Recently the IRS announced that it will be rolling out a compliance initiative for expatriates.
There is no information about how this program will work just yet. Here is what the IRS news announcement says, and this is all we have to go on at the moment:
“U.S. citizens and long-term residents (lawful permanent residents in eight out of the last 15 taxable years) who expatriated on or after June 17, 2008, may not have met their filing requirements or tax obligations. The Internal Revenue Service will address noncompliance through a variety of treatment streams, including outreach, soft letters, and examination.”
From this, it is a little unclear what we should expect, but one thing is obvious at a first glance: there is no mention of any options for voluntarily fixing tax compliance like taxpayers could do using the OVDP or the streamlined procedures.
I take that to mean that the IRS will be heightening its efforts to detect and resolve noncompliance on expatriation year tax returns without offering a way for taxpayers to come forward and receive reduced penalties.
Tax obligations for expatriates
When a US citizen or long-term resident (someone who has held their green card for a long enough period of time) terminates that status, they become an expatriate.
Expatriates must file Form 8854 with their expatriation year tax returns; failure to file or filing late could mean a $10,000 penalty.
Additionally, expatriates who meet certain wealth thresholds or who did not do their tax returns correctly for the 5 years before expatriation are what is known as “covered expatriates”. Covered expatriates must pay US tax on a pretend sale of all their worldwide assets when they expatriate; this is known as the exit tax. Failure to pay exit tax (or regular income tax for the year of expatriation) could result in a wide range of penalties, and interest accrues on unpaid tax, as well.
An expatriation year tax return does not include just Form 8854 and exit tax, however. It includes all the forms that are otherwise required to be filed, including various information returns that may be required for the portion of the year where the expatriate was still a US resident taxpayer.
A taxpayer who failed to file a return for their expatriation year may also have other unfiled information returns, including but not limited to Form 8938, Form 5471, Form 3520, Form 3520-A, Form 8621, FinCEN Form 114, and so on. For most of those forms, penalties are automatically assessed when they are filed late.
Failure to file Form 8854, an expatriation year income tax return, or any other information return, as well as a failure to pay tax, all have the same result: you terminated your US immigration status and became a nonresident alien, but you did not properly log out of the US tax system.
Ongoing filing requirements after expatriation
After expatriation, many expatriates have ongoing filing requirements with the IRS, particularly if they own US retirement accounts. Some retirement plans and trusts are required to be reported annually on Form 8854 each year after expatriation, whether distributions are taken or not.
Any expatriates who have ongoing investments in US partnerships must file income tax returns each year; investments in financial products or other business entities may require tax filings.
Fix problems now to avoid unknown future issues
If you failed to correctly log out of the US tax system when you turned in your passport or green card, or if you have not been filing US returns correctly since your expatriation, you are at risk of detection by the IRS.
A failure to correctly log out of the US tax system could include unfiled returns, particularly (but not limited to) Form 8854; incomplete or incorrect returns; or a certification on Form 8854 that your prior 5 years of tax returns are correct and complete when they are in fact not.
There is no indication that the IRS will be rolling out any programs to assist expatriates with coming forward to fix their tax compliance. It appears that all efforts from the IRS will be focused on detection and enforcement. Therefore, it is best not to wait until this program is rolled out; if you have issues with your expatriation year tax return or tax returns required in subsequent years, now is the time to fix them – before they are detected by the IRS.
Depending on whether you are filing your expatriation year tax return for the first time or if you need to correct something on the return you filed before, you may be filing original or amended returns. If you are at risk of penalty assessment for late or unfiled returns, you can request relief if the facts and circumstances of your situation indicate that you qualify for penalty abatement.
Hire someone to help you
We work on matters like this all the time. Many other firms do, as well. Especially if the tax problems you face are large in magnitude, we encourage you to consider getting help from a professional to ensure that your filings are complete and correct, and that IRS procedures with respect to penalty assessment, abatement, and appeals are correctly carried out.