Expatriation Tax Obligation 5-Year Rule
Expatriation Tax Obligations for 5 Preceding Years: When it comes to expatriation, there are three (3) main categories of U.S. Citizens or Legal Permanent Residents (Long-Term Resident) who can get swept up into the expatriation and exit tax tsunami by becoming a “covered expatriate.”
The first two test are relatively well-known — the net-worth test and the net-income tax test.
But as with most IRS tests, the Internal Revenue Service likes to sneak in a 3rd, less obvious catch-all category.
Just as the the IRS developed the Substantial Presence Test for non-citizens, and non legal permanent residents as a third catchall category for U.S. Person status, they also developed the equivalent for expatriation.
Let’s explore the how IRS Tax Obligations for 5 Preceding Years can impact the exit tax.
Form 8854 Expatriation Tax Certification
As a quick refresher, when a person is a U.S. Citizen or Legal Permanent Resident, they may be subject to exit tax if they meet the test to be considered a covered expatriate.
The two common tests are the net-worth test and net income tax test.
The third, more ominous test involves prior year tax compliance (or non-compliance)
Are You a Good Taxpayer?
For the third test, the IRS asks the following:
“Do you certify under penalties of perjury that you have complied with all of your tax obligations for the 5 preceding tax years? See instructions”
The instructions do not provide much more guidance:
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.”
Essentially, the IRS is telling potential covered expatriates that even if they fall below the net-worth or net-income tax test, they may still be subject to the onerous exit tax calculation (mark-to-market and deemed distribution excercise) if they cannot certify under penalty of perjury of their tax compliance.
Penalty of Perjury
Signing any document under penalty of perjury is serious.
This is especially true when the document is being furnished by the IRS. If the IRS catches you fibbing on your 8854, it may lead to serious consequences.
Offshore Disclosure Prior to Expatriation
If you are not tax compliant in the prior 5-years to expatriation, you have options to get compliant. We have helped many taxpayer stuck in this same predicament.
Some of these options may even result in no penalties.
And, once foreign tax credits (Form 1116) and/or the foreign earned income exclusion (FEIE Form 2555) is computed into the tax return — there may be no tax liability due as well.
Interested in Expatriation from the U.S.?
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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
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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+.
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.