U.S. Expatriates Must Prove Tax Compliance to Avoid U.S. Exit Tax

U.S. Expatriates Must Prove Tax Compliance to Avoid U.S. Exit Tax

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.

Exit Tax

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.

Golding & Golding, A PLC

We have successfully represented clients in more than 1,000 streamlined and voluntary offshore disclosure submissions nationwide and in over 70-different countries. We have represented thousands of individuals and businesses with international tax problems.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.


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