November 10, 2015 - Phil Hodgen

Who files Form 8854 and what if you’re late?

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Does a late Form 8854 doom you to covered expatriate status?

Applying Betteridge’s Law, the answer is “no”. But let’s get you a better-reasoned conclusion than that, shall we?

The conclusion I reach in this week’s newsletter is: if you are late with filing Form 8854, the worst that can happen is that you will be fined $10,000. You will not be a covered expatriate.

Three ways to be a covered expatriate

IRC §877A(g)(1)(A) defines a covered expatriate:

The term “covered expatriate” means an expatriate who meets the requirements of subparagraph (A), (B), or (C) of section 877(a)(2).

Briefly summarized, these three items are:

  • Your average tax liability for the five tax years before your expatriation year was $161,000 or more (assuming expatriation in calendar year 2016) [IRC §§877A(g)(1)(A), 877(a)(2)(A); Rev. Proc. 2015-53, §3.30]; or
  • Your net worth on your expatriation date is $2,000,000 or more [IRC §§877A(g)(1)(A), 877(a)(2)(B)]; or
  • You fail to certify that you fully satisfied all of your tax filing and payment obligations for the five years before the expatriation year IRC §§877A(g)(1)(A), 877(a)(2)(C)].

That’s it. There are only three, there are no more.

Certification test: entirely retrospective

The certification test looks back at the five calendar years before the year in which you expatriate. It asks you to say “yes” when asked whether you satisfied all of your tax filing and payment obligations for all five years. If you answer “no” you fail, and are a covered expatriate.

You also fail — and are a covered expatriate — if the IRS asks you to prove that you are fully tax compliant for the previous five years, and you do cannot prove it.

This means that the certification test is entirely retrospective. The only way you can fail this test — and become a covered expatriate — is by having some wreckage in your past.

Certification test: does not apply to the expatriation year

This means that the certification test does not care at all about the tax forms you file for your expatriation year, or when you file them. There may be consequences for filing nothing, filing bad forms, or filing late. But the certification test is unaffected by any of these actions.

If the certification test had anything to do with the expatriation year filings, we would have found something in IRC §877A(g)(1)(A) saying so.

Form 8854 and its filing deadline

Congress gave the IRS the power to design tax return forms [IRC §6011(a)] and the power to set the filing deadline [IRC §6071(a)].

Form 8854 is how the IRS exercised its power to compel a tax return (and set the filing deadline) for the information required to be collected by IRC §6039G.

Who must file Form 8854? Only covered expatriates?

IRC §6039G(a) is written in an interesting way. It defines who must give information to the IRS:

Notwithstanding any other provision of law, any individual to whom section 877(b) or 877A applies for any taxable year shall provide a statement for such taxable year which includes the information described in subsection (b).

Who is an individual “to whom section . . . 877A applies”? To me, the answer is “only covered expatriates”. Follow my reasoning and see if you agree with me. We will tick through each subsection of Section 877A in turn:

  • Section 877A(a). These are the mark-to-market rules. They apply only to covered expatriates.
  • Section 877A(b). This is an election to defer the payment of tax due because of Section 877A(a). That means the only people who could use this deferral mechanism will be covered expatriates.
  • Section 877A(c). This says that certain types of property are not taxed under the general mark-to-market rules of Section 877A(a), but are taxed using special rules. Since only covered expatriates pay tax using the mark-to-market rules of Section 877A(a), this means that the only people who pay tax using these carve-out rules will be covered expatriates, too.
  • Section 877A(d). This is the first of the carve-out rules. Deferred compensation is taxed according to the special rules here. Littered throughout this subsection you will find references to the type of people whose deferred compensation is taxed under these special rules–covered expatriates.
  • Section 877A(e). This is the second carve-out from the mark-to-market tax system, for “specified tax deferred accounts”. Again, the subsection itself refers to how covered expatriates are taxed on this type of asset.
  • Section 877A(f). This is the third carve-out from the mark-to-market tax system, for beneficial interests in nongrantor trusts. Again, you will find that these tax rules apply only to covered expatriates.
  • Section 877A(g). These are definitions.
  • Section 877A(h). These are other tax rules–the odds and ends. They can only apply to covered expatriates.
  • Section 877A(i). This subsection is where Congress told the Treasury Department to write regulations interpreting Section 877A.

Unless I am missing something, IRC §877A (the exit tax rules) do not apply to persons who are merely expatriates. Only covered expatriates are people “to whom Section 877A applies”, so only covered expatriates will trigger the requirement built into IRC §6039G to report information to the government on Form 8854.

