Expatriation Tax Compliance & TIGTA
Expatriation Tax Compliance & TIGTA: TIGTA is the Treasury Inspector General For Tax Administration. Recently, TIGTA completed an audit of the IRS involving issues surrounding expatriation. Unfortunately, TIGTA found that expatriation compliance is woefully lacking. For U.S. Person taxpayers, this means sooner or later the Internal Revenue Service will ramp up enforcement of expatriation related forms and filing under Internal Revenue Code sections 877 and 877A. For most expatriates, this involves the filing of Form 8854. which is the “expatriation statement.”
As with many issues involving Internal Revenue Service, TIGTA determined that the IRS’s expatriation enforcement procedures were in disarray and lacked a centralized enforcement unit capable of locating expatriates to determine whether they filed properly or not.
TIGTA also found that the database used to track expatriates was insufficient and did not properly track the nearly seventeen thousand expatriates who did not file 8854.
As provided by TIGTA:
“From a sample of 26 expatriates who did not file a Form 8854, five had potential unreported income over $6 million. From a sample of 61 expatriates who filed a Form 8854, 15 had potential unreported income over $17 million.
Lastly, TIGTA also found that expatriates with high net worth appear to not be paying their exit tax.
Without a centralized compliance effort, Congress’s attempts to create disincentives to expatriate via Section 877A will not be effective.”
TIGTA Recommendations for Expatriation & Tax Compliance
As a result of TIGTA’s evaluation of the IRS procedures for expatriation tax compliance, TIGTA came up with the following recommendations:
TIGTA recommended that the IRS:
“1) contact the Department of State, via the Federal Intergovernmental Program, for the Social Security Number data field to be added to the Form DS-4083, Certificate of Loss of Nationality of the United States, and explore the feasibility of obtaining the Certificate of Loss of Nationality electronically;
2) update the Letter 2399C Failure to File – Initial Form 8854, and Letter 4135C, Failure to Respond to Initial Form 8854 Request, for compliance under the HEART Act, and develop Internal Revenue Manual procedures to use these letters to obtain Form 8854 when a Certificate of Loss of Nationality is received and no Form 8854;
3) evaluate the information reported on Form 8854 and determine what data fields should be added to the expatriate database to ensure tax compliance of taxpayers who expatriate, e.g., Form 8854, Part IV, Section B, Property Owned on Date of Expatriation;
4) develop Internal Revenue Manual procedures for transcribing Form 8854 data, correcting Form 8854 data when information as filed by expatriates is missing or incomplete, and preparing analysis as needed to determine if the expatriate is a covered expatriate and subject to tax under Internal Revenue Code Section 877A; and
5) establish a process to compile information on all expatriates whether they filed Form 8854 with their individual tax return Form 1040-NR, U.S. Nonresident Alien Income Tax Return, or filed Form 8854 with the Philadelphia Campus and use this information to identify the highest risk expatriate returns for tax compliance. The IRS agreed with TIGTA’s recommendations.”
In conclusion, it is becoming apparent that the IRS will begin enforcement of expatriation tax compliance much more aggressively than it has done in the past. In addition, all signs point to the Internal Revenue Service developing new procedures in order to enforce expatriation related tax requirements and filing.
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