Some people who give up U.S. citizenship can get expatriate tax relief from the IRS. Under special procedures announced in 2019 (News Release IR-2019-151), certain former citizens may avoid the exit tax under Section 877A. In addition, they may avoid other unpaid taxes and penalties.
Who can use expatriate tax relief?
The relief applies to people who gave up U.S. citizenship after March 18, 2010. They must also meet the other rules listed below. In general, U.S. citizens, whether born in the U.S. or naturalized, may give up citizenship under 8 U.S.C. Section 1481(a).
How the exit tax works
Normally, expatriates must meet all federal tax requirements for the year they leave and the five years before. On top of that, Section 877A imposes an exit tax on “covered expatriates.”
Under this tax, most of their property is treated as sold at fair market value on the day before they expatriate. Then any net gain above an exclusion amount counts as income. The IRS adjusts this amount for inflation each year. For example, it was $725,000 in 2019.
Who is a covered expatriate?
Under Section 877(a), you are a covered expatriate if you meet any of these tests:
- Your average yearly net income tax for the five years before you expatriate is above a set amount. The IRS also adjusts this figure each year. For example, it was $168,000 in 2019.
- Your net worth is $2 million or more.
- You can’t certify, under penalty of perjury, that you met all federal tax requirements for the prior five years. Similarly, you are covered if you fail to provide proof the IRS requests.
You make this certification on Form 8854, Initial and Annual Expatriation Statement. So even people below the income and net worth limits can be covered expatriates if they can’t certify compliance.
What the expatriate tax relief provides
Under the relief procedures, eligible people are not treated as covered expatriates. As a result, the exit tax doesn’t apply to them. Also, they don’t owe unpaid taxes and penalties for the year they expatriated or earlier years. Again, they must have expatriated after March 18, 2010.
In addition, any failure to file returns or pay taxes for the six years at issue must be non-willful. These six years are the year of expatriation and the five years before it.
Required returns include income, gift and information returns. For instance, these include Form 8938 and FinCEN Form 114 (the FBAR). Non-willful conduct means negligence, an honest mistake or a good-faith misunderstanding of the law.
Eligibility rules for expatriate tax relief
To qualify, you must meet all of these conditions:
- You have no U.S. filing history as a citizen or resident. However, you may still qualify if you filed Form 1040-NR in the good-faith but mistaken belief that you weren’t a U.S. citizen.
- You meet the income tax limit for the five years before expatriation. Also, your net worth is under $2 million both when you expatriate and when you apply.
- Your total tax owed for the six years is $25,000 or less. You figure this after deductions, exclusions and credits, including foreign tax credits. However, you don’t count penalties, interest or the exit tax.
- You agree to file all required federal returns for the six years, with all schedules and information returns.
Get help with expatriation
Giving up citizenship has lasting tax effects, so careful planning matters. We help clients with Form 8854, back filings and exit tax questions. To discuss your situation, call (415) 842-2940 or book a free 15-minute call.