Expatriation with Offshore Disclosure: A New 2024 Tax Guide

An Overview of Expatriation with Offshore Disclosure, New 2024

Offshore Disclosure with Expatriation

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.

*Original publication date: 11/2018.

Covered Expatriate Status

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.

Post-Expatriate Tax Audit

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.