Form 8854 Penalties: For Covered Expatriates Only?

There is no question. If you expatriate (give up your green card after holding it for a long time, or renounce your U.S. citizenship), you must file Form 8854.

If you don’t file Form 8854, or you’re late? I don’t think a noncovered expatriate can be hit with the $10,000 penalty in IRC §6039G(c). Covered expatriates are definitely at risk.

Why Form 8854 Must Be Filed

There are two statutes that give the IRS power to ask you questions and make you fill in forms. Only one of those statutes contains a penalty for failing to file the required form.

General authority: IRC §6001

IRC §6001 is the generalized authority granted to the IRS to make up the questions and design the forms needed to ensure that they collect the right amount of tax from the right people.

Form 8854’s existence can be justified by IRC §6001. The IRS needs to ask you the right questions to see if you are a covered expatriate, for instance. And the Service will want you to answer those questions under penalty of perjury.

IRC §6001 does not have a penalty provision attached to it. If, for instance, you don’t attach Schedule B to your income tax return to report interest and dividend income, you are only liable for the tax on the omitted income (plus interest and penalties on that tax). You don’t have a separate penalty for failure to file Schedule B.

Specific authority: IRC §6039G

In many situations, Congress imposed a specific reporting requirement. Invariably, if Congress asks for information specifically, there is a companion penalty authorized for failure to provide the required information.

IRC §6039G is one of those specific requirements. It tells a certain group of people who renounce U.S. citizenship or give up green card status to provide information about themselves. IRC §6039G(a) says:

A reporting failure means a $10,000 penalty. IRC §6039G(c)(2).

I say this applies to a “certain group of people” because I think IRC §6039G is written to apply only to covered expatriates—not everyone who gives up U.S. citizenship or green card status. Everything turns on the meaning of the word “applies.”

Reporting requirements: summary

Summarizing the reporting requirements that impose Form 8854 to be filed by a person who gives up U.S. citizenship or long-term green card status under IRC §§6001 and 6039G:

Again, remember the important point:

• If IRC §6039G(a) requires you to file a statement, then the IRS can tag you with a penalty for not filing the statement.
• If IRC §6039G(a) does not require you to file a statement, then you cannot be tagged with a penalty for not filing the statement.

What does “applies” mean?

The rule

IRC §6039G(a) says that anyone to whom IRC §877A “applies” must provide the information detailed in IRC §6039G(b).

IRC §877(b) is a rule that applied to people who expatriated prior to June 17, 2008 and who elected to defer payment of their exit tax liability. I am going to ignore it here, as ancient history.

Let’s look at this phrase:

The ambiguity

“Applies” is ambiguous. There are two possible interpretations:

• Narrow. “Applies” means anyone who has actual tax consequences imposed because of IRC §877A.
• Broad. “Applies” means anyone who has an expatriation date after the date that IRC §6039G(a) became law.

The broad interpretation of “applies”

IRC §877A was enacted in 2008 by PL 110-245. IRC §6039G(a) was amended at the same time to add “or 877A.” The enabling legislation gave the effective date of new IRC §877A and the revised IRC §6039G(a). PL 110-245, §512(g)(1) says:

The effective date for new IRC §877A and amended IRC §6039G was June 17, 2008.

Therefore, if you read this sentence literally, it says “if your expatriation date is on or after June 17, 2008, then IRC §877A applies to you.”

That’s the broad interpretation.

Why the broad interpretation doesn’t make sense

But this doesn’t make sense. Think of me. Today is after June 17, 2008.

When I prepare my 2024 income tax returns, I look at IRC §877A(g)(3) to see if it “applies” to me.

I do not have an “expatriation date” based on the application of IRC §877A(g)(3) to my life. (I still have a U.S. passport at home, so it’s impossible to identify a date on which I renounced my U.S. citizenship).

Since I applied IRC §877A(g)(3), I should have a reporting requirement under IRC §6039G(a), right?

That’s silly, of course.

The statutory pattern is (1) definition to see if you are a target for the rules in a particular Code section; then (2) if you are a target, then apply the operative provisions to determine the outcome.

The narrow interpretation

The narrow interpretation of “section 877A applies . . .” as a trigger for IRC §6039G reporting is that the reporting requirement only applies to covered expatriates.

Everything in IRC §877A explicitly creates tax consequences for covered expatriates only. The mark-to-market rules of IRC §877A(a) apply to covered expatriates.

The narrow interpretation would say:

Why the narrow interpretation makes sense: legislative history

The history of IRC §6039G supports the narrow interpretation.

IRC §6039G started life in 1996 as IRC §6039F but was renumbered in 1997 to IRC §6039G. In its earliest incarnation, IRC §6039F(a) read:

This clearly ties the reporting requirement to the triggering event: losing U.S. citizenship.

In 2004, IRC 6039G(a) was revised to use the “applies” language that persists to this day.

IRC §877(b) says that an expatriate can postpone payment of an exit tax liability by posting a bond as security. It is the precursor provision to IRC §877A(b).

Congress changed the enhanced reporting requirement of IRC §6039G from a “change of individual status” trigger to an “existence of unsatisfied but secured income tax liability” trigger.

In 2008, IRC §6039G(a) was amended again to add “or 877A” to the language:

What does IRC §877A do? It creates taxable income for covered expatriates.

Thus, I assert that the amendments show a shift in the reporting requirement from “everyone who is an expatriate” to “people who have tax liabilities triggered by expatriation.”

Note that this doesn’t mean noncovered expatriates don’t file Form 8854. They must file—because of the statutory authority granted by IRC §6001.

The logical conclusion: if IRC §877A doesn’t “apply” to noncovered expatriates, then the penalty rules of IRC §6039G(c) don’t apply, either.

Conclusion for the noncovered expatriate

So, what does this all mean for a noncovered expatriate?

Form 8854 is required

First, all expatriates must file Form 8854—covered or not. IRC §6001. If you didn’t file Form 8854, you’re late and you probably need to do something about it.

(Aside: what’s the statute of limitations?)

Look at IRC §6501(c)(8)(A) and tell me what you think the statute of limitations is for failure to file Form 8854.

In my opinion, no $10,000 penalty for late Form 8854

Second, it is unclear whether the $10,000 penalty for a late-filed Form 8854 will apply to noncovered expatriates. I think it doesn’t.

• IRC §6039(c) says that the penalty applies if the reporting requirement of IRC §6039G(a) is not satisfied.
• IRC §6039G(a) requires reporting if IRC §877A “applies.”
• IRC §877A does not create any tax consequences for noncovered expatriates.
• Therefore, IRC §877A does not “apply” to noncovered expatriates, and in turn the reporting requirement of IRC §6039G(a) is not triggered.
• How can you be penalized for not doing a thing that you are not supposed to do? J

(Aside: Form 8854 has a Farhy problem)

Third, even if the $10,000 penalty applies, it has the same fatal flaw that Form 5471 penalties have under Farhy v. Commissioner: the statute does not make the penalty assessable.

However, reality . . . .

All of the above is fascinating until a computer at your favorite Federal agency sends you a personalized love letter asking for $10,000 and blithely rejecting all of your arguments otherwise.

Are you going to spend $50,000 or more in professional fees to fight an illicit (in your opinion) $10,000 penalty?

Your Primary Purpose is to exit the U.S. tax system cleanly and permanently. You can buy your freedom with money and paperwork. Do it.