Certain individuals who expatriate from the United States may obtain relief from the exit tax of Sec. 877A and other outstanding tax liabilities, under procedures the IRS outlined Friday on its website and announced in News Release IR-2019-151.
The relief applies to individuals who relinquished or will relinquish their U.S. citizenship after March 18, 2010, and meet a number of other criteria listed below. Native-born or naturalized U.S. citizens generally may voluntarily relinquish their citizenship for reasons and under procedures listed at 8 U.S.C. Section 1481(a).
Under the Code, expatriates must comply with all federal tax requirements for the year of expatriation and for the five immediately prior tax years. In addition, Sec. 877A imposes a tax on “covered expatriates” that deems most property as sold for its fair market value on the day before the day of expatriation. The resulting net gain over $725,000 (for 2019) is includible in their income. A covered expatriate is one who, under Sec. 877(a):
- Has an average annual net income tax liability in the five tax years ending before the date of expatriation of more than a specified amount ($168,000 for 2019);
- Has a net worth of $2 million or more; or
- Cannot certify under penalty of perjury that he or she has met all applicable tax requirements for the five preceding tax years or fails to submit evidence of compliance the IRS may require. This certification can be made with Form 8854, Initial and Annual Expatriation Statement.
In other words, even expatriates with income tax liabilities and net worths below these thresholds may still be covered expatriates if they cannot make the certification.
Under the relief procedures announced Friday, individuals who meet specified requirements will not be considered covered expatriates for purposes of Sec. 877A and will not be liable for any unpaid taxes and penalties for the year of expatriation and previously, the IRS stated. As noted above, the expatriation must have occurred after March 18, 2010.
Also, for the six tax years at issue (the year of expatriation and the five immediately prior years), any failure to file required tax returns and pay taxes and penalties for the years at issue must have been due to the taxpayer’s nonwillful conduct. Required tax returns include income, gift, and information returns (the latter including Form 8938, Statement of Specified Foreign Financial Assets), and FinCEN Form 114, Report of Foreign Bank and Financial Accounts, commonly known as FBAR. Nonwillful conduct is that which is due to negligence, inadvertence, mistake, or a good-faith misunderstanding of legal requirements.
In addition, to be eligible for relief, the individual must:
- Have no filing history as a U.S. citizen or resident (not including Form 1040NR, U.S. Nonresident Alien Income Tax Return, under a good-faith but mistaken belief that the individual was not a U.S. citizen);
- Meet the above income tax liability limits for covered expatriates for the period of five tax years ending before the date of expatriation and meet the $2 million-net-worth limit at the time of expatriation and when applying for the relief;
- Have an aggregate tax liability of no more than $25,000 for the six tax years at issue (after application of all applicable deductions, exclusions, exemptions, and credits, including foreign tax credits, but excluding penalties, interest, and the exit tax of Sec. 877A); and
- Agree to complete and submit all required federal tax returns for the six tax years at issue, including all required schedules and information returns.
The IRS provides answers to 23 frequently asked questions about the relief and several examples at irs.gov.
— Paul Bonner (Paul.Bonner@aicpa-cima.com) is a Tax Adviser senior editor.