Expatriation Tax Lawyers: The IRS tax rules for U.S. Citizens and Long-Term Legal Permanent Residents (LTR) who expatriate are hard and generally requires the filing of Form 8854. The U.S. requires citizens and long-term residents to first determine if they are covered expatriates. If the taxpayer is a covered expatriate and does not meet one of the exceptions or exclusions, the taxpayer must complete the part III of the 8854 Form (updated in 2019). Some covered expatriates may then become subject to an exit tax.
Expatriation Tax Lawyers
As the United States continually works toward enhancing and improving international tax law compliance and enforcement, Expatriate Laws (designed to reduce offshore tax evasion) have made avoiding the “Exit Tax” even more difficult.
When a person makes the serious decision to either relinquish their Green Card (Legal Permanent Residents) or renounce their Citizenship (U.S. Citizens through birth or naturalization), it does not mean they are “off the hook” for IRS Tax responsibilities.
Why is there an Expatriate Tax?
The IRS’ main concern behind the implementation of an Expatriate Tax is the very real concern that a person will accumulate a “fortune” while enjoying the benefits of being a U.S Citizen or Legal Permanent Resident and then leave the United States without being subject to tax on their earnings.
But the Income was Earned Overseas?
When it comes to U.S. Tax, one of the most important concepts to keep in mind is that the United State taxes individuals on their worldwide income. In other words, if you are a U.S. Citizen or Legal Permanent Resident it does not matter where you reside for purposes of U.S. Taxation purposes (subject to the Foreign Tax Credit and Foreign Earned Income Exclusion) – ALL of your income is subject to U.S. tax reporting – unless an exception or exclusion to the rule(s) applies.
An extension of the IRS worldwide taxation rule is called the Expatriate Tax. Essentially, when a person decides to terminate their relationship with United States, the IRS does not walk away that easy. In order to make a clean break, the individual who is expatriating may have to pay some tax to United States. This is to prevent various scenarios where the US loses out on tax, such as the following:
– Example: Citizens and Permanent residents may have earned substantial money (even if the income is earned overseas) while the person was enjoying the benefits of being a US Citizen or Legal Permanent Resident – only to renounce their citizenship or relinquish their green card and avoid paying any tax on these earnings that they should of been paying during their relationship with the United States or at a future date.
– Example: A U.S. Citizen or Legal Permanent Resident may earn substantial income in the United States through investments, but has not yet undergone a taxable event (increase in stock value without a stock sale). Thus, if the person was to expatriate and then sell the stock, without expatriate rules, the IRS not be entitled to any of the money as a result of the sale (even though the value increased during the time period in which the person was a US citizen or legal permanent resident.
Essentially, it prevents individuals from deriving the benefit of being a US citizen or legal permanent resident but then avoiding tax liability by picking up and leaving the United States for good.
It should be noted that the Expatriation laws have changed over the past few years. As provided by the IRS:
Expatriation on or after June 17, 2008
If you expatriated on or after June 17, 2008, the new IRC 877A expatriation rules apply to you if any of the following statements apply.
– Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($147,000 for 2011, $151,000 for 2012, $155,000 for 2013 and $157,000 for 2014).
– Your net worth is $2 million or more on the date of your expatriation or termination of residency.
– You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.
If any of these rules apply, you are a “covered expatriate.”
A citizen will be treated as relinquishing his or her U.S. citizenship on the earliest of four possible dates: (1) the date the individual renounces his or her U.S. nationality before a diplomatic or consular officer of the United States, provided the renunciation is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State; (2) the date the individual furnishes to the U.S. Department of State a signed statement of voluntary relinquishment of U.S. nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)-(4)), provided the voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State; (3) the date the U.S. Department of State issues to the individual a certificate of loss of nationality; or (4) the date a U.S. court cancels a naturalized citizen’s certificate of naturalization.
For long-term residents, as defined in IRC 7701(b)(6), a long-term resident ceases to be a lawful permanent resident if (A) the individual’s status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or if (B) the individual (1) commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, (2) does not waive the benefits of the treaty applicable to residents of the foreign country, and (3) notifies the IRS of such treatment on Forms 8833 and 8854.
