by John Anthony Castro, J.D., LL.M.
The new Exit Tax Relief Procedures for Certain Former Citizens are for current or former U.S. citizens that meet the following conditions: (1) not willful in failing to file, (2) net worth under $2 million, (3) net tax liability actually owed to the U.S. after applying the foreign tax credit over the last 6 years totals to less than $25,000, and (4) never filed a Form 1040 even if there was U.S.-source income; filing a Form 1040NR is fine. Basically, if you’re only a covered expatriate because of non-compliance as a U.S. citizen and, after applying the foreign tax credit, you don’t owe more than $25,000 in total covering the current year plus the 5 years prior, this program is for you. In fact, even if you don’t have a U.S. social security number (SSN), you can use this program without having to obtain an SSN.
The Internal Revenue Service realized that many U.S. citizens had no actual tax liability once the standard deduction and foreign tax credit were applied. Realizing that these individuals posed a low-risk for tax evasion, they created a new sister to the Offshore Voluntary Disclosure Program’s Streamlined Filing Compliance Procedures, which they titled “Relief Procedures for Certain Former Citizens.”
Some of the key benefits of this program are:
1. Total exemption from all tax and penalties if the total amount is less than $25,000.
2. Even if you had U.S.-source income, you’re still eligible for the program. SeeQ9, Hypothetical 3. In other words, having U.S.-source income does not create a presumption of willfulness.
3. Even if you filed a Form 1040NR, you’re still eligible. SeeQ9, Hypothetical 5.
4. If you don’t have an SSN, there is no need to apply for one. SeeQ9, Hypothetical 6; also see Q16.
5. As long as income is reported on the return, you can ignore complex calculation forms like Forms 3520, 5471, 8621, etc. SeeQ9, Hypothetical 1.
To be eligible, a non-willful individual must: (1) have relinquished U.S. citizenship after March 18, 2010, or will be relinquishing citizenship in a manner eligible to qualify for a Certificate of Loss of Nationality, (2) have no filing history as a U.S. citizen or resident, which means you never filed a Form 1040 but a Form 1040NR is fine, (3) have an average annual net income tax liability after applying the standard deduction and foreign tax credit did not exceed $161,000, (4) have a net worth less than $2 million even if you were a dual citizen at birth and have resided in the other country of citizenship at birth for the 10 out of the last 15 years, (5) have an aggregate total tax liability of $25,000 or less for the entire period encompassing 6 years, and (5) submit a tax return for the current year as well as the 5 tax years prior reporting all income.
Please note that the $25,000 tax threshold is after you apply all available deductions, exemptions, and credits, including the Foreign Earned Income Exclusion and the Foreign Tax Credit. SeeQ9, Hypotheticals 6-9. However, it does not take into account any withholding payments. SeeQ13.
Renunciation and Certificate of Loss of Nationality
Title 8, Section 1481 of the United States Code (8 U.S.C. § 1481) sets forth the acts manifesting an objective intent to relinquish United States citizenship. Other than formal renunciations of nationality before a diplomatic or consular officer of the United States in a foreign state, if, after attaining the age of 18, an individual performs any of the following acts, it shall constitute an objective intent to relinquish U.S. citizenship: (1) obtaining naturalization in a foreign state, (2) making a formal declaration of allegiance to a foreign state or a political subdivision thereof, (3) serving in the armed forces of a foreign state as a commissioned or non-commissioned officer, (4) entering the armed forces of a foreign state if such armed forces are engaged in hostilities against the United States, (5) accepting, serving in, or performing the duties of any office, post, or employment under the government of a foreign state if either nationality is acquired in that state or an oath, affirmation, or declaration of allegiance is required.
However, one must still have the subjective intent to relinquish U.S. citizenship in accordance with a ruling from the U.S. Supreme Court. One of the objective acts alone will not suffice unless it’s coupled with subjective intent. You and you alone know your intent. As such, IRC § 877A(g)(4)(B) includes a requirement that a taxpayer provide “to the United States Department of State a signed statement of voluntary relinquishment of United States nationality confirming the performance of an act of expatriation specified in” above other than formal renunciations before a diplomatic or consular office of the U.S.
Once this is confirmed, you can pay the U.S. Department of State $2,350 to process your request for a Certificate of Loss of Nationality, which is required under this program. If you cannot afford the $2,350 fee payable to the U.S. Department of State, we would still encourage you to contact our firm as the fee may be unconstitutional as applied to you; in other words, we would be interested in litigating your case to create an exception to the filing fee.
How to Submit
The “Relief for Certain Former Citizens” submission packet must include the following:
1. Form DS-4083, Certificate of Loss of Nationality (CLN), or a copy of a court order cancelling a naturalized citizen’s certificate of naturalization as described in IRC § 877A(g)(4)(D). If you supply Form DS-4083, the date in the field “That: he/she thereby expatriated __self on (Date) ______ under the provisions of Section…” must be after March 18, 2010. The CLN must be stamped “Approved” by the Department of State.
2. Identification: Copy of (a) valid passport OR (b) birth certificate and government issued identification.
3. Year of expatriation: “Dual-status” return including Form 1040NR with all required information returns: Form 8854; Form 1040 attached as an information return reporting worldwide income up to date of expatriation; and All other required information returns, including but not limited to Form 8938. See Notice 2009-85 for more information on dual-status returns.
4. Five tax years preceding the tax year of expatriation: Forms 1040 with all required information returns.
On the first page of the documents submitted pursuant to these procedures as well as each return submitted, write in red ink “Relief for Certain Former Citizens” at the top.
Please note that you must still submit your Foreign Bank Account Reports on FinCEN Form 114. SeeQ18. And unlike Streamlined cases, the IRS has promised to send letters confirming acceptance. SeeQ19. They have also provided a direct number for inquiries: 267-466-0020. They request 2 months before contacting them. SeeQ20.
It must then be mailed to the following address:Internal Revenue Service3651 South I-H 35Mail Stop 4301 AUSCAttn: Relief for Certain Former CitizensAustin, TX 78741
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About the Author
John Anthony Castro, J.D., LL.M., is the Managing Partner of Castro & Co., the author of International Taxation in Plain English as well as International Estate Planning in Plain English, an esteemed graduate of Georgetown University Law Center in Washington DC, an OPM Fellow at Harvard Business School, and an internationally recognized tax attorney with offices in New York, Los Angeles, Miami, Chicago, Dallas, and Washington DC.
Bluebook Citation: John Anthony Castro, IRS Relief Procedures for Certain Former Citizens, Castro Int’l Tax Blog (January 13, 2020) url.