Form 8854: (New) Reporting & Filing Instructions 2023

Form 8854: (New) Reporting & Filing Instructions 2022

Form 8854

Form 8854 Instructions: U.S. Citizens and Permanent Residents who are considered long-term residents file IRS Form 8854. The 8854 form is filed in the year after expatriation. For example, if a Long-Term Resident relinquishes citizenship in 2023, then in 2024 when he files his 2023 tax return, he includes Form 8854. We have summarized the Form and instructions below. If you are a covered expatriate becomes more complex. In addition, if you are unable to certify you are 5 years compliant with taxes and offshore reporting, you should speak with a board-certified tax specialist first before filing Form 8854. That is because with the IRS increasing enforcement of offshore accounts and asset reporting – compliance is crucial to avoid offshore penalties, and possible covered expatriate status.

Form 8854 & Instructions (Permanent Residents & U.S. Citizens)

A common misconception is that Form 8854 is only required for U.S. citizens, but that is false. The form is required for U.S. citizens and Lawful Permanent Residents who qualify as Long-Term Residents.

What is Expatriation?

Expatriation includes the acts of relinquishing U.S. citizenship and terminating long-term residency.

Who Must File

The “who” must file, breaks down into two main categories:

• • • Initial expatriation statement; and

    • Annual expatriation statement

Initial Expatriation Statement

You must file your initial Form 8854 (Parts I and II) if you relinquished your U.S. citizenship in 2023 or you are a long-term resident (LTR), defined below, and terminated your residency status in 2023.

You must file your annual Form 8854 (Parts I and III) if you expatriated before 2019 and you:

1. 1. 1. Deferred the payment of tax,

      2. Have an item of eligible deferred compensation, or

      3. Have an interest in a nongrantor trust

Explanation of the “Who”

The three categories of people who must continue to file are as follows:

Deferred Payment of Tax

 If a person posted a bond to avoid the payment of expatriation tax, the annual form is required.

Have an Item of Eligible Deferred Compensation

When a person expatriates with a 401K as one of their assets —  the 401K is not subject to the Mark-to-Market tax at expatriation — and is not deemed distributed. Once the expatriates receive payments, they will be subject to 30% withholding (Treaty rules do not apply) — and the expatriate may continue having to file the annual 8854.

Have an Interest in a Nongrantor Trust

This is relatively straightforward; if you have an interest in a non-grantor trust then you must continue filing the form.

Date of relinquishment of U.S. Citizenship

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

• • • You are considered to have relinquished your U.S. citizenship (and consequently, have an expatriation date) on the earliest of the following dates.

      1. 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).

      2. 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).

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

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

Long-Term Resident Defined

• • • 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.

    • Important: When a person is merely a visa holder or otherwise meets the substantial presence test, but did is NOT a Legal Permanent Resident, then they are not subject to U.S. expatriation rules.

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.

    • You generally have this status 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 an LTR, you terminated your lawful permanent residency (and consequently, have an expatriation date) on the earliest of the following dates.

Covered Expatriate

If you are a U.S. Citizen or Long-Term Resident, you must file Form 8854 BUT that does not mean you will be deemed a covered expatriate and therefore subject to the Exit Tax. In other words, you may have to file Form 8854 but may not be considered a covered expatriate.

Three Tests to Determine if you are a Covered Expatriate

You are a covered expatriate if you expatriated after June 16, 2008, and any of the following statements apply.

Net Income Tax Liability

Your average annual net income tax liability for the 5 tax years ending before the date of expatriation is more than the amount listed next.

1. 1. 1. $139,000 for 2008.

      2. $145,000 for 2009.

      3. $145,000 for 2010.

      4. $147,000 for 2011.

      5. $151,000 for 2012.

      6. $155,000 for 2013.

      7. $157,000 for 2014.

      8. $160,000 for 2015.

      9. $161,000 for 2016.

      10. $162,000 for 2017.

      11. $165,000 for 2018.

      12. $168,000 for 2019.

      13. $171,000 for 2020.

      14. $172,000 for 2021.

      15. $178,000 for 2022.

      16. $190,000 for 2023.

Net Worth Test

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

Certification of 5-Years of Tax Returns

You fail to certify on Form 8854 that you have complied with all federal tax obligations for the 5 tax years preceding the date of your expatriation We have prepared additional resources to help you understand the covered expatriate rules.

Exception for Dual-Citizens and Certain Minors

Dual-citizens and certain minors (defined next) won’t be treated as covered expatriates (and therefore won’t be subject to the expatriation tax) solely because one or both of the statements in paragraph (1) or (2) above (under Covered expatriate) applies. However, these individuals will still be treated as covered expatriates unless they file Form 8854 and certify that they have complied with all federal tax obligations for the 5 tax years preceding the date of expatriation as required in paragraph (3) (under Covered expatriate, earlier).

