U.S. Expatriates Must Prove Tax Compliance to Avoid U.S. Exit Tax & Other Penalties
- 1 Exit Tax
- 2 Proving U.S. Tax Compliance
- 3 How to Get Into Compliance
- 4 IRS Voluntary Disclosure
- 5 When Do I Need to Use Voluntary Disclosure?
- 6 Golding & Golding – Offshore Disclosure
- 7 The Devil is in the Details…
- 8 What if You Never Report the Money?
- 9 Getting into Compliance
The U.S. Exit Tax for Covered Expatriates is a bit of a strange concept.
It is the idea that if a person no longer wants to be a U.S. Citizen or Green Card Holder (Long-Term Residents 8 out of 15 years) they may have to pay a tax (Read: “Fine”) for the right to renounce or relinquish their U.S. Citizenship or Green Card.
Generally, the exit tax is limited to individuals who qualify as covered expatriates.
There are various threshold requirements used to determine if a person (presuming they are a U.S. Citizen or Long-Term Resident) is considered a Covered Expatriate.
The analysis is based on either:
– The total value of assets a person is accumulated, and/or
– The amount of income the individual has earned annually, and/or
– Whether they can show that they have been in U.S. Tax Compliance for the last five (5) years.
The focus of this article will be category three – noncompliance of tax filings.
The Exit Tax is founded on the idea that if you have accumulated wealth while residing in the United States, and you no longer want to be considered a U.S. citizen or Legal Permanent Resident, you may have to pay the US government for the benefit of having accumulated your wealth — while being a U.S. person.
It is completely unfair – especially for individuals who are non-US citizens. It is one thing to have been born in the United States and therefore a US citizen by birth. For these individuals who have lived their entire life under the protection of the U.S. government (we understand people have very passionate beliefs as to whether that protection actually exists), the idea of an Exit Tax is conceivable.
But, for individuals who are subject to the Exit Tax solely because they are considered a long-term resident (a.k.a. a green card holder who has resided in the United States for at least eight of the last 15 years) it is completely unfair. Why? Because they are green card holder of the United States – not citizens. It means they are citizen of another country and now they will be subject to an exit tax simply because they were a resident — sometimes being taxes solely because they decided to return to their home country to live.
Proving U.S. Tax Compliance
This can be a major hurdle for individuals who believed that by simply moving outside of the United States and no longer utilizing their green card, that they had no more responsibility to the United States. This is also big problem for individuals who are termed “Accidental Americans” aka (people who are Americans by birth possibly because their parents were US citizens and/or were born in the United States but lived their life in a foreign country, or were born outside the United States and never spent any significant time in the United States).
In order to renounce your citizenship or relinquish your green card you have to file form 8854. For some individuals, they will not meet the minimum threshold of having significant assets necessary to qualify for the exit tax and/or will not have earned enough income to meet the second category either. But, if a person cannot prove that they have properly complied with US tax law for the last five years than they are also considered a covered expatriate – subject to the exit tax.
How to Get Into Compliance
Depending on the facts and circumstances of your case, you may consider offshore disclosure as a means for getting into compliance. The United States government has different programs established depending on the facts and circumstances of your case. If you happen to reside overseas already, meet the foreign resident requirement, and were non-willful in your failure to comply — you might qualify Streamlined Foreign Offshore Procedures, which qualifies you for complete penalty waiver.
IRS Voluntary Disclosure
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.” It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
The Devil is in the Details…
If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.
It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.
Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.
What if You Never Report the Money?
If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a predicament, which you will need to resolve before it is too late.
As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.
Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).
Getting into Compliance
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.
We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlikes the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.
After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.
If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.
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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, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
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