Hey there. Phil again, and this is the regular Expatriation newsletter that goes out every Tuesday. You signed up for it, but if you want to unsubscribe just click on the link at the bottom of this email.
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This week’s question comes from an accountant friend who inherited a problem. Here is the situation he is facing (my wording, not his):
A long-term resident returned to Country X in 2013 and filed Form I-407 to abandon her green card.
She was not a covered expatriate because of the balance sheet test or the net tax liability test. However, she could not answer the certification test question (Form 8854, Part IV, Line 6) with “yes” because her 2012 tax return was wrong.
Her income tax return filing history is:
- Her 2012 income tax return (as a resident) was filed but omitted some income. She was a green card holder for the full calendar year of 2012. She did not abandon her green card until 2013.
- She filed a tax return for 2013. (I do not know whether she filed as a resident or nonresident). She did not file Form 8854 with the tax return
- She filed Form 1040 (a resident’s tax return) for the full year of 2014, with no Form 8854.
Now, in 2015, she will amend her 2012 income tax returns to fix the problem. Then she will file her Form 8854 in 2015.
The question facing the taxpayer is how should Form 8854 be answered? What is the taxpayer’s expatriation date (see Part I of Form 8854) — sometime in 2013 or sometime in 2015?
There is a related problem: do you file Form 8854 with the 2015 tax return or the 2013 tax return?
The critical fact my accountant friend needs to know is “What is the taxpayer’s expatriation date?” That is what Form 8854, Part I, Line 4 asks for.
“Expatriation date” is defined in the Code at Internal Revenue Code Section 877A(g)(3)(B):
The term “expatriation date” means . . . in the case of a long-term resident of the United States, the date on which the individual ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6)).
We have already decided that the taxpayer is a “long-term resident”. (This simply means that she held a permanent resident visa — a green card — for a long enough time to reach that status). So now we only have to figure out when she lost her “lawful permanent resident” visa status.
Internal Revenue Code Section 7701(b)(6) says that a person is a “lawful permanent resident” until certain events happen:
For purposes of this subsection, an individual is a lawful permanent resident of the United States at any time if—
(A) such individual has the status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws, and
(B) such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).
The date that Form I-407 is handed to the Consular official is (almost always) the date on which permanent resident visa status (aka your green card) is considered to have been abandoned. Technically there can be a period of time afterwards for administrative or court appeal, but assuming that time expires, the day you handed in Form I-407 is the magic day.
Thus, unless there is evidence to the contrary, this taxpayer ceased to be a lawful permanent resident on the day she filed Form I-407 after leaving the United States because:
Form 8854 is required to be filed for the year of the expatriation date. The Instructions to Form 8854 tell us (emphasis added by me):
If you expatriated after June 16, 2008, attach Form 8854 to your income tax return (Form 1040 or Form 1040NR) for the year that includes your expatriation date, and file your return by the due date of your tax return (including extensions). Also send a copy of your Form 8854, marked “Copy,” to the address under Where To File, later. If you are not required to file Form 1040NR or Form 1040, send your Form 8854 to the address under Where To File, later, by the date your Form 1040NR (or Form 1040) would have been due (including extensions) if you had been required to file. (See Resident Alien or Nonresident Alien in the Instructions for Form 1040NR.)
This means that when the taxpayer files her remedial Form 8854, she should attach it to an amended income tax return for calendar year 2013. She will be able to successfully check the box on the 2013 edition of Form 8854, Part I, Line 4, to report that expatriation happened during the calendar year 2013.
The late Form 8854 might trigger a $10,000 penalty. Internal Revenue Code Section 6039G(c)(2) says:
(1) an individual is required to file a statement under subsection (a) for any taxable year, and
(2) fails to file such a statement with the Secretary on or before the date such statement is required to be filed or fails to include all the information required to be shown on the statement or includes incorrect information,
such individual shall pay a penalty of $10,000 unless it is shown that such failure is due to reasonable cause and not to willful neglect.
Section 6039G is the operating part of the Code that requires you to give the balance sheet and income information on Form 8854. So there is a risk that the IRS might impose this $10,000 penalty.
In other words, SNAFU. International tax paperwork problem = “$10,000 please” from the IRS.
The other thing to worry about is the certification test itself. By filing a late Form 8854, has the taxpayer failed the certification test, thereby becoming a covered expatriate?
The definition of “covered expatriate” found at Internal Revenue Code Section 877A(g)(1)(A) defines that status by incorporating the wording in Internal Revenue Code Section 877(a)(2)(C), so that a person is a covered expatriate if:
. . . such individual 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.
The Internal Revenue Code does not say anything about when the individual is required to certify that everything is fully satisfied for those five preceding years.
However, Notice 2009-85, Section 2(A) tells us that it is the opinion of the IRS that this certification must be made on a timely-filed Form 8854. It defines a covered expatriate as someone who:
. . . (3) 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.
(Emphasis added by me).
One can certainly claim the IRS has stepped beyond the powers granted to it by Congress in Section 877 and 877A by requiring this certification on a timely-filed Form 8854. However, setting filing deadlines for stuff is usually accepted as being within the implicit power of the IRS.
My guess is that filing a late Form 8854 is an open invitation to covered expatriate status. Be prepared to fight this.
Not legal advice. Don’t blame me. It’s probably wrong, too. Go hire someone to give you good advice before taking action. Look before you leap, etc.
See you next Tuesday,