As was discussed in our last U.S. Tax Tip, the IRS had announced a number of new compliance programs emanating from their Large Business and International (LB&I) unit. We also had previously reported that one of the IRS compliance programs, the Offshore Voluntary Disclosure Program terminated on September 28, 2018. The Streamlined Compliance Filings Procedures Program (both foreign and domestic), however, is still in effect. It would appear that as time goes on and more taxpayers have become compliant that the value of these programs to the IRS diminishes. At some point in time, the Streamlined Compliance Filings Procedures will also come to an end.
On September 6th, 2019, however, the IRS announced new procedures for certain persons who have relinquished, or intend to relinquish, their U.S. citizenship and who wish to bring their U.S. tax filings into compliance.
Under the U.S. Internal Revenue Code, individuals who are “covered expatriates” are treated as
- having disposed of all worldwide assets on the day before their expatriation date, are required to pay a mark-to-market exit tax on the gain (subject to an exclusion amount) resulting from the deemed disposition of their worldwide assets, and
- are subject to additional tax consequences with respect to certain deferred compensation items and trust distributions.
In general, an individual will be classified as a “covered expatriate” if:
- The individual has an average annual U.S. net income tax liability (after any applicable foreign tax credits) of the five years preceding the year of expatriation that exceeds a specified amount adjusted for inflation (U.S. $168,000 for 2019) (“average income tax liability test”),
- The individual has a net worth of $2 million or more as of the expatriation date (“net worth test”). Note that this U.S. $ 2 million threshold is NOT adjusted for inflation, or
- The individual cannot certify, under penalties of perjury, on Form 8854, “Initial and Annual Expatriation Statement”, that the individual is compliant with all Federal tax obligations for the five tax years preceding the tax year that includes the expatriation date (“certification test”).
Under the Relief Procedures for Certain Former Citizens (“these procedures”), the IRS is providing an alternative means for satisfying the tax compliance certification process for citizens who expatriate after March 18, 2010.
These procedures are only available to U.S. citizens with a net worth of less than $2 million (at the time of expatriation and at the time of making their submission under these procedures), and an aggregate tax liability of $25,000 or less for the taxable year of expatriation and the five prior years.
In order to become compliant, the former U.S. citizen must submit the following documents:
- Certificate of Loss of Nationality (CLN) of the United States, or copy of court order cancelling a naturalized citizen’s certification of naturalization
- Identification: Copy of (a) valid passport OR (b) birth certificate and government issued identification
- U.S. tax and information returns for the year of expatriation, including (but not limited to):
- Dual-status return including Form 1040NR with all required information returns;
- Form 8854, “Initial and Annual Expatriation Statement”;
- Form 1040 attached as an information return reporting worldwide income up to date of expatriation; and
- All other required information returns, including but not limited to Form 8938, “Statement of Specified Foreign Financial Assets”
- U.S. Form 1040 for the five tax years preceding the year of expatriation, with all required information returns
While these procedures are certainly good news for many taxpayers, they will not provide any relief for high net worth taxpayers. For example, residents of Toronto or Vancouver may find that, when their Canadian principal residence is included (in determining their net worth), that they may exceed the US $ 2 million threshold. As such, they would not qualify for relief under this program.
Individuals who qualify under this program will not be “covered expatriates”. As such, the “normal” treatment, discussed above will not apply (there is no deemed disposition, etc.). In addition they will not be liable for any unpaid taxes and penalties for these years or any previous years. As such, it would appear that the IRS is providing a level of tax forgiveness.
These procedures may only be used by taxpayers whose failure to file required tax returns (including income tax returns, applicable gift tax returns, information returns (including Form 8938, Statement of Foreign Financial Assets), and Report of Foreign Bank and Financial Accounts (FinCEN Form 114, formerly Form TD F 90-22.1)) and pay taxes and penalties for the years at issue was due to non-willful conduct.
Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
Similar to most of the other IRS programs, there is no announced termination date for this new program. It would be hard to imagine, however, that the program would be in existence for an extended period (just our opinion). Individuals who had previously filed as a nonresident alien, under the belief that they were not U.S. citizens, may use this program to correct their prior filings.
One perhaps frustrating point is that a qualified taxpayer must still obtain a U.S. social security number (SSN) in order to file U.S. returns (assuming they do not have one). Obtaining a SSN can, in many instances, take a significant amount of time to obtain as the U.S. Social Security Administration requires significant documentation before a SSN can be issued. One would think that taxpayers who are going to renounce would be able to obtain an IRS Individual Taxpayer Identification Number (ITIN) instead. It seems a waste of time and energy to obtain a SSN when the sole purpose is then to renounce their U.S. citizenship!
It should also be emphasized that, in general, there are two components to renunciation. First is dealing with the U.S. Department of State. A person can only renounce by making a formal renunciation of nationality before a U.S. diplomatic or consular officer. This requires scheduling and attending an “exit” interview. Currently there is a fee of U.S. $2,350 for this interview. The U.S. Department of State will subsequently issue the Loss of Nationality Certificate (LNC).
The second component is dealing with the U.S. Internal Revenue Service and being compliant with your U.S. tax filings. This new procedure can provide assistance with qualifying individuals in fulfilling this component.
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