Expatriation Tax for Beginners: More than Filing IRS Form 8854

Expatriating From the U.S. is More than Filing IRS Form 8854

Expatriating From the U.S. is More than Filing IRS Form 8854

Each year, thousands of U.S. Citizens and Long-Term Lawful Permanent Residents consider terminating their Lawful Permanent Resident status or renouncing their U.S. citizenship. Technically, this process is referred to as expatriation. The process of expatriating from the United States is complicated and has both immigration and tax components to it. Expatriation requires significant planning and execution before the final tax return and IRS Form 8854 are filed. In recent years, the number of Taxpayers considering expatriation has been on the rise — and unfortunately, this has led to many inexperienced attorneys providing inaccurate advice to Taxpayers about what the expatriation process entails and how to properly prepare for expatriation. Here are six (6) important facts about expatriation that Taxpayers should consider before deciding to expatriate.

Expiration of a Green Card is Not The Same As Expatriation

One common misconception that many Taxpayers understandably have is that if their green card expires, they are no longer considered a U.S. Person for tax purposes — but this is incorrect. In other words, even if a Lawful Permanent Resident’s green card expires it does not mean that they have expatriated and formally terminated their U.S. Person status. The individual is still required to file a final tax return. And, if he is a Long-Term Lawful Permanent Resident, he is also required to file an initial Form 8854 — and possibly an annual Form 8854 as well.

Form 8854 is Not Only For Covered Expatriates

One of the biggest misconceptions about IRS Form 8854 is that it is only required for covered expatriates, but that is inaccurate. An initial Form 8854 is required by U.S. citizens or Long-Term Lawful Permanent Residents whether or not they are covered expatriates. Some Taxpayers who may otherwise be covered expatriates or subject to exit tax may qualify for an exception or an exclusion — but that does not negate them having to file Form 8854.

IRS Form 8854 is Due When the Tax Return is Filed

Form 8854 is due with the final tax return following the expatriating act. For example, if a Taxpayer submits Form I-407 in the current year, then he will file Form 8854 in the subsequent year when he files his tax return. Some Taxpayers are being misguided into filing Form 8854 in the same actual year that they expatriate, which leads to the Taxpayer filing the incorrect form and increasing the chance of an audit.

Before Filing Form 8854 You Need 5 Years of Tax Compliance

Some Taxpayers are only deemed covered expatriates because they cannot certify under penalty of perjury that they have been tax-compliant for the past five years. To avoid this outcome, the Taxpayer must be in tax compliance before starting the immigration expatriation process (which precedes the expatriation tax filing process) such as renouncing U.S. citizenship or filing Form I-407 to terminate their U.S. person status. 

As provided by the IRS:

• • • Date of relinquishment of U.S. citizenship.

      • You are considered to have relinquished your U.S. citizenship (and consequently, have an expatriation date) on the earliest of the following dates.

        1. The date you renounced your U.S. citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a certificate of loss of nationality).

        2. The date you furnished to the State Department a signed statement of your voluntary relinquishment of a U.S. nationality confirming the performance of an expatriating act (provided that the voluntary relinquishment was later confirmed by the issuance of a certificate of loss of nationality).

Annual Reporting for Deferred Compensation Owners

Even after Form 8854 is filed in the year of expatriation, some Taxpayers may have an ongoing Form 8854 filing requirement if they still maintain certain deferred compensation such as a 401K. To avoid this nuisance, some Taxpayers may withdraw their deferred compensation at the time they expatriate and pay U.S. taxes at the time.

Failure to File Form 8854 Leads to Additional 1040 Returns

Until a person files IRS Form 8854, the IRS is unaware that the Taxpayer has formally expatriated. That is because expatriation is a two-pronged process that includes immigration and tax. Unless the Taxpayer files Form 8854, the IRS is not aware that the Taxpayer has already completed the immigration portion. If Form 8854 was not filed, the Taxpayer may become subject to additional Form 1040 returns and still have to pay U.S. taxes on their worldwide income.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and 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.