Understanding the Relief Procedures for Certain Former US Citizens

/ Expat Tax, Individual, US Tax

In September 2019, the IRS announced new relief procedures to support former US citizens to come back into compliance with their US tax filing obligations and avoid any potential “Exit tax”.

The program allows taxpayers to become US tax compliant without having to pay any tax owed, provided that certain criteria are met:

  • The individual’s failure to file tax returns was non-wilful.
  • The individual did not have any filing history as a US citizen or resident.
  • The individual had an average annual net income tax liability after credits for the 5 years ending before the year of expatriation below a certain annually adjusted threshold ($171,000 for 2020).
  • The Individual had global net assets of less than $2,000,000 at the time of expatriation and at the time of filing their return under these procedures.
  • The individual did not have an overall tax liability of more than $25,000 over the five tax years prior to expatriating and in the year of expatriation.
  • They agree to complete and submit all required Federal tax returns for the six tax years at issue, including all required schedules and information returns such as Form 8938, Statement of Foreign Financial Assets and FinCEN Form 114, the FBAR

No social security number is required to file under the relief procedures for former US citizens.

Understanding US Citizenship

The 14th Amendment of the US Constitution states that “all persons born or naturalized in the United States” are citizens of the country. This includes any person that is born abroad to a US citizen parent or born to any parents that meet the conditions specified in the US immigration and Nationality Act.

This means that by law, all US citizens are required to who meet the filing requirements, are required to file US tax returns and report their worldwide income and gains, irrespective of which country they live in.

Accidental Americans

If a person is born in the US to foreign parents or born outside of the country to American parents and is completely unaware of their US citizenship status, they are known as “Accidental Americans”.

As we already know, all US citizens are supposed to report and pay their taxes, so if you are an Accidental American and want to renounce your citizenship, you have to make sure that your US taxes are filed and paid correctly. Provided that the conditions above are met, the accidental American may be eligible for filing under the relief procedure in order to come into tax compliance.

Renouncing US Citizenship

As long as you are an adult and comply with the US citizenship laws and policies, it is possible to renounce your US citizenship. US nationals are subject to a loss of nationality if they perform certain specified acts voluntarily and with the intention of relinquishing US nationality, briefly these acts include:

  • Obtaining naturalization in a foreign state upon one’s own application after the age of 18.
  • Taking an oath, affirmation or other formal declaration of allegiance to a foreign state or its political subdivisions after the age of 18.
  • Formally renouncing U.S. nationality before a U.S. diplomatic or consular officer outside the United States.
  • Renouncing U.S. nationality, officially, within the United States.

Giving up US citizenship also includes a fee to pay of $2,350 to the embassy. Renouncing your US citizenship can also have negative impacts such as the ability to travel to and work in the US.

Covered Expatriates

The IRS deems that “covered expatriates” are treated as having disposed of all worldwide assets on the day before their expatriation date. They are required to pay a mark-to-market exit tax on the gain (subject to an exclusion amount) resulting from the deemed disposition of their worldwide assets. They are also subject to additional tax consequences with respect to certain deferred compensation items and trust distributions.

When expatriating, an individual will be considered a covered expatriate if they expatriate after June 16th, 2008 and any of the following statements apply:

  1. The average annual net income tax liability for the 5 tax years ending before the date of expatriation is more than $171,000 (this figure is for 2020 as future years are not available yet). This is known as the “average income tax liability test”
  2. The individual’s net worth was at least $2 million or more at the date of expatriation.
  3. The individual fails to certify on form 8854 that you have complied with all federal obligations for the 5 tax years preceding expatriation.

How to expatriate for tax purposes as a Covered Expatriate

To meet the requirements of the certification test, individuals must file a Form 8854, Initial and Annual Expatriation Statement, with their tax return for the year of expatriation and certify compliance for the prior five tax years. Certifying compliance for the prior five tax years requires that all Federal tax returns for the five tax years before the year of expatriation were properly filed, complete, and accurate.

Considering giving up your US citizenship?

Giving up your citizenship as an American living overseas is something that you need to think about very carefully. Once your citizenship status is relinquished, the action is permanent, so we highly advise you talk to a US tax accountant and immigration attorney before doing this.

Here at Ingleton, we support US Expats becoming tax compliant with many methods including the Streamlined Procedure. If you would like to find out how we can help, please contact us on +44 (0) 207 183 2251 or email info@ingletonpartners.com.

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