8 Exit Tax Traps When Expatriating from the United States

Each year, thousands of U.S. Taxpayers (U.S. Citizens and Lawful Permanent Residents) formally expatriate from the United States. While some Taxpayers can make a clean break from the U.S., many Taxpayers who are considered to be covered expatriates may become subject to exit taxes at the time they expatriate. For these Taxpayers, sometimes proper planning may help to minimize the exit tax – although due to issues such as gift pullback and U.S. Person status at the time of the gift (and other limitations imposed by the IRS) may minimize any actual benefits unless the preparation begins several years before the expatriation process starts. As one of the few Board-Certified Tax Law Specialist firms that specializes in expatriation, we are approached by many taxpayers each year who all have the same or similar common issues that may have been avoided if the Taxpayer was made aware of the facts before they expatriated.

First, Being Pressured by an Attorney to ‘Act Fast’

You rarely, ever have to act immediately when it comes to expatriation. It is important to speak with multiple attorneys and properly assess your facts and strategies before filing any documents with the IRS.

Attorneys Who Lie About Being “Certified”

Some lawyers will do or say anything to bag clients, including falsifying their own experience and/or making it seem that the Taxpayer must take immediate action to avoid disastrous results. Here are some issues to consider when hiring an attorney for expatriation:

- - Attorneys who claim to be ‘experts.’ Most attorneys with true expertise in an area of tax do not refer to themselves as experts.
  - Attorneys who claim to be ‘certified’ even though they are not Board-Certified by any State Bar in the country (which is required even for Federal Law).
    - - One example is a tax attorney who claims to be a Certified Expert in U.S. Tax, which appears to be a designation the attorney made up and awarded to himself.
      - Another tax attorney claims to be ‘Board-Certified’ because the attorney hired a first year CPA to work at the firm and the CPA is an accountant and now miraculously, the attorney (who is not a CPA) is now referring to himself as a Board-Certified Tax Law Specialist — without taking the rigorous exam or education/referral requirements.

5 Years Tax Compliance (Timing)

The 5-years tax compliant rule requires Taxpayers to be compliant at the time they renounce (for example, filing an I-407 Form or going to the Consulate with DS-4079 – DS-4083 forms) and not when the Taxpayer files their final tax return and Form 8854.

Making an NRA Election in Year 8

If a person is in their eighth year as a Long-Term Lawful Permanent Resident and then files a Form 8833 to make a treaty election to be treated as an NRA, this will sound the ‘expatriation’ alarm:

From IRS Form 8833:

- - “If the taxpayer is a dual-resident taxpayer and a long-term resident, by electing to be treated as a resident of a foreign country for purposes of claiming benefits under an applicable income tax treaty, the taxpayer will be deemed to have expatriated pursuant to section 877A.”

Foreign Pension Plans and Exit Taxes

Exit Tax is not limited to Mark-to-Market gains; it includes many different categories. An important fact is that foreign pension plans do not get treated the same way as a 401K equivalent (eligible deferred compensation plan). Foreign pension plans will usually be treated as ineligible deferred compensation and deemed distributed at exit (subject to the ‘step-up rules’).

Traditional IRA and Exit Taxes

A Traditional IRA loses its benefits at exit. This means the Traditional IRA will be deemed distributed at the time of exit. It does not receive ‘mark-to-market’ treatment and exit tax exemption amount for capital gains is not applicable.

Remaining in the U.S. After Expatriation (Substantial Presence Test)

If you formally expatriate from the U.S. but remain in the United States, you may still be subject to U.S. Tax on worldwide income if you meet the Substantial Presence Test (even if you are on a temporary visa).

Subsequent Form 8854 Filing Requirements

If you maintain certain U.S. assets after you expatriate, you may be required to file subsequent Form 8854 forms after you expatriate. Taxpayers may want to consider closing certain eligible deferred compensation plans when they expatriate to avoid this nuisance.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.

**Need Help Finding an Experienced Offshore Tax Attorney?**

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

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

Contact our firm today for assistance.