Hi again, and thanks for reading. It’s Phil with the every-other-week Expatriation Only email newsletter. You can unsubscribe by clicking the link at the bottom of this email.
Closure After Expatriation
This week is an answer to an email I received from a reader. It asks about what happens after you file that final income tax return.
It is a fairly common question, and there is a short, but unsatisfactory (to those of us who are a teensy bit OCD) answer.
I would like to thank you for the wealth of information you have shared in your expatriation blog. It has certainly helped me greatly in trying to work my way through the entire process.
I’m pretty much on the other side of the tunnel by now, except for a question that may not have been asked, or discussed on the blog before.
What happens when you’ve finished the whole process and you’ve filed your final tax return? (Assuming a non covered expatriate)
I’m finding myself in that situation where all has been done and filed, but part of me feels like there should be some sort of confirmation from the IRS that the US tax liability has been
Do you know if such a confirmation is generally issued by the IRS? Or is it proof enough to show that a tax return was filed?
I think that would be an interesting bit of information, as to whether an expatriated citizen should expect to receive a confirmation from the IRS.
Normally when one e-files, the confirmation is done electronically. But since a dual status tax return can only be filed by paper mail, that leaves one in the dark after the envelope has been sent across the pond.
At least I know it arrived at its intended destination, thanks to the postal tracking system.
There is no closure.
How It Works (Seen From the Outside)
As near as I can tell, the tax return system works approximately like this:
- You send a tax return to the IRS.
- They have a certain amount of time to say something is wrong with the tax return. (This is the “statute of limitations” in legal jargon.)
- If the IRS does not do anything within that time period, the door closes and what you put on the tax return is the final answer, for you and for the U.S. government.
There is no proactive way (again, as near as I can tell) to force the IRS to send you a letter saying that your tax obligations to the U.S. government are closed for a particular year. Well, you could be audited — at the end of an audit there is a definitive closure, in writing. But you’re not looking for an audit. 🙂
So, the normal process is:
- File tax return +
- Silence from the IRS =
How long must I wait?
How long must you wait before you can be assured you have closure? The answers are:
- Three years; and
- Never, really; but
- As a practical matter, three years.
The normal statute of limitations is three years. The IRS has three years from the filing date to assess additional tax for a particular tax year.1
The “filing date” is one of those simple/not simple things to explain, depending on whether you file on time, get an extension on time and file within the extension period, or file late.2
For the purposes of this explanation, let’s just assume that my reader filed by his normal filing deadline.
This means that the filing deadline would be his filing date for the tax return.
You renounce your U.S. citizenship in 2014. The normal June 15 deadline applies to you, so your filing deadline for the expatriation year 2014 income tax return is June 15, 2015.3
You file your expatriation year 2014 income tax return with your Form 8854 attached to it on June 1, 2015.
Your filing date is June 15, 2015.
In a situation like this, the IRS must declare that you owe more tax for 2014 no later than June 15, 2018. You can fight their decision if you want — for years if necessary. But the IRS must put that stake in the ground and declare that additional tax is due.
More than Three Years
There are all sorts of reasons why the three year rule might not apply, and the IRS would have a longer time period to challenge your expatriation year income tax return.4
The most common reason I see for expatriation tax returns is a failure to attach a required form. There is a laundry list of “foreign” types of paperwork that is required.
In the case of any information which is required to be reported to the Secretary pursuant to an election under section 1295(b) or under section 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A, or 6048, the time for assessment of any tax imposed by this title with respect to any tax return, event, or period to which such information relates shall not expire before the date which is 3 years after the date on which the Secretary is furnished the information required to be reported under such section.5
If the forms are not filed, the three-year clock does not start ticking. The IRS has forever — until the rest of your life and after that, even — to reopen the tax return for your expatriation year and claim additional tax.
If you screwed up, did not file one of the required forms, all is not lost. The three year statute of limitations is assumed to apply if it was an accidental screwup on your part — not a deliberate omission:
If the failure to furnish the information referred to in subparagraph (A) is due to reasonable cause and not willful neglect, subparagraph (A) shall apply only to the item or items related to such failure.6
Still. Listen to me. You expatriated in 2014. It is now 2022, and the IRS comes knocking on your door. Do you really want to have to go back in time to prove “reasonable cause and not willful neglect” to fight against a tax assessment?
The moral of that
story is to spend extra time and effort and prepare and file an excruciatingly correct income tax return. You’re going through a citizenship divorce. The last
thing you want is for your ex to come back a couple of years later and attempt to change the property settlement in that divorce.
But Really, Three Years
But really, as a practical matter your exposure to an IRS audit is practically (though not totally) nil after three years. This is just real life.
During the three years window of time, the normal audit risks apply. The IRS runs its statistical models and pulls tax returns for audit. Whatever.
After those three years are up, only an affirmative jolt will awaken the IRS. The FATCA machine dredges up information on you and it finds its way to the IRS, and they cannot match it up to your tax return. Stuff like that.
And even if an affirmative jolt awakens the IRS, and they decide your expatriation year tax return is audit-worthy, there is a second question they must ask themselves: it is worth their while? You are no longer a U.S. citizen and taxpayer. You are living on another piece of Planet Earth. You might not have any U.S. assets. If they declare you owe a million dollars in taxes and penalties, can they even collect?
And this is why my parting comment for our expatriating friends is:
- Clean up those five years of income tax returns to pass the certification test with ease;
- File an excruciatingly correct expatriation year income tax return and Form 8854; and
- Be willing to spend a fair bit of money on someone deeply skilled to do so.
With those actions, you can comfortably put a date 3 years in the future in your calendar. This is your (practical) Day of U.S. Tax Freedom. Throw a party.
Prompt Assessment? Nope
There is a procedure by which you can ask the IRS to fish or cut bait in 18 months rather than three years.7
File Form 4810
(warning: PDF) to get this rolling.
There is one critical element to this procedure that will probably kill it (pun warning) as a viable (vague Latin pun warning) solution to your desire for closure.
The request for prompt assessment only works for tax returns of a decedent. A dead person.
You, if you are reading this newsletter, are probably not dead.
This is not tax advice at all. It’s just stuff for you to read to know how things work. Do your own research, hire your own people and tell them your story. That’s how you will avoid shooting yourself in the foot, metaphorically speaking.
Talk to you in a couple of weeks.