Your Taxes: US expat relief

Who is eligible? The Expat Relief only applies to individuals and only a certain group of US citizens who expatriated after March 18, 2010.

Money (photo credit: INGIMAGE / ASAP)
(photo credit: INGIMAGE / ASAP)
Even after immigrating to Israel, American citizens and residents (i.e., greencard holders) remain obligated to file US income tax returns reporting their worldwide income and to pay tax on such income. In addition to filing income tax returns, there are many other information forms that American immigrants must file to report their connection to foreign assets. These forms, like the FBAR, all have substantial monetary penalties when not filed timely or correctly.
These annual filing obligations remain unless and until the American immigrant formally renounces his or her US citizenship. However, expatriating can generate a substantial exit tax.
In order to file any of these documents, the taxpayer must have a US social security number which takes ages to obtain. There are many US citizens who reside abroad who have failed to comply with these rules.
In an effort to relieve the financial difficulties associated with complying with US tax rules and expatriation costs, the IRS released on September 6, 2019, Relief Procedures for Certain Former Citizens (“Expat Relief”). The Expat Relief relieves certain US citizens of having to pay tax, interest, penalties and the exit tax upon relinquishing their citizenship. In exchange, these taxpayers need to file six years of tax returns along with all required information returns. The six years is really five years of back tax returns with the sixth comprising the final return for the year of the expatriation.
This sixth year must also include Form 8854.
The Expat Relief is designed to address two distinct but interrelated issues: 1) A taxpayer’s noncompliance with US income tax return filing requirements, and 2) A taxpayer’s failure to file Form 8854.
While the failure to file tax returns leaves the statute of limitation open indefinitely in which the IRS could assess and collect the tax, the failure to file Form 8854 keeps an individual who relinquished his or her US citizenship for immigration purposes liable for US income tax indefinitely.
Who is eligible? The Expat Relief only applies to individuals and only a certain group of US citizens who expatriated after March 18, 2010. Moreover, such individuals must meet these criteria: 1) No US income tax returns were filed as a US citizen or resident (i.e., no Forms 1040). If an individual filed a Form 1040NR with the good faith belief that he/she was not a citizen, the Expat Relief is still available.
2) Their average annual net income tax for the five years prior to expatriation must not exceed the annual threshold in Section 877(a) (2)(A). For 2019, the threshold is $168,000.
Notwithstanding this amount, the Expat Relief states that the individual’s aggregate income tax liability after applying all deductions, exclusions, exemptions, and credits for all six years of income tax returns being filed, must not exceed $25,000.
3) Their net worth must be less than $2 million on the date of the expatriation and the date that the Expat Relief submission is filed.
4) Their failure to comply with the Internal Revenue Code was due to non-willful conduct.
Similar to the manner in which it is defined in the Foreign Streamlined procedures, non-willful conduct means “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.”
What is filed? The following documents need to be sent to the IRS: • Loss of Nationality. Expat Relief is premised upon the individual already having relinquished their US citizenship under the Immigration and Nationality Act.
• Six years of tax returns. As noted earlier, five years of back tax returns inclusive of all information returns. The Expat Relief also indicates that unfiled gift tax returns can be filed through the submission. In the year of expatriation, there needs to be two tax returns. A Form 1040 reporting worldwide income up through the date of expatriation, and a Form 1040NR.
Both returns should include all required information returns. Form 8854 must accompany the returns in the sixth year. To assist with the processing, on the top of the first page of each of these documents submitted, the individual should write in red ink, “Relief for Certain Former Citizens.”
• Identification. For identification purposes, the individual must provide a copy of their valid passport or birth certificate and a government issued identification.
There is no payment required under the terms of the Expat Relief. The IRS, however, indicates that the returns may be selected for audit under the normal section process. The IRS will acknowledge receipt of the submission after reviewing the submission package to make certain that it complies with the eligibility criteria.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
The writer is a tax attorney at Holland & Knight, Miami. [email protected]