On September 6, 2019, the IRS announced “Relief Procedures for Certain Former Citizens”, a new amnesty program for certain U.S. citizens who have renounced, or intend to renounce, their U.S. citizenship. Among other requirements, you must have renounced U.S. citizenship after March 18, 2010, and have never filed a U.S. Form 1040 income tax return. The relief is also good news for certain individuals (referred to as “accidental Americans”) who are U.S. citizens because they were born outside the U.S. to a U.S. citizen parent.
If you meet all the eligibility requirements, the IRS will forgive all past income tax and penalties, including penalties on failure to file certain international information forms, as well as any expatriation tax (exit tax), and you will not be considered a “covered expatriate”. (For a discussion regarding the potentially devastating result of covered expatriate status, please see our May 25, 2017, International Tax Alert, “U.S. Expatriation Tax Implications of Renouncing U.S. Citizenship or Surrendering a Green Card”).
The forgiveness of the expatriation tax is important because individuals who renounced, but did not file IRS Form 8854, are subject to the expatriation tax, including but not limited to, tax on the potential deemed disposition at fair market value of foreign pension plans. It appears the US $10,000 penalty for late filing of IRS Form 8854 is also forgiven.
The amnesty does not apply to long-term residents (green card holders) and will not last indefinitely.
Eligibility Requirements
In addition to the above, you must meet the following requirements:
- Your net worth was less than US $2 million at the time of the expatriation (renunciation), and at the time of entering the amnesty program. (To the extent real estate, stock, and other values are likely to increase in future years, individuals should consider acting sooner, rather than later).
- Your aggregate federal income tax liability is US $25,000 or less for the year in which you renounce, plus the 5 prior years, but excluding any interest and penalties. (For many U.S. citizens living outside the U.S., there may be little or no annual U.S. tax liability because of the foreign tax credit and/or the foreign earned income exclusion).
- You file complete U.S. income tax returns (including all international information reporting forms) for the renunciation year and the five prior years, and you attach IRS Form 8854 to the renunciation year.
- Your past noncompliance was due to non-willful conduct (which the IRS defines as negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law). The IRS announcement does not state that you must substantiate your non-willfulness.
For individuals who are eligible for this amnesty program, it is superior to the existing amnesty programs because there is no restriction based on the number of days the individual has been present in the U.S., or whether the individual has an abode in the U.S., and apparently the non-willfulness does not have to be substantiated.
The IRS announcement reminds everyone that under the U.S. Foreign Account Tax Compliance Act (FATCA), foreign banks and other foreign financial institutions are generally required to determine whether their customers are U.S. citizens and, if so, report certain information about the account. So, this new generous gesture by the IRS may be intended to give individuals a little time to become compliant prior to adopting a future more aggressive program follow up on information it will be receiving about U.S. citizens from foreign governments and foreign financial institutions.
How to Apply
The applicant must send the aforementioned six years of complete tax returns (including all required international information forms), along with a copy of his/her approved Certificate of Loss of Nationality (CLN) and passport (or a copy of his/her birth certificate and government issued identification) to:
Internal Revenue Service
3651 South I-H 35
Mail Stop 4301 AUSC
Attn: Relief for Certain Former Citizens
Austin, TX 78741
If a U.S. Social Security Number (SSN) was never obtained it is not necessary to obtain one. The SSN box on the tax returns can be left blank. If tax is owing on the returns, but the 6 year aggregate does not exceed US $25,000, excluding penalties, you are not required to pay it.
Unlike normal tax return filings, after reviewing your submission to confirm that you meet the eligibility criteria, the IRS will send you a letter notifying you that your submission was received and is complete.
What About Unfiled FBARs?
Your past compliance with FBAR requirements is not an eligibility requirement for this new amnesty program. However, the IRS has stated that if you fail to file FBARs, the IRS may assert FBAR penalties if your amnesty submission is selected for examination. If you are eligible for this amnesty, and you file the FBARs before or at the same time as the amnesty application, the IRS will not assert FBAR penalties.
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