Expatriation Citizen / Resident

The expatriation tax provisions under Internal Revenue Code (IRC) sections 877 and 877A apply to US citizens who have renounced their citizenship and long-term residents (as defined in IRC 877(e)) who have ended their US resident status for federal tax purposes. Different rules apply according to the date upon which you expatriated.

  1. Expatriation on or after June 16, 2008
  2. What to do if you haven’t filed a Form 8854
  3. What to do if you haven’t filed an Income Tax Return
  4. Significant Penalty Imposed for Not Filing Expatriation Form

Expatriation on or after June 16, 2008

If you expatriated after June 16, 2008, the new IRC 877A expatriation rules apply to you if any of the following statements apply.

  1. Your average annual net income tax liability for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($145,000 for 2009 and 2010, $147,000 for 2011, $151,000 for 2012, and $155,000 for 2013, and $157,0000 for 2014)
  2. Your net worth is $2 million or more on the date of your expatriation or termination of residency
  3. You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency

IRC 877A(g)(4) provides that a citizen will be treated as relinquishing his or her U.S. citizenship on the earliest of four possible dates: (1) the date the individual renounces his or her U.S. nationality before a diplomatic or consular officer of the U.S., provided the renunciation is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State; (2) the date the individual furnishes to the U.S. Department of State a signed statement of voluntary relinquishment of U.S. nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)-(4)), provided the voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State; (3) the date the U.S. Department of State issues to the individual a certificate of loss of nationality; or (4) the date a U.S. court cancels a naturalized citizen’s certificate of naturalization.

For long-term residents, per IRC 7701(b)(6), as amended, a long-term resident ceases to be a lawful permanent resident if (A) the individual’s status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or if (B) the individual (1) commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, (2) does not waive the benefits of the treaty applicable to residents of the foreign country, and (3) notifies the IRS of such treatment on Forms 8833 and 8854.

IRC 877A imposes a mark-to-market regime, which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date. IRC 887A further provides that any gain arising from the deemed sale is taken into account for the taxable year of the deemed sale notwithstanding any other provisions of the Code. Any loss from the deemed sale is taken into account for the taxable year of the deemed sale to the extent otherwise provided in the Code, except that the wash sale rules of IRC 1091 do not apply.

Under IRC 877A(a)(3), the amount that would otherwise be includible in gross income by reason of the deemed sale rule is reduced (but not to below zero) by $600,000, which amount is to be adjusted for inflation for calendar years after 2008 (the “exclusion amount”). For calendar year 2010, the exclusion amount as adjusted for inflation is $627,000. For calendar year 2011, the exclusion amount is $636,000. For calendar year 2012, the exclusion amount is $651,000. For calendar year 2013, the exclusion amount is $668,000, and for tax year 2014, the exclusion amount is $680,000.

The amount of any gain or loss subsequently realized (i.e., pursuant to the disposition of the property) will be adjusted for gain and loss taken into account under the IRC 877A mark-to-market regime, without regard to the exclusion amount under IRC 877A(a)(3). Pursuant to IRC 877A(b), a taxpayer may elect to defer payment of tax attributable to property deemed sold.

For more detailed information regarding the IRC 877A mark-to-market regime, refer to
Notice 2009-85
.

Form 8854, Initial and Annual Expatriation Information Statement (PDF), has been revised to permit individuals to meet the new notification and information reporting requirements. Revised Form 8854 and its instructions (PDF) also address how individuals should certify (in accordance with the new law) that they have met their federal tax obligations for the five preceding taxable years and what constitutes notification to the Department of State or the Department of Homeland Security.p>

Note. If you expatriated before June 17, 2008, the expatriation rules in effect at that time continue to apply. See chapter 4 in Publication 519, U.S. Tax Guide for Aliens, for more information.

The expatriation tax applies to the 10-year period following the date of the expatriation action. Individuals that renounced their US citizenship and long-term residents that terminated their US residency for tax purposes on or before June 3, 2004 must file an initial Form 8854, Initial and Annual Expatriation Information Statement. For more detailed information refer to Expatriation Tax in Publication 519, U.S. Tax Guide for Aliens.

What to do if you haven’t filed a Form 8854

Individuals that renounced their US citizenship or terminated their long-term resident status for tax purposes on or before June 3, 2004 must file a Form 8854 to comply with the notification requirements under IRC 877 and 877A. For more detailed information refer to Expatriation Tax in Publication 519, U.S. Tax Guide for Aliens.

Individuals that renounced their US citizenship or terminated their long-term resident status for tax purposes after June 3, 2004 must file a Form 8854 to effect the expatriation tax provisions under IRC 877. Furthermore, pursuant to IRC 7701(n), until such an individual both files a Form 8854 with the IRS and notifies either the Department of State or of Homeland Security of their expatriation or termination of long-term resident status for tax purposes, such individuals will continue to be treated as if they were still US citizens or residents for tax purposes.

Also, for individuals that expatriated after June 3, 2004, IRC 6039G requires annual information reporting for each taxable year during which such an individual is subject to the rules of IRC 877. The annual Form 8854 is due on the date that the individual’s U.S. income tax return for the taxable year is due or would be due if such a return were required to be filed.

Form 8854, Initial and Annual Expatriation Information Statement, has been revised to permit individuals that expatriated after June 3, 2004 to meet the new notification and information reporting requirements under IRC 6039G.

For more detailed information on how, when and where to file Form 8854, refer to the Instructions for Form 8854.

What to do if you haven’t filed an Income Tax Return

Among the various new requirements contained in IRC 877 and 877A, individuals that renounced their US citizenship or terminated their long-term resident status for tax purposes after June 3, 2004 are required to certify to the IRS that they have satisfied all federal tax requirements for the 5 years prior to expatriation. If all federal tax requirements have not been satisfied for the 5 years prior to expatriation, even if the individual does not meet the monetary thresholds in IRC 877 or 877A, the individual will be subject to the IRC 877 and 877A expatriation tax provisions.

Individuals that have expatriated should file all tax returns that are due, regardless of whether or not full payment can be made with the return. Depending on an individual’s circumstances, a taxpayer filing late may qualify for a payment plan. All payment plans require continued compliance with all filing and payment responsibilities after the plan is approved.

For more detailed information on what to do if you have not filed your required federal income tax returns, you should contact a qualified tax professional to analyze and evaluate your situation prior to contacting IRS. That way you can develop a strategy before IRS interactions, thereby allowing time in which to gather data and optimize filings.

Significant penalty imposed for not filing expatriation form

The Internal Revenue Service reminds practitioners that anyone who has expatriated or terminated his U.S. residency status must file Form 8854, Initial and Annual Expatriation Information Statement (PDF). Form 8854 must also be filed to comply with the annual information reporting requirements of Internal Revenue Code section 6039G, if the person is subject to tax under Section 877 of the Code. A $10,000 penalty may be imposed for failure to file Form 8854 when required.

IRS is sending notices to expatriates that have not complied with the Form 8854 requirements, including the imposition of the $10,000 penalty where appropriate.