U.S. citizens, regardless of whether they live in the United States or abroad, are required to report and pay to the IRS all applicable taxes on their worldwide income, including on their income from foreign financial assets. To comply with existing tax law and to avoid significant tax liability under the Internal Revenue Code, U.S. citizens who renounce or otherwise relinquish their citizenship must comply with federal tax requirements for the year of expatriation and for the five tax years before their expatriation.
In News Release 2019-151, the IRS recently announced procedures under which “nonfiler expats” may come into compliance with their U.S. filing obligations and receive relief for back taxes. These are persons who have relinquished (or who intend to relinquish) their U.S. citizenship, have not filed U.S. tax returns as U.S. citizens or residents, and owe relatively small amounts of unpaid tax.
Under what the IRS is calling “Relief Procedures for Certain Former Citizens,” persons who meet the criteria described below will be deemed to be in compliance with their U.S. tax and filing obligations, won’t be covered expatriates under Section 877A and will receive relief for back taxes. Only taxpayers whose past compliance failures were because of nonwillful conduct may use the procedures. Applicants must meet the following criteria:
- The person relinquished his or her U.S. citizenship after March 18, 2010.
- He or she has no filing history as a U.S. citizen or resident (more on this below).
- The person didn’t exceed the threshold in Internal Revenue Code Section 877(a)(2)(A), related to average annual net income tax for the period of five tax years ending before his or her date of expatriation.
- His or her net worth is less than $2,000,000 at the time of expatriation and at the time of submission under these procedures.
- The person has an aggregate total tax liability of $25,000 or less for the five tax years preceding expatriation and in the year of expatriation. This amount is calculated after application of all applicable deductions, exclusions, exemptions and credits — including foreign tax credits, but excluding the application of Sec. 877A and any penalties and interest.
- He or she agrees to complete, and provide with their submission, all required federal tax returns for the six tax years at issue, including all required schedules and information returns.
“No filing history” means the individual hasn’t filed a gift tax return, information return (including Form 8938, “Statement of Specified Foreign Financial Assets”), or a Report of Foreign Bank and Financial Accounts (FBAR). It also generally means he or she hasn’t filed an income tax return either, but a person who filed a Form 1040NR (“U.S. Nonresident Alien Income Tax Return”), under the good-faith belief that he or she wasn’t a U.S. citizen, may use these procedures.
When applying for relief, applicants must submit the following documentation:
Proof of identity. This may be a copy of a valid passport or birth certificate, and a form of government-issued identification.
Proof of expatriation. Applicants need to file a CLN (“Certificate of Loss of Nationality of the United States,” Form DS-4083). Alternately, an applicant may submit a copy of a court order canceling a naturalized citizen’s certificate of naturalization, as described in Sec. 877A(g)(4)(D).
If the person supplies Form DS-4083, the date in the field “That: he/she thereby expatriated ___self on (Date) under the provisions of Section …” must be after March 18, 2010. The CLN must be stamped “Approved” by the Department of State.
Proof of year of expatriation. Applicants need to provide:
- A “dual-status” return, including Form 1040NR with all required information returns,
- Form 8854,
- Form 1040 attached as an information return reporting worldwide income up to the date of expatriation, and
- All other required information returns, including, but not limited to, Form 8938.
(IRS Notice 2009-85 has more information on dual-status returns.)
Tax records of five tax years preceding the tax year of expatriation. This includes Forms 1040 with all required information returns.
On the first page of the documents submitted pursuant to these procedures, the person should write in red ink “Relief for Certain Former Citizens” at the top of the document.
A note on FBARs
Although filing FBARs isn’t an eligibility criterion, a person who has an FBAR filing requirement should file them. If he or she is eligible to use these procedures and files FBARs before submission or contemporaneously with submission, the IRS won’t assert FBAR penalties. If the individual fails to file FBARs, the IRS may assert the applicable penalties if his or her submission is selected for examination.
For individuals only
These procedures are available only to individuals. Estates, trusts, corporations, partnerships and other entities may not use them. In addition, the IRS is offering the procedures without a specific termination date. The agency will announce a closing date before ending the procedures. If you think you might be eligible to apply, contact your Elliott Davis Advisor for more information and assistance.