Covered Expatriate

Covered Expatriates: When a person is a covered expatriate, it complicates expatriation. The IRS rules for covered expatriates are complex.

When certain U.S. persons relinquish their U.S. status (aka expatriation), they become a “covered expatriate” for tax purposes. The covered expatriate rules apply to U.S. persons who were either U.S. Citizens or Legal Permanent Residents who qualify as an LTR (Long-Term Residents).

The IRS requires certain “expats” to calculate an exit tax when they exit the U.S., and file their 1040/1040NR dual-status return — along with Form 8854.

The failure to file the necessary U.S. expatriation forms, may result in FBAR penalties, FATCA penalties, PFIC Tax, passport revocation, liens, levies, and examination. 
A summary of what is a Covered Expatriate and what you need to know before renouncing:
What is a Covered Expatriate?

What is a Covered Expatriate?

What are the IRS Requirements

Unfortunately, the IRS has a whole set of additional rules for “covered expatriate” individuals who want to “renounce or relinquish,” beyond the requirements of submitting Form I-407.

When a Legal Permanent Resident or U.S. Citizen wants to give-up their U.S. status, the (usual) first-step — after proper planning – is to file Form I-407.

This is not a tax form, but rather an immigration form (aka U.S. Citizenship and Immigration Services aka USCIS)

“Form I-407, Record of Abandonment of Lawful Permanent Resident Status, is designed to provide a simple procedure to record an individual’s abandonment of status as a lawful permanent resident (LPR) of the United States.

Use of Form I-407 also ensures that an individual abandoning his or her LPR status is informed of the right to a hearing before an immigration judge and that the individual has knowingly, willingly, and affirmatively waived that right.”

Expatriation Tax 

When the IRS levies an exit tax it can be tough. Once a person is ready to relinquish their citizenship, or give up their U.S. legal permanent resident status to the IRS, the first step is generally submitting a form I-407 – but usually that is not the last step — which is where many unsuspecting applicants get lost.

Initial & Annual Expatriation Statement

Form 8854 is an “Expatriate” form, and required by the IRS. This form is required, irrespective of whether the individual is considered a covered expatriate or not.

As provided by the IRS:

You must file Form 8854 to:

  • Establish that you have expatriated for tax purposes; or
  • Comply with the annual information reporting requirements of section 6039G, if you are subject to tax under section 877.

*New Form 8854 is not published yet, but the IRS has issued a draft Form 8854 instructions.

Who is Eligible to be considered a Covered Expatriate?

  • U.S. Citizens
  • Legal Permanent Residents who are LTRs

What is a Long-Term Resident (for Expatriation)?

Generally, if you have had Legal Permanent Resident status for 8 of the last 15-years, you are a Legal Permanent Resident.

As provided by the IRS:

“You are an LTR if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your status as an LTR ends.

In determining if you meet the 8-year requirement, don’t count any year that you were treated as a resident of a foreign country under a tax treaty and didn’t waive treaty benefits applicable to residents of the country.”

What are the Exceptions to being Considered a Covered Expatriate?

There are a few exceptions to being considered a Covered Expatriate:

Exception for dual-citizens and certain minors

Dual-citizens and certain minors (defined next) won’t be treated as covered expatriates (and therefore won’t be subject to the expatriation tax) solely because one or both of the statements in paragraph (1) or (2) above (under Covered expatriate) applies.

However, these individuals will still be treated as covered expatriates unless they file Form 8854 and certify that they have complied with all federal tax obligations for the 5 tax years preceding the date of expatriation as required in paragraph (3) (under Covered expatriate, earlier).

Certain Dual-citizens

You can qualify for the exception described above if you meet both of the following requirements.

You became at birth a U.S. citizen and a citizen of another country and, as of the expatriation date, you continue to be a citizen of, and are taxed as a resident of, that other country.

You were a resident of the United States for not more than 10 years during the 15-tax-year period ending with the tax year during which the expatriation occurred. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.

Certain Minors

You can qualify for the exception described above if you meet both of the following requirements.

You expatriated before you were 181/2.

You were a resident of the United States for not more than 10 tax years before the expatriation occurs. For the purpose of determining U.S. residency, use the substantial presence test described in chapter 1 of Pub. 519.

Am I a Covered Expatriate?

There are 3 main ways a person meets the covered expatriate test

Average Tax Liability Test

Your average annual net income tax liability for the 5 tax years ending before the date of expatriation is more than the amount listed next.

  • $139,000 for 2008.
  • $145,000 for 2009.
  • $145,000 for 2010.
  • $147,000 for 2011.
  • $151,000 for 2012.
  • $155,000 for 2013.
  • $157,000 for 2014.
  • $160,000 for 2015.
  • $161,000 for 2016.
  • $162,000 for 2017.
  • $165,000 for 2018.

Net Worth Test

Your net worth was $2 million or more on the date of your expatriation.

5-Year Tax Compliance

You fail to certify on Form 8854 that you have complied with all federal tax obligations for the 5 tax years preceding the date of your expatriation.

What if a Person is a Covered Expatriate?

When a person is a Covered Expatriate, they may have to pay an “exit tax,” in addition to an ongoing (annual) filing requirement of form 8854 (even after they relinquished their status).

Interested in Expatriation from the U.S.?

Our firm specializes exclusively in international tax.

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20-years experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Our lead attorney is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.

How to Hire Experienced Offshore Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience
  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA

Interested in Learning More about our Firm?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant.

We specialize in FBAR and FATCA. Contact our firm today for assistance with getting compliant.

Partner Profiles

Mr. Sean M. Golding

Partner

Mrs. Jenny K. Golding

Partner

Reduced-Fee Confidential Consultation

Address

930 Roosevelt Avenue, Suite 321, Irvine, CA 92620