IRC 877A imposes a mark-to-market regime, which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date. Any gain arising from the deemed sale is taken into account for the tax year of the deemed sale notwithstanding any other provisions of the Code. Any loss from the deemed sale is taken into account for the tax year of the deemed sale to the extent otherwise provided in the Code, except that the wash sale rules of IRC 1091 do not apply.
The amount that would otherwise be includible in gross income by reason of the deemed sale rule is reduced (but not to below zero) by $600,000, which amount is to be adjusted for inflation for calendar years after 2008 (the “exclusion amount”). For calendar year 2014, the exclusion amount is $680,000. For other years, refer to the Instructions for Form 8854.
The amount of any gain or loss subsequently realized (i.e., pursuant to the disposition of the property) will be adjusted for gain and loss taken into account under the IRC 877A mark-to-market regime, without regard to the exclusion amount. A taxpayer may elect to defer payment of tax attributable to property deemed sold.
For more detailed information regarding the IRC 877A mark-to-market regime, refer to Notice 2009-85.
Form 8854, Initial and Annual Expatriation Information Statement, and its Instructions have been revised to permit individuals to meet the new notification and information reporting requirements. The revised Form 8854 and its instructions also address how individuals should certify (in accordance with the new law) that they have met their federal tax obligations for the five preceding taxable years and what constitutes notification to the Department of State or the Department of Homeland Security.
Note. If you expatriated before June 17, 2008, the expatriation rules in effect at that time continue to apply. See chapter 4 in Publication 519, U.S. Tax Guide for Aliens, for more information.
What to do if you haven’t filed a Form 8854
For more detailed information on how, when and where to file Form 8854, refer to the Form 8854, Initial and Annual Expatriation Information Statement, and its Instructions.
What to do if you haven’t filed an Income Tax Return
Among the various requirements contained in IRC 877 and 877A, individuals who renounced their US citizenship or terminated their long-term resident status for tax purposes after June 3, 2004 are required to certify to the IRS that they have satisfied all federal tax requirements for the 5 years prior to expatriation. If all federal tax requirements have not been satisfied for the 5 years prior to expatriation, the individual will be subject to the IRC 877 and 877A expatriation tax provisions even if the individual does not meet the monetary thresholds in IRC 877 or 877A.
Individuals who have expatriated should file all tax returns that are due, regardless of whether or not full payment can be made with the return. Depending on an individual’s circumstances, a taxpayer filing late may qualify for a payment plan. All payment plans require continued compliance with all filing and payment responsibilities after the plan is approved.
For more detailed information on what to do if you have not filed your required federal income tax returns, refer to Filing Past Due Tax Returns.
Significant penalty Imposed for not Filing Expatriation Form
The Internal Revenue Service reminds practitioners that anyone who has expatriated or terminated his U.S. residency status must file Form 8854, Initial and Annual Expatriation Information Statement, and its Instructions. Form 8854 must also be filed to comply with the annual information reporting requirements of IRC 6039G, if the person is subject to the alternative expatriation tax under IRC 877 or IRC 877A. A $10,000 penalty may be imposed for failure to file Form 8854 when required.
IRS is sending notices to expatriates who have not complied with the Form 8854 requirements, including the imposition of the $10,000 penalty where appropriate.
The Instructions for Form 8854 provide details about the filing requirements, related definitions and line-by-line instructions for completing the form. Failure to file or not including all the information required by the form or including incorrect information could lead to a penalty.
- U.S. Citizens and Resident Aliens Abroad
- Form 8854, Initial and Annual Expatriation Information Statement, and its Instructions
If you have recently expatriated from the United States or are considering doing so, you may consider speaking with an experienced international tax lawyer before initiating any communications with the IRS on this and related international tax issues.
Golding & Golding: Expatriation & International Tax Law
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Recent Golding & Golding Case Highlights
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.