It looks like the IRS wants to make peace with ex-pats who have fallen short on their U.S. tax obligations. The agency is offering new procedures for individuals who relinquished their U.S. citizenship to come into compliance with U.S. tax law and receive relief for back taxes.
The program, Relief Procedures for Certain Former Citizens, applies only to individuals who meet the following criteria:
- Relinquished U.S. citizenship after March 18, 2010.
- No filing history as a U.S. citizen or resident;
- Average annual net income does not exceed an inflation-adjusted amount ($168,000 in 2019) for 5 tax years ending before the date of expatriation;
- Net worth is less than $2,000,000 at the time of expatriation and at the time of making the required submissions under these procedures;
- Aggregate total tax liability of $25,000 or less for the five tax years preceding expatriation and in the year of expatriation.
Also, the taxpayer must have clean hands, meaning the earlier noncompliance must be “non-willful.” 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.
How to Come Clean
Taxpayers who want to take advantage of the relief procedures must file outstanding U.S. tax returns, including all required schedules and information returns, for the five years preceding and for their year of expatriation. The taxpayer also must file documents such as a Certificate of Loss of Nationality, proving their expatriation status.
If the tax liability does not exceed a total of $25,000 for the six years in question, the taxpayer is relieved from paying U.S. taxes. Individuals who qualify for these procedures will not be assessed penalties and interest. Currently, there is no deadline for this program, but the IRS has indicated it won’t last forever.
The IRS cautions ex-pats that they could face harsh consequences if they don’t get right with their U.S. tax obligations.
“Relinquishing U.S. citizenship and the tax consequences that follow are serious matters that involve irrevocable decisions. Taxpayers who relinquish citizenship without complying with their U.S. tax obligations are subject to the significant tax consequences of the U.S. expatriation tax regime.”
Expatriates who want to take advantage of this amnesty-type provision should consult their tax advisor at Frazier & Deeter before making any decisions.