TAX RELIEF FOR EXPATRIATING “ACCIDENTAL AMERICANS”

US citizens and Green Card Holders have ongoing US tax obligations wherever they reside in the world and are required to submit US tax returns if their income is over the de minimus filing limits. It is not surprising therefore, that some individuals living outside of the US decide to abandon their US citizenship or relinquishing their Long-Term Permanent Resident (Green card) status. More details about this process can be found here – https://pjdtax.co.uk/updates/expatriation/

On 6 September 2019, the IRS announced new procedures which may significantly relieve the tax burden for specific individual taxpayers – including “Accidental Americans” – who have, or intend to, relinquish their US citizenship and wish to comply with their U.S. income tax and reporting requirements.

 “Accidental Americans” are people who don’t know that they are American citizens. They typically fall into one of two groups: people who were born in the US to foreign parents who were their temporarily, either working, studying, or even on holiday; and children of an American citizen who were born and have always lived abroad and who have never applied for a US passport or a green card. 

These procedures are intended to mitigate the tax burden faced by taxpayers who have lived outside the United States most of their lives and were not aware that they had U.S. tax obligations.  A successful submission will mean the taxpayer is not liable for unpaid taxes or penalties for these years or previous years.

What are the eligibility requirements?

The procedures may only be used by taxpayers whose past compliance failures were due to non-wilful conduct. 

Non-wilful 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.

You must also meet ALL the following eligibility requirements:

  1. You relinquished your U.S. citizenship after March 18, 2010.
  2. You have no tax filing history as a U.S. citizen or resident;
  3. You did not exceed the average annual net income tax threshold for the period of 5 tax years ending before your date of expatriation (for 2019 this threshold is $168,000);
  4. Your net worth is less than $2,000,000 at the time of expatriation and at the time of making your submission under these procedures;
  5. You have an aggregate total tax liability of $25,000 or less for the five tax years preceding expatriation and in the year of expatriation (net of deductions, exclusions, exemptions and credits, including foreign tax credits).
  6. You complete and submit with your submission all required Federal tax returns for the six tax years at issue, including all required schedules and information returns.

Net worth is the combined total of your worldwide assets which includes any cash and the fair market value of all securities, property, pensions, trusts, i.e. anything with value, and converted to US Dollars. This is reduced by any liabilities, for example mortgages and other debts.

What happens next?

After reviewing your submission to confirm that you meet the eligibility criteria, the IRS will send you a letter notifying you that your submission was received and complete.  Failed submissions will be processed using normal processing procedures, including the obligation to settle for all taxes, penalties, and interest associated with the submission.

What are the benefits of this procedures?

Eligible individuals who successfully submit and meet the requirements of these procedure will not be considered “covered expatriates” under IRC 877A, nor will they be liable for any unpaid taxes and penalties for these years or any previous years.

Covered Expatriates are subject to Exit Tax when they expatriate by renouncing citizenship or giving up the Green card. The Exit Tax is income tax calculated on the net gain from the deemed sale (or distribution) of your worldwide assets on the day before the date of expatriation.

How long will this procedure be available for?

The IRS is offering these procedures without a specific termination date. The IRS will make an announcement prior to terminating these procedures.

What if I don’t have a Social Security Number?

It is not necessary to obtain an SSN merely for the purpose of using this procedure. If you do not have an SSN, you can still make an eligible submission by leaving the boxes blank where an SSN is requested.  If you mistakenly applied for and received an ITIN in the past, you would include your ITIN on your submission.

Further Information

Full IRS announcement, including Frequently Asked Questions can be found here – https://www.irs.gov/individuals/international-taxpayers/relief-procedures-for-certain-former-citizens#relief

For more information and advice on your specific circumstances, please contact your regular PJD Tax advisor.

This article should be read in conjunction with our articles on expatriation (https://pjdtax.co.uk/updates/expatriation/) and the Foreign Offshore Streamlined Procedure (https://pjdtax.co.uk/updates/delinquent-us-tax-filers/)