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Should You File Prior-Year Tax Returns Before Expatriating?
Filing Prior-Year Tax Returns Before Expatriating
It is not uncommon for US taxpayers to want to expatriate from the United States and formally relinquish their permanent residence status or renounce their US citizenship. This is especially true for taxpayers who may have been residing outside of the United States for many years and have no need for their US person status any longer. Other common scenarios include permanent residents who are considered long-term lawful permanent residents who want to relocate back to their home country and/or Accidental Americans who may have never known they were even considered a US citizen but realized it later in life and have no use for their US person status. When it is finally time to formally expatriate, oftentimes a taxpayer may have many years of noncompliance in terms of having not filed required tax returns, FBARs, or International Information Reporting Forms for one or more years. The question then becomes should the person file prior year tax returns and FBAR before expatriation.
Automatically Become a Covered Expatriate
The first reason why taxpayers should consider filing prior year tax returns (or fixing/amending prior your returns that were not filed correctly) before expatriating is that if the expatriate cannot confirm under penalty of perjury that they have been compliant for the past five years at the time of expatriation — then they are automatically deemed a covered expatriate. This could have significant tax implications — and therefore it is important that before expatriation, the taxpayer get into compliance.
Can Still be Audited for Prior Years
Just because a person is no longer a US person does not mean that the Internal Revenue Service loses the ability to audit them and their tax returns for prior years. In fact, the Internal Revenue Service can still audit taxpayers for years that they are no longer considered a US person, for years in which they were a US person at that time. And, there is no statute of limitations in any year that a tax return was not filed.
Non-Compliance May Result in Significant Penalties
If the Internal Revenue Service determines that the taxpayer was not in compliance at the time the expatriated, then they may issue penalties after the fact and those penalties can be significant –– especially if the taxpayer has international information reporting requirements for various foreign bank accounts, assets, investments, etc. In recent years, the Internal Revenue Service has taken a hard line on international reporting for foreign accounts and assets.
Having the Matter Hanging Over Your Head
The concept behind expatriation is giving up US person status. But, if a person is concerned that they did not follow all the proper steps and procedures for expatriating, then it can become an issue down the line — and cause the expatriate to unnecessarily worry about whether or not they are going to get in trouble with the IRS. Since the person has already expatriated, it is difficult to go back and try to fix it after the fact — and this could lead to fines and penalties. For taxpayers who are out of compliance and want to expatriate — our team has helped thousands of taxpayers get into offshore compliance.
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