Hello again from Phil Hodgen. This is the biweekly Expatriation newsletter, in which we talk about the U.S. tax ramifications of giving up U.S. citizenship or permanent residence status.
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The Certification Test and Installment Agreements
This newsletter is about the certification test. If you owe the IRS money, and you are paying it off using an installment agreement, will you be a covered expatriate because of the certification test?
Reader H. was a green card holder and gave up his green card in 2015. He held the green card long enough so that he became a “long-term resident” and has to worry about the exit tax rules.
Is he a covered expatriate? That’s the problem he needs to solve. Here is his question (heavily edited to hide identifying information):
I am filing my final tax return this year along with Form 8854. I am a long term resident and I filed all my tax years. My ex-wife and I were audited for a previous year and we owe $(big number) in back taxes. The tax debt is being paid off using an installment agreement.
He comments that his net worth is well below $2,000,000, and his average income tax liabilty for the five years before his expatriation is well below the threshold for being a covered expatriate.
That leaves only the certification test as a possible trigger for making him a covered expatriate:
But do I pass the certification test if I owe back taxes? Would it be better if I tried to get a loan and pay off the debt before filing Form 8854 with the last tax return?
What the Certification Test Requires
Reader H. is a covered expatriate if he:
“fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.”1
Two things, then:
- Reader H must make the certification that he has “met the requirements of this title” for 2010 – 2014; and
- If the IRS says “prove it” he must produce evidence to show that indeed he met all of the requirements.
Let’s put a little flesh on those bones. Reader H will be a covered expatriate if he:
fails to certify, under penalties of perjury, compliance with all U.S. Federal tax obligations for the five taxable years preceding the taxable year that includes the expatriation date, including, but not limited to, obligations to file income tax, employment tax, gift tax, and information returns, if applicable, and obligations to pay all relevant tax liabilities, interest, and penalties (the “certification test”). This certification must be made on Form 8854 and must be filed by the due date of the taxpayer’s Federal income tax return for the taxable year that includes the day before the expatriation date. See section 8 of this notice for information concerning Form 8854.2
The important things to glean from Notice 2009-85 are:
- The certification test requires you to certify that you filed all of the tax returns (of whatever type) that apply to you; and
- The certification test requires you to certify that you are in compliance with your obligations to pay tax, interest, and penalties.
Grammar and Punctuation
That quoted block of text is not clearly written. Let me parse it for you by deleting the references to the requirement to file tax returns. A covered expatriate is someone who:
fails to certify, under penalties of perjury, compliance with all U.S. Federal tax obligations for the five taxable years preceding the taxable year that includes the expatriation date, including, but not limited to
, obligations to file income tax, employment tax, gift tax, and information returns, if applicable, and obligations to pay all relevant tax liabilities, interest, and penalties (the “certification test”).
This makes it a bit clearer, but not much.
- The reference to “U.S. Federal3 tax obligations for the five taxable years preceding” the expatriation year seems to say you just certify that you’ve paid up for the five years in question.
- The reference at the end says that you certify that you are in full compliance for “obligations to pay all relevant tax liabilities”. Does that mean tax liabilities that are more than five years old will not matter? Specifically, if you have a well-aged tax debt (over five years old) can you renounce your U.S. citizenship and walk away without being a covered expatriate? That’s a question for another day.
Installment Agreement in Good Standing?
Fortunately, the confusion over time period is not relevant to Reader H.
The only question that matters is this: he has an installment agreement agreement with the IRS and he is making the payments religiously and on time.
That means he is meeting all of his obligations to the IRS. But he owes tax.
Does owing tax condemn him to covered expatriate status under the certification test?
Or does the fact that he is in good standing under his installment agreement mean that he is satisfying his tax obligations — so the mere fact of a tax debt will NOT make him a covered expatriate?
Let’s put it simply. You owe tax, but you’re paying on time, every month. Which of these two statements is correct?
- You have not satisfied your obligations to pay tax, penalties, and interest since you owe the IRS some money?
- You have satisfied your obligations to pay tax, penalties, and interest because you have a signed agreement with the IRS to do so.
I do not know the answer to this question, Reader H. My guess? You are a covered expatriate. The tax debt exists. It has not been paid. The installment agreement you have with the IRS is merely an agreement by the IRS to hold their tax collectors on a leash . . . for now . . . as long as you keep paying.
More simply, you have not satisfied the tax obligation for the prior year; the IRS is just being nice to you.
Installment Agreements, The Law
An installment agreement is authorized by IRC §6159. There are a bunch of technical requirements for when and how installment agreements are made so that taxpayers can pay their tax debts over time. We don’t care about that.
What we care about is what an installment agreement does. And the answer is that it stops collection activity. The IRS will not levy your assets (i.e., seize them) while there is an installment agreement in place.4
There are some other things the IRS can and cannot do while the installment agreement is in place, but again, these are details that do not matter.
One critical point about installment agreements: the IRS may unilaterally cancel them
if, among other reasons, “collection of any liability to which the installment agreement applies is in jeopardy”.5
Well. If Reader H no longer lives in the United States and has taken himself out of the U.S. tax system by abandoning his green card, that makes collection of the tax debt a little bit harder for the IRS. I would expect a letter from the IRS, Reader H.
Back to the Certification Test
Let’s circle back and come to a conclusion. My opinion (and do not take this to the bank, Reader H):
- If you have an installment agreement to pay off a tax debt for one of the five prior years before expatriation, I think you have not satisfied your tax payment obligations. The installment agreement merely holds the hounds of hell at bay for as long as you keep making payments, or until the IRS changes its mind.
- This means that you cannot certify full satisfaction of your tax obligations for the prior five years.
- And this, in turn, means that you are a covered expatriate.
Maybe some day the IRS will issue some Regulations and we will have definitive guidelines on what this means.
In the meantime, Reader H, I would pay off that tax debt in full so you can file Form 8854 and check the magic “Yes” box at Part IV, Section A, Line 6: “Do you certify under penalties of perjury that you have complied with all of your tax obligations for the 5 preceding years (see instructions)?”
This is not legal advice. This is a carefree meandering summer stroll through the meadows of the Internal Revenue Code and the Treasury Regulations. Before you take a tax position that will cost you money if you get it wrong, why don’t you go hire someone competent and get some advice?
See you in a couple of weeks,