Why the IRS Cares About the Date that Form I-407 is Filed

Why the IRS Cares About the Date You Filed Your Form I-407

USCIS Form I-407 and the IRS

It is not uncommon for U.S. Taxpayers who are considered Lawful Permanent Residents to consider giving up their permanent residency when it is no longer beneficial to them. Sometimes, it is because they only obtained permanent residency status while they were working in the United States and are no longer employed in the U.S.  In other scenarios, it is because the taxpayer has reached retirement and/or their family members live abroad, and they no longer want to be subject to the strict requirements of maintaining permanent residency in the United States. One issue that plagues many Taxpayers who want to terminate their LPR status is that they file their I-407 before properly planning for potential exit taxes. It is important to note that not everyone who gives up their permanent residency status has to be concerned about exit taxes — and just because the person is considered a Long Term Lawful Permanent Resident does not mean they will owe any exit tax, even if they are considered to be a covered expatriate. Let’s go through some of the basics.

A Long-Term Resident or Not?

The first factor to consider is whether the taxpayer is considered a long-term lawful permanent resident. If the taxpayer is not considered a long-term lawful permanent resident– which typically means that they maintained their permanent residency status in at least eight of the past 15 years –then the exit tax is not applied to them. So in a common situation in which a taxpayer may have been on an H1B or other visa for many years and then only became a permanent resident a few years ago, when they give up their permanent residency status they are not considered to be long-term.

Conversely, for taxpayers who are considered to be long-term lawful permanent residents, if they already filed their I-407 then that will be considered the date of expatriation. Even though the tax filings occur in the subsequent year, they are considered to have expatriated at that time. This may pose a problem for some taxpayers.

Covered or Not?

Only U.S. citizens and Long-Term Lawful Permanent Residents may become subject to the exit tax. In other words, if a person falls into neither of these two types of categories then they cannot be subject to the exit tax – no matter how long they resided in the U.S.. Likewise, to even (possibly) become subject to the exit tax, the taxpayer must be considered a covered expatriate. Thus, if at the time the U.S. Citizen or Long-Term Lawful Permanent Resident taxpayer files the I-407, and does not qualify as a covered expatriate — they will not become subject to the exit tax – but they will still file a Form 8854.

Covered Expatriate Status

To be considered a covered expatriate, the taxpayer falls into one of three categories (noting, that the taxpayer only has to meet one category and not all three categories to be considered covered).

As provided by the IRS:

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

1. 1. 1. Your average annual net income tax liability for the 5 tax years ending before the date of expatriation is more than $190,000.

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

      3. 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.”

If the taxpayer is a covered expatriate, then they have to determine whether there is an exit tax that applies. There are various categories of exit taxes, such as mark-to-market, Ineligible Deferred Compensation, Eligible Deferred Compensation, Specified Tax Deferred Accounts, and Trusts. Specifically, the date of filing of the Form I-407 is the date of expatriation (presuming the filing is approved by USCIS) and the day before the filing date is considered the date to determine whether there is any exit tax.

If the Taxpayer did not plan before filing the I-407 — and before throwing in the towel and presuming that the taxpayer is subject to exit tax — there are various factors to consider first.

There Still May Not be Any Exit Tax

Even if the Taxpayer is a covered expatriate and did not have the opportunity to plan to avoid exit taxes, they may not be subject to exit tax. Here are some common examples that help avoid the exit tax:

Cash

• • • Taxpayers who have a significant portion of their money in cash will be happy to learn that the exit tax is not a wealth tax, but rather an exit tax. Since there is no gain on cash, case is not subject to the exit tax.

MTM Exclusion

• • • Taxpayers are able to exclude upwards of $800,000 of gain on assets that have accumulated gain but have not been recognized yet. Therefore, depending on how much unrealized gain is contained within the assets will help determine whether there is any exit tax. Thus, if there is not a lot of gain contained inside the assets that have not yet been recognized, then there may not be any exit tax.

Step-Up Basis

• • • Taxpayers receive a step-up basis on various assets that they owned before becoming a U.S. person presuming that they were not a U.S. person when the assets were accumulated. Thus, for example if taxpayers come to the united states and they already own foreign pension, when it’s time to exit they will not pay exit tax on the full amount of pension, but rather they receive a step-up on the value of the pension when they became a U.S.person. Likewise, the same rule applies to other assets as well.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and 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?

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.