New IRS Program Provides Relief For Those Who Relinquish US Citizenship

Red traffic light in front of Internal Revenue Service building

New IRS Program Provides Relief For Those Who Relinquish US Citizenship

By Monica Martinez, CPA, CA, CPA
Principal, U.S. and Cross-Border Tax & Advisory Services

On September 6, 2019, the IRS announced the new “Relief Procedures for Certain Former (US) Citizens” (Relief Procedures), which apply to certain individuals who have relinquished, or intend to relinquish their US citizenship (expatriate). If eligibility criteria are met, the new Relief Procedures will allow individuals who have been delinquent with their US tax and filing obligations to become compliant, without having to pay back taxes, penalties, interest or the exit tax upon expatriating.

Unlike the taxation systems of most countries which are based on tax residency, the US taxes its US citizens on their worldwide income, regardless of where they live. They are required to submit annual US tax returns (including detailed information returns), which can create major headaches for US citizens, particularly those with little or no attachment to the US. Many US citizens caught by this requirement may have been born in the US to parents from another country and left the US early on in their childhood, or were born outside of the US to US citizen parent(s). Many in these circumstances are not even aware of their annual US tax filing obligations.

In addition, some US citizens may also face immediate and detrimental tax consequences from relinquishing their US citizenship if they are considered a “covered expatriate” under the US expatriation provisions. A “covered expatriate” is someone: a) with a net worth of USD $2,000,000 or more on the date of expatriation, b) whose average US tax liability for the prior five years before expatriation exceeds USD $168,000 in 2019 (adjusted for inflation), or 3) who has not been fully compliant with their US tax filings in the prior five years. If an individual meets any of these three tests, they are treated as having disposed all of their worldwide assets at fair market value on the day before expatriation and are required to pay an exit tax on the gain (subject to an exclusion amount). There are other unfavourable tax consequences with respect to certain deferred compensation plans and punitive gift and estate tax implications. On the bright side, those individuals who meet the specific criteria to qualify under the new Relief Procedures, will not be subject to these punitive expatriation provisions.

To qualify for the new Relief Procedures, an individual must meet the following criteria:

  • They relinquished US citizenship (expatriated) after March 18, 2010
  • They never filed income tax returns with the IRS as a US citizen or US resident
  • Their net worth was less than USD $2,000,000 on the date of expatriation
  • They had an aggregate US tax liability of USD $25,000 or less in the year of expatriation and the five previous years (six years in total) and
  • Their failure to comply with past US tax and reporting obligations was due to “non-willful” conduct

If eligibility is met, the individual is required to submit income tax returns and all information returns, for the past 5 years and for the year of expatriation, as well their ‘Certificate of Loss of Nationality of the United States’ and a copy of a valid government ID such as a passport or birth certificate.

This new program is welcome news for some non-compliant US citizens that wished to relinquish their US citizenship but were reluctant to take on the onerous, lengthy and costly task of catching up on their tax filings over several years, before being eligible to formally terminate their US citizenship. The new program allows participants to submit their US tax filings, for prior years and the year of expatriation, in one step without incurring taxes, penalties and interest. They can also make their submission even if they do not have a social security number (SSN). This avoids the challenging and lengthy process of obtaining a SSN, for those US citizens who have lived outside of the US most of their lives.

This new IRS program may not be permanent. For anyone interested in extracting themselves from their on-going IRS obligations, now is the time to act.

Contact GGFL’s US and cross-border tax specialists to discuss your US tax compliance obligations, the tax implications of renouncing your US citizenship and whether you are eligible for the new IRS Relief Procedures.