U.S. Federal Income Tax and Information Reporting Relief Procedures for Certain Former U.S. Citizens

January 21, 2020

On September 6, 2019, the Internal Revenue Service (“IRS”) announced new U.S. tax relief procedures for certain former U.S. citizens.

Tax Relief

The new procedures are intended to provide relief to eligible individuals who had renounced their U.S. citizenship or plan to renounce.

U.S. citizens are subject to U.S. federal income tax and information reporting requirements annually, even if they live outside of the United States. Some U.S. citizens who are born outside of the U.S. to U.S. parents and never lived in the U.S. or have not lived in the U.S. as adults may not be aware of their U.S. filing obligations or be fully compliant with their U.S. tax requirements. 

A U.S. citizen can renounce his or her U.S. citizenship without being compliant with U.S. federal tax requirements; however, doing so results in the former U.S. citizen being treated as a “Covered Expatriate.” A Covered Expatriate is subject to U.S. Exit Tax in the year of renunciation and U.S. federal income tax on certain income in future years. In addition, if the Covered Expatriate subsequently gifts or bequests to U.S. persons, the recipient may be subject to a U.S. transfer tax on the amount received at rates similar to U.S. federal gift tax.

Eligibility Requirements for New IRS Relief Procedures

These IRS relief procedures provide eligible former U.S. citizens an alternative method to satisfy their U.S. tax compliance requirements and avoid the Covered Expatriate treatment.  To be eligible, the former U.S. citizen’s past failures to comply with U.S. tax requirements must be due to non-willful conduct and meets the following criteria:

  • Renounced U.S. citizenship after March 18, 2010;
  • Has not previously filed as a U.S. citizen or resident (IRS Form 1040);
  • Has an average annual net U.S. income tax liability for five tax years preceding the renunciation of less than US$168,000 (for 2019);
  • Has a net worth of less than US$2 million at the time of renunciation and at the time of filing under these procedures;
  • Has an aggregate tax liability of US$25,000 or less (after applicable deductions, credit, and exclusions) for the year of renunciation and five preceding years; and
  • Agrees to complete and submit all required U.S. federal tax returns and disclosures for the six tax years at issue.

The individual is also required to file an IRS Form 8854, Initial and Annual Expatriation Statement, for the year of the renunciation and discloses his or her worldwide net worth.

If eligible to file under these procedures, the IRS will not assess penalties, and the individual is not required to remit any U.S. federal income tax liability totaling US$25,000 or less.

The IRS has previously introduced different voluntary disclosure programs to encourage U.S. citizens living outside of the U.S. to become compliant.  While they reduced or waived penalties, they require actual U.S. income tax liability to be paid.  These procedures are the latest to specifically provide relief to former U.S. citizens, and the unique feature and additional incentive to these individuals to becoming compliant under these procedures is the lack of requirement to remit tax liability.

If you would like to discuss whether you are eligible to take advantage of these new procedures and how we can help, we invite you to contact us to review your situation.

Emily Yu, CPA, CGA

Emily Yu, CPA, CGA

January 21, 2020 | 8:00 am

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