IRS Notice 2009-85 (Section 2: Individuals Covered)
Notice 2009-85 (Section 2: Individuals Covered): Expatriation and the exit tax do not apply to everybody. Rather, the IRS has very specific definitions on who is considered a possible covered expatriate. Noting, that only covered expatriates can be considered for the exit tax. Even if a person has resided in the United States for 30 years, if they do not qualify as a US citizen, or a Long-Term Resident, then they would not be subject the exit tax. Conversely, even if a U.S. citizen or Legal Permanent Resident resides outside of United States (subject to 8833 treaty positions that may have been claimed), they may still be considered a covered expatriate, because U.S. residence is not required to be considered a covered expatriate.
Who is Considered Expatriate?
Section 2 of Notice 2009-85 focuses on the definition of an expatriate and covered expatriate.
As provided by the IRS:
“Section 877A(g)(2) provides that the term “expatriate” means
(1) any U.S. citizen who relinquishes his or her citizenship and
(2) any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6), as amended). Pursuant to section 877A(g)(5), a long-term resident is an individual who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year that includes the expatriation date.”
Definition of an Expatriation
Not all expatriates are covered expatriates.
Before determining if someone is a covered expatriate, they must meet the definition of an expatriate.
As provided by the Internal Revenue Service an Expatriate is either a U.S. citizen who relinquishes citizenship or Long-Term Resident who ceases to be a long term resident.
For example, when a legal permanent resident files a Form I-407.
“Covered expatriate. Section 877A(g)(1)(A) defines the term “covered expatriate” to mean an expatriate who:
(1) has an average annual net income tax liability for the five preceding taxable years ending before the expatriation date that exceeds a specified amount that is adjusted for inflation ($145,000 in 2009) (the “tax liability test”);
(2) has a net worth of $2 million or more as of the expatriation date (the “net worth test”); or
(3) fails to certify, under penalties of perjury, compliance with all U.S. Federal tax obligations for the five taxable years preceding the taxable year that includes the expatriation date, including, but not limited to, obligations to file income tax, employment tax, gift tax, and information returns, if applicable, and obligations to pay all relevant tax liabilities, interest, and penalties (the “certification test”).
This certification must be made on Form 8854 and must be filed by the due date of the taxpayer’s Federal income tax return for the taxable year that includes the day before the expatriation date. See section 8 of this notice for information concerning Form 8854.”
What is a Covered Expatriate?
When a person is considered an expatriate under the definition above, the next issue is to determine whether the person qualifies as a covert expatriate.
In order to meet the definition of a covered expatriate, the expatriate must meet one of the three tests above.
That means they must meet either:
- Net Worth Test; or
- Net Income Tax Liability Test; or
- Fail to certify under penalty of perjury that they have met all their federal tax obligations.
There are some exceptions to covered expatriate status.
“However, section 877A(g)(1)(B) provides that an expatriate will not be treated as meeting the tax liability test or the net worth test of section 877(a)(2)(A) or (B) if
(1) the expatriate became at birth a U.S. citizen and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and has been a U.S. resident for not more than 10 taxable years during the 15 taxable year period ending with the taxable year during which the expatriation date occurs; or
(2) the expatriate relinquishes U.S. citizenship before the age of 181/2 and has been a U.S. resident for not more than 10 taxable years before the date of relinquishment.
The determination as to whether an individual is a covered expatriate is made as of the expatriation date.”
Exceptions to Covered Expatriate Status
Even if an expatriate would otherwise meet the definition of a covered expatriate, they may be able to avoid covered expatriate status if they qualify for one of the two exceptions.
- Dual-Citizen at Birth
- Citizen of an Taxed as Resident of Foreign Country
- Not a U.S. Resident for more than 10 of the last 15 taxable years.
- Relinquishes U.S. Citizenship Before 18 ½
- Was not a U.S. Resident for more than 10 years.
“Expatriation date. Section 877A(g)(3) defines the term “expatriation date” as the date an individual relinquishes U.S. citizenship or, in the case of a long-term resident of the United States, the date on which the individual ceases to be a lawful permanent resident of the United States within the meaning of section 7701(b)(6).”
Relinquishment of citizenship. Section 877A(g)(4) provides that a citizen will be treated as relinquishing his or her U.S. citizenship on the earliest of four possible dates:
(1) the date the individual renounces his or her U.S. nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)), provided the renunciation is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State,
(2) the date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of U.S. nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)-(4)), provided the voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State,
(3) the date the United States Department of State issues to the individual a certificate of loss of nationality, or
(4) the date a court of the United States cancels a naturalized citizen’s certificate of naturalization.
Cessation of lawful permanent residency. Under section 7701(b)(6), as amended by the Act, a long-term resident ceases to be a lawful permanent resident if (A) the individual’s status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or if (B) the individual (1) commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, (2) does not waive the benefits of the treaty applicable to residents of the foreign country, and (3) notifies the Secretary of such treatment on Forms 8833 and 8854.
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