Certain 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.

Certain Minors

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

• • • You expatriated before you were 181/2.

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

Taxation Under Section 877A

As provided by the IRS:

• • • 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 (FMV) on the day before your expatriation date (“mark-to-market tax”).

      • This applies to most types of property interests you held on the date of your expatriation. But see Exceptions, later.

      • Gains from deemed sales are taken into account without regard to other rules under the Code. Losses from deemed sales are taken into account to the extent otherwise allowed under the Code.

      • However, section 1091 (relating to the disallowance of losses on wash sales of stock and securities) doesn’t apply.

      • For 2023, the net gain that you must otherwise include in your income is reduced (but not below zero) by $821,000.

        • 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.

Explanation

When you are a covered expatriate, you must then perform a calculation to determine your net unrealized gain. In other words, you subtract the adjusted basis A/B from the current FMV on the date before expatriation. The gain is then reduced up to $821,000, which means if your total gain is less than $821,000, you do not owe any tax for the MTM – subject to potential tax on deemed distributions for non-MTM items (See next section)

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.

• • • You make the election on a property-by-property basis.

    • The deferred tax on a particular property is due on the return for the tax year in which you dispose of the property.

    • Interest is charged for the period the tax is deferred.

    • The due date for the payment of the deferred tax cannot be extended beyond the earlier of the following dates.

      • The due date of the return required for the year of death.

      • The time that the security provided for the property fails to be adequate.

    • You make the election in Part II, Section D—Deferral of Tax.

    • You must provide adequate security (such as a bond).

    • You must make an irrevocable waiver of any right under any treaty of the United States that would preclude assessment or collection of any tax imposed by section 877A.

Expatriation with Offshore Disclosure

When a person is either considered a U.S. citizen or a Long Term Lawful Permanent Resident (LTR), the formal process of either renouncing US citizenship or relinquishing a green card is referred to as expatriation. When a taxpayer expatriates from the United States there are various tax and immigration requirements that they must be aware of to ensure that the process goes smoothly. One of the biggest hurdles for some taxpayers is that they are not in IRS tax compliance for the five prior years at the time that they expatriate. As a result, this may lead to the taxpayer having to pay an exit tax when they may have avoided attacks if they had been tax-compliant at the time that they expatriated. Let’s look at four common issues involving offshore disclosure with expatriation.

Are You a Covered Expatriate?

When a person is considered a covered expatriate, it means that they may be subject to the exit tax. When at all possible, taxpayers will try to avoid the covered expatriate status – and there are three (3) tests to determine covered expatriate status. If a taxpayer qualifies for either the net worth test, the net income average tax liability test, or the tax compliance test, they will be deemed a covered expatriate — unless an exception or exclusion applies. Thus, taxpayers who would only be considered to be covered expatriates because of the five-year tax compliance rule should be sure they are in tax compliance before they expatriate. This is because it can lead to an exit tax for items such as mark-to-market unrecognized gains; specified tax-deferred accounts, and ineligible deferred compensation (foreign pension). For taxpayers who have unreported foreign accounts, assets, investments, or income they will want to consider one of the offshore disclosure programs otherwise known as international tax amnesty.

Tax Audits of Expatriates

Some taxpayers are under the impression that once they expatriate, they are no longer subject to U.S. taxes. While they may not be subject to US taxes on their worldwide income, their prior-year tax returns that are still within the statutory time may be audited even after they expatriate, including their final year of tax filings. In other words, simply expatriating from the United States does not protect the taxpayer against the IRS auditing them for prior years. If a taxpayer is audited and the IRS determines that they did not properly expatriate because they did not actually meet the tax compliance rule it could lead to extensive fines and penalties after the fact.

U.S./Foreign Assets May be Subject to Levy/Lien

Even after a person expatriates from the United States, they can still be subject to examination and if the IRS determines that taxes or penalties are owed, then the IRS can lean or levy their bank accounts and other US-based assets, along with foreign assets in conjunction with cooperation clauses contained in tax treaties and FATCA agreements.

401K Withholding

 An additional potential tax pitfall is 401K and other eligible deferred compensation that is not subject to exit tax at the time of expatriation for non-covered expatriates. If the person is later determined to be a covered expatriate it will impact their 401K withholding because taxpayers who are determined to be covered expatriates are subject to a 30% withholding and even if the taxpayer is in a treaty country, they cannot take advantage of the treaty election if they are considered a covered expatriate.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms and do not qualify for an exception or exclusion to FBAR filing, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.