Please. Where is my logic hole? Where did I go astray?

Notice 2009-85 seems to agree with me

Notice 2009-85, Section 8.A seems to agree with the conclusion that only covered expatriates must file Form 8854:

Background. Section 301(e) of the Act amended section 6039G to impose a requirement on any individual to whom section 877A applies for any taxable year, to provide a statement that includes certain information as provided in section 6039G, including details of the individual’s income, assets, and liabilities. The Treasury Department and the IRS intend to issue regulations under section 877A that will require covered expatriates who are liable for tax under section 877A to report certain information in connection with their expatriation. Until the issuance of such regulations, covered expatriates must report information in compliance with the rules set forth in this notice and any other information that the IRS may require.

Emphasis added.

Late filing and IRC §6039G

Let’s get back to the question of late-filing of Form 8854. What if you miss the deadline?

IRC §877A(g)(1) is exceedingly clear. The only way you can become a covered expatriate is by ticking one of the three boxes specified in IRC §877(a)(2). If Congress wanted a filing failure in the expatriation year to trigger covered expatriate status, it would have said so.

IRC §6039G is also exceedingly clear; at subsection (c) it spells out exactly what happens to you if you do not file, or you file late:

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.

Nothing is said about failure to file Form 8854 on time as triggering covered expatriate status.

What should a regular noncovered expatriate do?

Regular expatriates must also file Form 8854, but for a reason entirely distinct from the requirements of IRC §6039G.

Recall that you are a covered expatriate unless you certify that your previous five years of life are fully compliant with all of the requirements of Title 26 of the United States Code. IRC §§877A(g)(1)(A), 877(a)(2)(C).

Let us take on faith that IRC §6011(a) gives the IRS the power to specify how this particular duty (your duty to certify, that is) must be carried out on paper. Let us also take it on faith that IRC §6071(a) gives the IRS the power to specify when that piece of paper must be filed with the IRS.

Notice 2009-85, Section 2.A says that the IRS has decided that Form 8854 is the way that you satisfy the certification test. A person is a covered expatriate, says Notice 2009-85, if the person:

(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.

I think we must accept the legitimacy of having the certification test checkbox on Form 8854. I think we must also accept the legitimacy of the IRS setting the filing deadline for Form 8854. Congress did not set the filing deadline, so the IRS has the administrative power to do so.

Late filing of Form 8854 and the IRC §877(a)(2)(C) certification test

We previously decided that filing a late Form 8854 would carry at worst a $10,000 penalty for not timely reporting the information required by IRC §6039G. Note that IRC §6039G(c) has the penalty–and the deadline–hardwired into the Code. The penalty is imposed if the taxpayer

(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[.]

I noted, however, that IRC §877(a)(2)(C) says an expatriate will be a covered expatriate unless he or she certifies full compliance with tax obligations for the previous five years. There is no equivalent hard-wired provision in the Code for time deadlines.

I assert — without benefit of research — that IRC §877(a)(2)(C) makes thecertification a prerequisite to avoiding covered expatriate status, not a timely certification.

This means, if I am right, that a late certification may be punishible by a civil penalty, but is not punishable by a permanent flip in status from expatriate to covered expatriate.

Again, warning: no research.

The reason for no research is that we are now hip-deep in the laws governing the grant of administrative power by Congress to the IRS to design forms, require filing, and set the deadlines. Research can certainly be done. But I’m not doing it right now.


Form 8854 is required for two different reasons:

  • Covered expatriates are required to file Form 8854 to provide a raft of information specified in IRC §6039G, because they are people “to whom Section 877A applies”.
  • Noncovered expatriates and covered expatriates alike are required to file Form 8854 to satisfy the disclosure requirements inherent in IRC §877A(g)(1)(A) and IRC §877(a)(2)(C).

A late Form 8854 will trigger a $10,000 penalty under IRC §6039G(c). The filing requirement triggered by IRC §877(a)(2)(C) does not have a statutory penalty provision built into it, and I do not believe the IRS has the power to do anything other than assess a civil penalty for missing the deadline for making the certification. It does not (I think) have the authority to convert you to being a covered expatriate.

Do your own research

In the meantime, please remember my handy-dandy warning shot (with 12 gauge) / pre-emptive strike (with a B-52) / warning / disclaimer:

This email may be wildly entertaining but it is not legal advice to you. Do your own work and figure your own stuff out.

I’m outta here

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