Pre-Expatriation 5-Year Tax Compliance
Pre-Expatriation 5-Year Tax Compliance: When a U.S. Citizen or Long-Term Permanent Resident gets ready to expatriate, there are lots of moving parts. One key component (when possible) is to try to avoid the Covered Expatriate status. While a Covered Expatriate may not necessarily have any exit tax due at expatriation, it does not mean there are not post-expatriation issues to contend with.
Two common issues with everlasting impact, include:
- Gifts from Covered Expatriate to U.S. Persons
- Treaty-Benefits Irrevocable Waiver
Even if with Exit Tax Planning, an expatriate can avoid the Net Income Tax Liability and Net Worth covered expatriate tests, they also must be sure that they are tax compliant for the prior 5-years under IRC 877(a)(2)(C).
We will summarize some of the more common Pre-Expatriation 5-Year Tax Compliance issues.
IRC 877(a)(2)(C) Tax Compliance for 5-Years
In accordance 26 U.S.C. 877(a)(2)(C):
(a) Treatment of expatriates. —
(1) In general. –Every nonresident alien individual to whom this section applies and who, within the 10-year period immediately preceding the close of the taxable year, lost United States citizenship shall be taxable for such taxable year in the manner provided in subsection
(b) if the tax imposed pursuant to such subsection (after any reduction in such tax under the last sentence of such subsection) exceeds the tax which, without regard to this section, is imposed pursuant to section 871 .
(2) Individuals subject to this section. —
This section shall apply to any individual if–
(A) the average annual net income tax (as defined in section 38(c)(1) ) of such individual for the period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $124,000,
(B) the net worth of the individual as of such date is $2,000,000 or more, or
(C) such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.
5-Year Tax Compliance
When it comes to 5-year tax compliance, the IRS requires both domestic and offshore tax and reporting compliance.
When a U.S. person has foreign assets, accounts, investment and income, they may have several annual international information reporting form requirements.
Common International Information Reporting Forms
The following is a summary of five (5) common international tax forms.
FinCEN Form 114 (aka FBAR)
The FBAR is used to report “Foreign Financial Accounts.” This includes investments funds, and certain foreign life insurance policies.
The threshold requirements are relatively simple: On any day of the year, if you aggregated (totaled) the maximum balances of all of your foreign accounts, does the total amount exceed $10,000 (USD)?
If it does, then you most likely have to file the form.
The most important thing to remember is you do not need to have more than $10,000 in each account; rather, it is an annual aggregate total of the maximum balances of all the accounts.
*While technically the FBAR is not a U.S. Tax form, it is enforced by the IRS, so non-compliance may result in failing to meet 877(a)(2)(C).
This form is used to report “Specified Foreign Financial Assets.”
There are four main thresholds for individuals is as follows:.
- Single or Filing Separate (in the U.S.): $50,000/$75,000
- Married with a Joint Returns (In the U.S): $100,000/$150,000
- Single or Filing Separate (Outside the U.S.): $200,000/$300,000
- Married with a Joint Returns (Outside the U.S.): $400,000/$600,000
Form 3520 is filed when a person receives a Gift, Inheritance or Trust Distribution from a foreign person, business or trust. There are three (3) main different thresholds:
- Gift from a Foreign Person: More than $100,000.
- Gift from a Foreign Business: More than $16,388.
- Foreign Trust: Various threshold requirements involving foreign Trusts
Form 5471 is filed in any year that you have ownership interest in a foreign corporation, and meet one of the threshold requirements for filling (Categories 1-5). These are general thresholds:
- Category 1: U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965.
- Category 2: Officer or Director of a foreign corporation, with a U.S. Shareholder of at least 10% ownership.
- Category 3: A person acquires stock (or additional stock) that bumps them up to 10% Shareholder.
- Category 4: Control of a foreign corporation for at least 30 days during the accounting period.
- Category 5: 10% ownership of a Controlled Foreign Corporation (CFC).
Form 8621 requires a complex analysis, beyond the scope of this article.
It is required by any person with a PFIC (Passive Foreign Investment Company).
The analysis gets infinitely more complicated if a person has excess distributions. The failure to file the return may result in the statute of limitations remaining open indefinitely.
*There are some exceptions, exclusions, and limitations to filing.
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.?
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