5-Year Covered Expatriate Tax Trap Simplified
When certain U.S. taxpayers want to either renounce their U.S. citizenship or terminate their long-term lawful permanent resident status, they may be considered a covered expatriate. If they are a covered expatriate, then they may become subject to exit tax depending on their specific facts and circumstances. For assessing who is subject to exit tax, the taxpayer must satisfy at least one of the three tests to determine if they are a covered expatriate. Then, if they are a covered expatriate, they may become subject to exit tax, but not always (it depends on their specific facts and circumstances). While many taxpayers are aware of the net worth test and the net income average tax liability test, there is a third test the taxpayers must be aware of – the five-year tax compliance requirement.
Expatriation Tax Compliance Requirement
If a taxpayer is a long-term resident and wants to terminate their U.S. person status, even if they do not meet the net worth test or the net income average tax liability test, if they cannot show that they have been five years tax compliant, they may also be considered a covered expatriate, even if they don’t meet the two other tests. In other words, if taxpayers have not been properly reporting their foreign accounts, assets, and investments along with filing accurate tax returns, they may not be considered tax compliant in order to avoid covered expatriate status.
As provided by the IRS:
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Your average annual net income tax liability for the 5 tax years ending before the date of expatriation is more than $206,000.
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Your net worth was $2 million or more on the date of your expatriation.
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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.
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Getting Into Compliance Before Terminating U.S. Status
For taxpayers who are considering renouncing U.S. citizenship or giving up their green card, they should be sure that they are in U.S. tax/reporting compliance before submitting their I-407 or Department of State forms.
Late Filing Penalties May Be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, 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?
Hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting can be overwhelming for Taxpayers trying to sift through the false information and nonsense they find in online research. Only a handful of attorneys worldwide are Board-Certified Tax Specialists who specialize exclusively in offshore disclosure and international tax amnesty reporting.
*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.
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.