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Form 8854 Instructions (2018) – Basics of IRS Expatriation Statements

Form 8854 Instructions (2018) – Basics of IRS Expatriation Statements (Golding & Golding, Certified Tax Specialist)

Form 8854 Instructions (2018) – Basics of IRS Expatriation Statements (Golding & Golding, Certified Tax Specialist)

Form 8854 Instructions (2018) – Basics of IRS Expatriations

One of the most complicated aspects of US international tax law is how to handle the exit tax (aka expatriation tax) using IRS Form 8854 – which is a necessary analysis for certain individuals who have decided to either renounce their U.S. citizenship, or relinquish their green card (aka Legal Permanent Residency Status).

IRS Form 8854

For U.S. citizens, it does not come as much of a surprise that there may be an exit tax for renouncing your citizenship, but it often comes as a surprise to a green card holder (aka Legal Permanent Resident) who is not even considered a U.S. citizen.

From their perspective (understandably so) they are just giving back their green card, so why would they have to follow that up with a complicated and many times unnecessary exit tax form 8854 filing?

Oftentimes the assets were acquired with money that was earned or generated from money earned before becoming a Legal Permanent Resident.

               

IRS Form 8854 Instructions

Threshold Question: Are You a U.S. Citizen or Long Term Resident?

Expatriation tax provisions apply to U.S. citizens who have relinquished their citizenship and long-term residents who have ended their residency (expatriated).

Form 8854 is used by individuals who have expatriated on or after June 4, 2004.

Does it Apply to U.S. Citizens?

Yes. The following is a breakdown of when a U.S. Citizen is considered to have expatriated.:

U.S. Citizen – Day of Relinquishment of Citizenship

You are considered to have relinquished your U.S. citizenship on the earliest of the following dates:

– The date you renounced your U.S. citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a certificate of loss of nationality).

– The date you furnished to the State Department a signed statement of your voluntary relinquishment of a U.S. nationality confirming the performance of an expatriating act (provided that the voluntary relinquishment was later confirmed by the issuance of a certificate of loss of nationality).

– The date the State Department issued a certificate of loss of nationality.

– The date a U.S. court canceled your certificate of naturalization.

Are All Legal Permanent Residents Required to File a Form 8854?

No.

In order to be required to file this form, the person must be considered a long-term permanent resident, or stated another way – the person is a Legal Permanent Resident, who is a “Long-Term Resident”

Long-Term Resident (LTR)

You are an LTR if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your status as an LTR ends. In determining if you meet the 8-year requirement, don’t count any year that you were treated as a resident of a foreign country under a tax treaty and didn’t waive treaty benefits applicable to residents of the country.A=

What is a Lawful Permanent Resident

You are a lawful permanent resident of the United States if you have been given the privilege, according to U.S. immigration laws, of residing permanently in the United States as an immigrant.

What if I resided outside of the U.S?

Simply residing outside of the U.S. is no enough to relinquish your Green Card. Rather, you still retain your Green Card Status until you formally abandon the Green Card (actually or constructively).

You generally remain a Legal Permanent Resident if you have been issued an alien registration card, also known as a “green card,” and your green card hasn’t been revoked or judicially or administratively determined to have been abandoned, and you haven’t commenced to be treated as a resident of a foreign country under a tax treaty between the United States and such foreign country.

You aren’t treated as a lawful permanent resident if you commenced to be treated as a resident of a foreign country under a tax treaty, didn’t waive the benefits of such treaty applicable to foreign residents, and notified the IRS of such a position on a Form 8833 attached to a timely filed income tax return.

If you were already an LTR at the time you commence to be treated as a resident of such foreign treaty country, then you will be treated as having expatriated as of that date.

Date of Termination of Long-Term Residency

If you were a U.S. long-term resident (LTR), you terminated your lawful permanent residency on the earliest of the following dates.

– The date you voluntarily abandoned your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U.S. consular or immigration officer.

– The date you became subject to a final administrative order that you abandoned your lawful permanent resident status (or, if such order has been appealed, the date of a final judicial order issued in connection with such administrative order).

– The date you became subject to a final administrative or judicial order for your removal from the United States under the Immigration and Nationality Act.

– If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date you commenced to be treated as a resident of that country and you determined that, for purposes of the treaty, you are a resident of the treaty country and gave notice to the Secretary of such treatment on a Form 8833 attached to a timely filed income tax return. See Regulations section 301.7701(b)-7 for information on other filing requirements if you are such an individual.

