The Internal Revenue Service is giving a tax break to certain qualifying individuals who’ve relinquished their U.S. citizenship but wish to come into compliance with their U.S. tax and filing obligations and avoid being taxed as “covered expatriates” under Internal Revenue Code Section 877A.
New procedures announced by the agency last week, the Relief Procedures for Certain Former Citizens, will apply only to a narrow group of individuals who: (1) haven’t filed U.S. tax returns as U.S. citizens or residents; (2) owe a limited amount of back taxes to the U.S. government; and (3) have net assets of less than $2 million (at the time of expatriation and at the time of making their submission for relief). The legislature appears to be targeting individuals who’ve lived outside the United States for most of their lives and may not have been aware of their U.S. tax obligations—according to the procedures, only those expatriates whose previous compliance failures were non-willful are eligible to apply.
Under the procedures, citizens who expatriated after March 18, 2010 (the date which the Foreign Account Tax Compliance Act was passed), meet the above mentioned criteria and want to take advantage of the tax break must file outstanding U.S. tax returns, including all required schedules and information returns, for the five years preceding and their year of expatriation. Qualifying individuals who don’t exceed the $25,000 threshold of taxes owed for the six years in question will be relieved from paying U.S. taxes and won’t be assessed penalties or interest.
Proceed with Caution
Though the incentive for clients to apply is attractive, it’s important to carefully examine each individual client’s circumstances, as filing for relief will put those clients whose back taxes end up exceeding the $25,000 amount on the IRS’ radar. The same holds true for those individuals whose conduct the IRS determines to, in fact, have been willful or intentional or who otherwise don’t meet the criteria. Per its website, the IRS will process returns of individuals who aren’t eligible to make a submission under the procedures, but who still make a submission, using normal processing procedures. Such individuals “will be liable for all taxes, penalties, and interest associated with the submission.”
The IRS also makes clear that estates, trusts, corporations, partnerships and other entities aren’t eligible for these procedures.
The IRS is offering these procedures without a specific termination date but will make an announcement prior to their termination.