Expatriation IRS Tax Requirements

Expatriation IRS Tax Requirements

Expatriation & U.S. Tax

Expatriation: Who is a U.S. Expatriate (Citizens & Residents): Expatriation under U.S. tax law is complex. One of the most common misconceptions about U.S. expatriation and the IRS definition of an expatriate, is that it only involves U.S. citizens — and it is only for wealthy people.

Expatriation is the process of relinquishing U.S. status. It includes both U.S. citizens, and Green Card Holders (aka Legal Permanent Resident) who meet the definition of a Long-Term Resident (LTR), then the expatriation laws apply to them as well.

U.S. Citizens & Permanent Residents

In addition, the expatriation rules apply to more than just the wealthy. Even if a person is below the net worth test, if they meet the net income tax liability test and/or cannot certify that they have been U.S. tax compliance for the last 5-years, they will also qualify as a covered expatriate — and may become subject to U.S. exit tax.

Expatriation is the process of relinquishing a person’s U.S. status. The most common example is when a person is a U.S. citizen, either by birth or naturalization.

U.S. Citizen Example

In the most common example, a person was born a U.S. citizen. Let’s call him Michael. Michael grew up in the U.S., and then began working overseas. He started making significant income in a foreign country with a lower tax rate. Now that Michael is a high-income earner, he has a dilemma. As a U.S. citizen, he is subject to United States’ tax on his worldwide income. In the country Michael lives and calls home, his tax rate is 20%. In the U.S., Michael’s tax rate is 37%. Michael never visits the U.S. aside from work, and has no other ties to the U.S.

As a result, Michael does not want to pay the hefty additional tax to the U.S., and decides he will relinquish his U.S. citizenship.

Green Card Example (Legal Permanent Resident)

Meet Ingrid. She came to the U.S. as an F-1 student, and then H-1B. A few years later, she because a green card holder and has been in the U.S. ever since 2003. Now it is 2020 and she wants to move back to Peru. She has significant assets. Her children (and grand-children) are grown, and Ingrid wants to enjoy her sunset years in her home country. From a U.S. tax perspective, Ingrid has been a green card holder for just shy of 20 years. If Ingrid wants to relinquish her green card, she must do more than just let her green card expire — she must file a Form I-407 (or pursue other relinquishment options) and submit a Form 8854.

Why?

Because Ingrid has been a green card holder for at least 8 of the last 15 years. Therefore, she is considered an LTR (Long-Term Resident) and must file a Form 8854.

What happens if Ingrid’s Green Card expires?

She may no longer be a valid green card holder but that will not eliminate her U.S. tax responsibilities.

Voluntary Abandonment vs. Involuntary Abandonment

In order to remove a person’s U.S. tax status, they must do more than just let the green card expire. Rather, the person must take proactive action. In other words, the green card holder must take an affirmative step in order to remove the taint of U.S. tax responsibility — even after the Green Card expires.

The simplest method is to file a Form I-407.

Form I-407

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.

Form I-407 Certification Language

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.

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.

 

Covered Expatriate vs. Non-Covered Expatriate

When it comes to evaluating expatriation, one of the most important determinations is whether or not the person who is expatriating qualifies as a covered expatriate.

To recap the process:

  • First, the expatriate must determine if they are U.S. Citizen or Long-Term Resident
  • Then, conduct the three different covered expatriate tests.

A. Net Income Tax Liability

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.

a. $139,000 for 2008.

b. $145,000 for 2009.

c. $145,000 for 2010.

d. $147,000 for 2011.

e. $151,000 for 2012.

f. $155,000 for 2013.

g. $157,000 for 2014.

h. $160,000 for 2015.

i. $161,000 for 2016.

j. $162,000 for 2017.

k. $165,000 for 2018.

l. $168,000 for 2019. 2.

B. Net Worth Test

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

C. 5-Year Tax Certification

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.

Exceptions

There are a few exceptions to the covered expatriate status. 

As provided by the IRS:

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.

Expatriation with IRS Offshore Disclosure

A very common situation in the past few years has been when a U.S. Citizen or Long-Term Resident wants to expatriate, but is out of international offshore reporting compliance.  In this scenario, the client is unable to certify that they have been 5-years compliance. 

Therefore, we develop a strategy to both get the client into offshore compliance and complete the expatriation process.

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.

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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+.

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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

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