Date of Expatriation

Date of Tax Expatriation For purposes of filling out Part I, the date of your expatriation is the later of the date you notified the relevant agency of your expatriating act or the date Form 8854 was first filed in accordance with these instructions. Apply the rules of section 7502 to determine the date on which this form is filed. Generally, the postmark date is the filing date

Will I Be Taxed Under IRC Section 877

There are three main situations which may result in Exit Tax Liability:

You are subject to taxation under section 877 if, within the 10-year period immediately preceding 2017, you lost your U.S. citizenship or you were an LTR who ceased to be a lawful permanent resident and any one of the following applies to you:

– Your average annual net income tax liability for the 5 tax years ending before the date of your expatriation is more than the amount listed by the IRS for the respective year:

  • $139,000 for 2008
  • $145,000 for 2009
  • $145,000 for 2010
  • $147,000 for 2011
  • $151,000 for 2012
  • $155,000 for 2013
  • $157,000 for 2014
  • $160,000 for 2015
  • $161,000 for 2016
  • $162,000 for 2017

Your net worth is $2 million or more on the date of your expatriation.

You fail to certify on Form 8854 that you have complied with all of your federal tax obligations for the 5 tax years preceding the date of your expatriation.

Exceptions

Dual Citizens

You can qualify for the exception described above if you meet both of the following requirements:

– You became at birth a U.S. citizen and a citizen of another country and, as of the expatriation date, you continue to be a citizen of, and are taxed as a resident of, that other country.

– You were a resident of the United States for not more than 10 years during the 15-tax-year period ending with the tax year during which the expatriation occurred. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.

Minors

You can qualify for the exception described above if you meet both of the following requirements:

– You expatriated before you were 18

– You were a resident of the United States for not more than 10 tax years before the expatriation occurs. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.

Exit Taxation under Section 877A – A Summary

The following is provided in the instructions of Form 8854, but we will provide an additional summary for you to provide a bit of clarity:

How is the Tax Calculated?

If you are a covered expatriate in the year you expatriate, you are subject to income tax on the net unrealized gain in your property as if the property had been sold for its fair market value on the day before your expatriation date (“mark-to-market tax”).

Does It Apply to All Property?

No. This applies to most types of property interests you held on the date of your expatriation. But see Exceptions, later.

Gains vs. Losses

The IRS will try to tax you on all Gain, while limiting your losses. As provided by the IRS: Gains from deemed sales are taken into account without regard to other U.S. internal revenue laws. Losses from deemed sales are taken into account to the extent otherwise allowed under U.S. internal revenue laws. However, section 1091 (relating to the disallowance of losses on wash sales of stock and securities) doesn’t apply.

Current Year (2017)

For 2017, the net gain that you otherwise must include in your income is reduced (but not below zero) by $699,000.

Exceptions

The Mark-to-Market tax does not apply to the following

  1. Eligible deferred compensation items.
  2. Ineligible deferred compensation items.
  3. Specified tax deferred accounts.
  4. Interests in nongrantor trusts.

Deferral of the Payment of Mark-to-Market Tax

You can make an irrevocable election to defer the payment of the mark-to-market tax imposed on the deemed sale of property.

If you make this election, the following rules apply:

  1. You make the election on a property-by-property basis.
  2. The deferred tax on a particular property is due on the return for the tax year in which you dispose of the property.
  3. Interest is charged for the period the tax is deferred.
  4. The due date for the payment of the deferred tax cannot be extended beyond certain dates.

Considering Expatriation?

If you are considering expatriation, and you’re either a US citizen or Long-Term Permanent Resident, that it is important to understand the exit tax implications.

Just as important, is that because the submission of form 8854 typically ignites a more in-depth review of your prior tax history and filings, it is important that you are in compliance prior to submitting the form.

Oftentimes, we will prepare both in offshore compliance package along with a form 8854 to make sure you are in compliance at the time you are expatriating.

What Can You Do?

Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist

Our Managing Partner, Sean M. Golding, JD, LLM, EA  holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

*Click Here to Learn about how Attorneys falsely market their services as “specialists.”

Less than 1% of Tax Attorneys Nationwide

Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.

The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

Contact Us Today; Let us Help You.