IRS has announced new procedures under which persons who have relinquished, or who intend to relinquish, their U.S. citizenship, who have not filed U.S. tax returns as U.S. citizens or residents, and who have relatively small amounts of unpaid tax liability, may come into compliance with their U.S. filing obligations and receive relief for back taxes.
Under what IRS is calling Relief Procedures for Certain Former Citizens, persons who meet the criteria described below will be deemed compliant with their U.S. tax and filing obligations, will not be “covered expatriates” under IRC § 877A, and will receive relief for prior year tax liabilities.
Who is eligible?
Only taxpayers whose past compliance failures were due to non-willful conduct may use these procedures. To be eligible, the individual must:
- have relinquished their U.S. citizenship after March 18, 2010;
- have no filing history as a U.S. citizen or resident;
- not have exceed the threshold in IRC § 877(a)(2)(A), related to average annual net income tax for the period of 5 tax years ending before the date of expatriation;
- have a net worth less than $2,000,000 at the time of expatriation and at the time of making their submission under the relief procedures;
- have an aggregate total tax liability of $25,000 or less for the five tax years preceding expatriation and in the year of expatriation (after application of all applicable deductions, exclusions, exemptions and credits, including foreign tax credits, but excluding the application of IRC § 877A and excluding any penalties and interest);
- agree to complete and submit with their submission all required Federal tax returns for the six tax years at issue, including all required schedules and information returns.
“No filing history” means the individual has not filed a gift tax return, information return (including Form 8938, Statement of Foreign Financial Assets), or a Report of Foreign Bank and Financial Accounts (FBAR). It generally means the individual has not filed an income tax return either, but a person who filed a Form 1040NR (U.S. Nonresident Alien Income Tax Return), under the good faith belief that they were not a U.S. citizen, may use these procedures.
These procedures are only available to individuals; estates, trusts, corporations, partnerships, and other entities may not use these procedures.
How to Claim Relief?
The individual must submit the following in order to claim relief:
- Certificate of Loss of Nationality (CLN) of the U.S., Form DS-4083, or copy of court order canceling a naturalized citizen’s certificate of naturalization (described in IRC § 877A(g)(4)(D)). If the person supplies Form DS-4083, the date in the field “That: he/she thereby expatriated him/herself on (Date) ______ under the provisions of Section…” must be after March 18, 2010. The CLN must be stamped “Approved” by the Department of State.
- Identification: Copy of (a) valid passport OR (b) birth certificate and government issued identification.
- For the tax year of expatriation: “Dual-status” return including Form 1040NR with all required information returns; Form 8854; Form 1040 attached as an information return reporting worldwide income up to date of expatriation; and all other required information returns, including but not limited to Form 8938. Notice 2009-85 has more information on dual-status returns.
- For five tax years preceding the tax year of expatriation: Forms 1040 with all required information returns.
On the first page of the documents submitted pursuant to these procedures, the person should write in red ink “Relief for Certain Former Citizens” at the top of the document.
IRS is offering these procedures without a specific termination date and will announce a closing date prior to ending the procedures.
A Note on FBARs
Although filing FBARs is not an eligibility criterion, a person who has an FBAR filing requirement should file them. If they are eligible to use these procedures and file FBARs before their submission or contemporaneously with their submission, IRS will not assert FBAR penalties. If they fail to file FBARs, IRS may assert FBAR penalties if their submission is selected for examination.
Tip: IRS will host an on-line webinar in the near future providing additional information and practical tips for making a submission to the Relief Procedures for Certain Former Citizens.
Read the full article and expert analysis in Checkpoint Federal Tax Update. To continue your research on the tax consequences of relinquishing U.S. citizenship, see FTC 2d/FIN ¶ O-11650.
