Section 877(e)(2) Foreign Resident Status Pitfalls: IRS Overview

Section 877(e)(2) Foreign Resident Status Pitfalls: IRS Overview

Treaty Tie-Breaker Provision Under 877(e)(2)

Section 877(e)(2) Foreign Resident Status Pitfalls: Expatriation is the formal renouncement/relinquishment process for US Citizens and Long-Term Lawful Permanent Residents, in which either a US Citizen or Long-Term Lawful Permanent Resident (LTR) renounces their US Citizenship or formally relinquishes their green card (more specifically, their “permanent resident status”). When it comes to planning for expatriation, it is important for Taxpayers to have their ducks in a row before you get to the 8-year mark. That is because once a person is considered an LTR it is very hard to undo. Some taxpayers believe they can just start filing Form 8833 going forward — the problem with that strategy is that once a person is considered a LTR, filing a form 8833 is a tripwire that will count as the expatriating act.  The question then becomes whether the Taxpayer can rely on section 877 (e)(2) to show that they should not considered an LTR in a specific tax year(s) — sufficient to avoid LTR taint — and circumvent Covered Expatriate tax status. Presumably, the IRS will require the Taxpayer to have notified the IRS in prior years when their tax returns were filed by previously filing Form 8833. If a Form 8833 was not filed in prior years and the Taxpayer wants to take the position they’re not a LTR — it may become a costly and time-consuming batter. Let’s take a look at Internal Revenue Code section 877 (e)(2):

26 USC IRC 877 (e)(2)

    • (2) Long-Term Resident

      • For purposes of this subsection, the term “long-term resident” means any individual (other than a citizen of the United States) 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 during which the event described in paragraph (1) occurs.

      • For purposes of the preceding sentence, an individual shall not be treated as a lawful permanent resident for any taxable year if such individual is treated as a resident of a foreign country for the taxable year under the provisions of a tax treaty between the United States and the foreign country and does not waive the benefits of such treaty applicable to residents of the foreign country.

No Mention of 8833 in Treaty Tie-Breaker Provision Statute

In the statutory language of section 877 (e)(2) there is no specific requirement that the Taxpayer have filed the Form 8833 in any of those prior years to put the US government on notice that they are claiming to be treated as a foreign resident — but in the most recent version of the IRS Instructions for Form 8854 — the following is provided in terms of establishing a person is a foreign resident and therefore not subject to that specific tax year being included in the “eight of the 15 years rule”

      • You are a lawful permanent resident of the United States if you have been given the privilege, according to U.S. immigration laws, of residing permanently in the United States as an immigrant.

      • You generally have this status if you have been issued an alien registration card, also known as a “green card,” and your green card hasn’t been revoked or judicially or administratively determined to have been abandoned, and you haven’t

        • 1) commenced to be treated as a resident of a foreign country under the provisions of a tax treaty

        • 2) waived the benefits of such treaty, and

        • 3) notified the IRS of such a position on a Form 8833 attached to an income tax return.

Form 8854 Non-Filing Dangers and Treaty Tie-Breaker Provision 

Here’s where the expatriation problem begins.

Presuming a Form 8833 was not filed in prior years, some inexperienced tax attorneys will simply tell clients not to file the Form 8854, because they are taking the “silent position” that they are not considered a LTR. This is generally the case in which the LTR is considered a Covered Expatriate and all the tax planning in the world would still not reduce their exit tax.

The problem them becomes that the IRS may come back and decide that the person was a Long-Term Resident — and significant Exit Tax may be due at a time when the Taxpayer had already “moved on.” The IRS may also want to tack on penalties and interest — and dispute certain valuation appraisals that may not have been done because the taxpayer took the position that they were not subject to exit tax.

If any tax professional attorney (especially the “self-proclaimed experts“) are telling you not to file the Form 8854 because you are not a Long-Term Resident in accordance with 877(e)(2) — even though you never followed the form 8833 in prior years — please be sure to get that assurance in writing from the Attorney — to protect you at a later date.

You should also reach out and speak to some Board-Certified Tax Attorneys to a second or third opinion.

About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and expatriation.

Contact our firm today for assistance.

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