What IRS Relief is Available for Former U.S. Citizens?
There are plenty of circumstances in which a U.S. citizen may want to relinquish their citizenship, but a process this complicated and potentially expensive should not be undertaken lightly. The Internal Revenue Service and U.S. Department of State require someone giving up their citizenship to jump through a number of hoops and pay a variety of fees; add in the tax considerations, and the costs can quickly add up. However, there is some IRS relief available for former U.S. citizens, though it only applies in some cases. To learn more about whether you’re eligible for this relief and how you might obtain it, keep reading as the international tax accountants at US Tax Help discuss this topic in depth.
What Are the IRS Requirements for Former U.S. Citizens?
In addition to the requirements imposed by the State Department – which generally involve making an oath renouncing your citizenship in front of a diplomatic officer at a U.S. consulate overseas – an American taxpayer living outside the United States and looking to give up their citizenship must comply with certain tax laws enforced by the IRS. Whether or not you personally are subject to these obligations will depend on whether you qualify as a “covered expatriate” under U.S. law. This label and its attendant responsibilities apply to you if you meet any of the following criteria:
- Your average income over the five years preceding expatriation is greater than a certain amount, adjusted for inflation; in 2020, this amount is $171,000.
- Your net worth is $2 million or more when expatriating.
- You are unable or unwilling to certify that you have been in full compliance with U.S. tax laws for the past five years using IRS Form 8854, Initial and Annual Expatriation Statement.
If you can show that you have complied with all tax requirements over the last five years, have less than $2 million in assets, and have averaged less than the maximum income limit for the current year, then you are not a covered expatriate and do not have to pay an expatriation tax, although you will need to pay a mandatory fee of $2,350. However, if you do meet one of these standards, then you will face a tax on your assets upon expatriation.
Your last hurdle to becoming a former U.S. citizen – the U.S. expatriation tax – works like this: The IRS will look at the worth of virtually all the assets you own on the date of your expatriation and levy a tax as though you sold all those assets at fair market value on that day, treating all that hypothetical gain as income. The amount that is taxed will be reduced by a certain amount first, though, which varies by year; in 2019, the amount you can subtract from this taxable “income” is $725,000.
IRS Relief Procedures for Former U.S. Citizens
For a certain subset of former U.S. citizens, there are relief procedures available that can allow a person to give up their citizenship without penalty, even if they have failed to submit the legally required tax documents in previous years. These procedures are generally intended for use by U.S. citizens who have lived in another country for the majority of their lives, either because they were born there to American parents or because they were born in the U.S. and moved out of the country soon after. These procedures are only available to those whose past failure to comply was in good faith, meaning that any lapse must have been accidental and non-willful; anyone who purposefully attempted to dodge their tax responsibilities may not use this option.
To be eligible for this type of IRS relief, you must not have any tax filing history as a U.S. citizen or resident, and you cannot exceed the net worth and average income thresholds outlined above. In addition, you must have an aggregate tax liability of no more than $25,000 for the prior five years; this total liability can take into account any credits, deductions, exemptions, or exclusions for which you are eligible, however. Finally, you must submit all federal tax returns for the current year and the last five years. This includes the following information returns:
- Report of Foreign Bank and Financial Accounts (FBAR), which can be submitted electronically through the Financial Crimes Enforcement Network website using FinCEN Form 114
- Form 8938, Statement of Foreign Financial Assets, which only applies to those whose total foreign financial assets exceed a certain amount – generally $200,000 for single taxpayers or $400,000 for married taxpayers filing together
Additional forms will likely need to be filed to claim the foreign tax credit (IRS Form 1116), which allows someone to reduce their obligation by the amount they paid in taxes in another country, or the foreign earned income exclusion (IRS Form 2555), which offers another way to lower your taxable income. Assuming that you have spent the past five years living and working in another country, there is a possibility that you will owe nothing to the IRS during this process, aside from the required $2,350 fee on expatriation. A knowledgeable international tax specialist can help you determine what you might owe and assist you in navigating this complicated process.
Contact US Tax Help Today for Help with IRS Relief for Former U.S. Citizens
Over the past 30 years, Ted Kleinman – head of the team at US Tax Help – has worked with clients around the globe to resolve a wide variety of tax issues. If you are a former U.S. citizen or expat living abroad, contact US Tax Help today to access a wealth of experience and ensure that your expatriation goes smoothly. To schedule a consultation from anywhere in the world, visit US Tax Help online or call us at (541) 362-9127.