Taxpayers who relinquish citizenship without complying with their U.S. tax obligations are subject to the significant tax consequences of the U.S. expatriation tax regime. If you're an expat who has relinquished - or intends to relinquish - your U.S. citizenship but still has U.S. tax filing obligations (including owing back taxes), you'll be relieved to know there are IRS procedures in place that allow you to come into compliance and receive relief for any back taxes owed. Let's take a look:

Background

Intended for anyone who has relinquished or intends to relinquish their United States (U.S.) citizenship, the Relief Procedures for Certain Former Citizens apply to taxpayers who want to come into compliance with their U.S. income tax and reporting obligations and avoid being taxed as a "covered expatriate" under section 877A of the U.S. Internal Revenue Code (IRC). There is no specific termination date for the relief procedures; the IRS will make an announcement prior to terminating these procedures.

Relief Applies Only to Individuals

The Relief Procedures for Certain Former Citizens apply only to individuals (not estates, trusts, corporations, partnerships, and other entities) who:

  • Have not filed U.S. tax returns as U.S. citizens or residents;
  • owe a limited amount of back taxes to the United States; and
  • have net assets of less than $2 million.

Furthermore, only those U.S. taxpayers whose past compliance failures were non-willful can take advantage of these new procedures. Typically, this situation involves someone born in the United States to foreign parents or someone born outside the United States to U.S. citizen parents, who may be unaware of their status as U.S. citizens or the consequences of such status.

The Details

Eligible individuals wishing to use these relief procedures are required to file outstanding U.S. tax returns, including all required schedules and information returns, for the five years preceding and their year of expatriation. Provided that the taxpayer's tax liability does not exceed a total of $25,000 for the six years in question, the taxpayer is relieved from paying U.S. taxes. The purpose of these procedures is to provide relief for certain former citizens. Individuals who qualify for these procedures will not be assessed penalties and interest.

There is no specific termination date associated with the new IRS procedures; however, a closing date will be announced prior to ending the procedures. Also, individuals who relinquished their U.S. citizenship any time after March 18, 2010, are eligible as long as they satisfy the other criteria of the procedures.

Questions?

Relinquishing U.S. citizenship and the tax consequences that follow are serious matters that involve irrevocable decisions. Please contact the office if you have any questions about this topic.