updated 3:05 PM CEST, Sep 18, 2019

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IRS unveils tax breaks for 'certain former citizens'; tax experts give their verdicts

The U.S. Internal Revenue Service unveiled a set of "new procedures" on Friday that it said would enable "certain" expatriates – a sub-group of "accidental Americans" who have renounced their citizenship, or are considering doing so – to avoid key taxes normally associated with renouncing.

Tax experts said the announcement was highly significant, and would likely be welcomed by many who fit the relatively narrow category of those likely to benefit from it. One suggested the scheme might help the IRS to focus its attention on the "bigger fish" it believes to be lurking in the overseas pond. 

In a statement, the Accidental Americans Association said it welcomed the initiative, but added that it did "not go far enough". 

The "Relief Procedures for Certain Former Citizens" only applies to individuals who have relinquished their citizenship since March 18, 2010, or have not yet done so, who have less than US$2m in net worth, and who have never filed U.S. tax returns as U.S. citizens or residents, the IRS explained in a statement. 

They also must "owe [only] a limited amount of back taxes to the United States." 

The procedures enable such qualifying individuals to come into compliance with their U.S. tax and filing obligations and, "providing that the taxpayer's tax liability does not exceed a total of US$25,000 for the six years in question, the taxpayer is relieved from paying U.S. taxes," the IRS statement continues.

"Individuals who qualify for these procedures will not be assessed penalties and interest."

The IRS statement said the IRS had yet to set a "specific termination date" for the new procedures, and that when such a date was set it would be announced in advance.

An "online webinar" will be hosted in the "near future" to provide taxpayers interested in the new program with further information as well as "practical tips for making a submission," the IRS said.

What it means

In essence, says Toronto-based lawyer John Richardson, the newly-announced IRS "procedures" mean that qualifying individuals "can file, avoid paying the U.S. taxes they would otherwise owe, and NOT be classified as a 'covered expatriate'," a taxpayer classification that the IRS uses to refer to expats whose income, net worth and other characteristics make them liable for the Section 877A Expatriation Tax (which people are subject to when they renounce US citizenship).

"This is of value for a limited (but probably numerically large) group of people," Richardson adds.

"It is also likely to upset those who previously went to the trouble of coming into compliance in order to expatriate, as you'll note that the new procedures are not available to anybody who has ever filed a 1040 [tax return]."

In thoughts on the new IRS Relief Procedures posted yesterday on his blog, www.citizenshipsolutions.ca, Richardson noted that although “nobody outside [the U.S.] Treasury/IRS knows” what the motivations behind it were, his personal speculation is “that this is a political response from the U.S. Treasury to the problems that FATCA [Foreign Account Tax Transparency Act] is causing with foreign banks," not an effort to make life easier for accidental Americans.

"Note that the relinquishment date [mentioned in the IRS’s explanation of its new procedures] – March 18, 2010 – is tied to the date that FATCA was enacted," he added, referring to the date when FATCA, a tax evasion bill currently causing problems for Europe's banks in particular, as reported, was signed into law. 

"In other words... I think that it was conceived to assist foreign banks with the problems they are having with accidental Americans.”

David Treitel, managing director of American Tax Returns Ltd of London, says he’s already taken to calling the “splendid” new IRS procedures for qualifying expatriates “the Boris Amnesty,” because “it is almost certainly designed with the [recently-renounced, New York-born British prime minister] Boris Johnson.”

“Think about it. He renounced after 2010,” Treitel explains. “His name was on the Q4 list in 2016. He may well have paid the taxes he owed at that point, but we don’t know. There’s no evidence one way or the other.

“But everything about his situation would suggest that he would be among those who would potentially benefit.” 

 Treitel adds that "for the general population, this is a good deal." And not just ordinary accidental Americans: "It will, for example, enable Archie – the newborn son of Prince Harry and his American wife Meghan – to renounce easily from his American heritage when he's 18, assuming no one has filed an income tax return for him by then, although it's likely they may have to." 

Treitel notes that some expats who might have trouble qualifying for the new IRS procedure would be those “who live in a country that has a low rate of tax, as this could mean that they owe more than US$25,000 to the U.S. over the applicable six-year period ahead of their initiating the program; or if they’ve sold a house in the last five years in a country like the UK that doesn’t tax the sale of a primary residence. Because if the U.S. recognizes a capital gains tax owing on that sale of more than US$25,000, that would also be a problem.”

Virginia La Torre Jeker, a Dubai-based American expat tax specialist who, like Richardson, is a prolific blogger and commentator on the American expat tax scene, said she had been "surprised by this groundbreaking IRS announcement," and thinks it is linked with a set of "compliance initiatives" the IRS published in July. As reported, what the IRS called its “Six Additional Compliance Campaigns"  were unveiled by the agency's Large Business and International Division. Among the six compliance campaign topics announced at the time were "Post-OVDP (Offshore Voluntary Disclosure Program) and Expatriation. 

"Taken in conjunction with the earlier IRS announcement, that expatriation cases will now be in the spotlight as one of its latest 'campaigns', all indications are that the IRS will be looking closely at expatriates going forward – which may not be an entirely good thing for many!

"I don’t expect much leniency either."

La Torre Jeker says she hadn't initially realized that the new procedures might apply "not only to those who have expatriated, but also to persons who are considering expatriating but who have not yet done so." 

In analyzing this as a real possibility, she noted that while she "can understand how persons considering expatriation may be deemed to have been 'nonwillful' in their past tax noncompliance, she questioned the effects of their newly-obtained knowledge.

“What about the present knowledge?" she asks. 

"The mere fact that they are now planning to expatriate suggests that they obviously can be understood to know about their tax obligations now, if they are considering using the new IRS procedures."

Even if they have this knowledge today, La Torre Jeker notes that "technically they may still meet the procedural criteria if their final tax returns in the expatriation year are filed timely, along with their Form 8854 [Expatriation Statement], and therefore they will be seen to have avoided any wrongdoing.

"Therefore, if done correctly, I think the procedure can possibly work for those who are 'considering' expatriation, assuming they meet all the other requirements."

La Torre Jeker echoes Richardson's observation that some who played by the rules in the past, and paid their taxes as required, may not be pleased to hear that those who didn't step forward earlier are now being "rewarded" for waiting.

"This appears to mean that 'accidentals' who had otherwise met the criteria [to file under the IRS's new procedures], but who had already filed their late tax returns under the IRS's Streamlined procedures and as a result paid taxes on their income, are treated worse for having rectified their tax matters 'sooner rather than later'."

'Big stumbling block' seen

La Torre Jeker says she sees  "the six-year aggregate tax liability of $25,000" as likely to be "a big stumbling block for many" who are considering taking advantage of the new "Relief Procedures".

"This is a very low number for six years’ worth of tax," she notes.

"This cut-off will preclude many from using the procedure, but of course, the IRS had to draw the line someplace.

"The initiative will help a lot of people who are not working, such as  the stay-at-home mom or dad, and who did not make the mistake of jointly owning income-producing properties and assets with their non-U.S. citizen spouse, or living in a so-called 'community property jurisdiction', which would see the assets and income as owned equally by the spouses."

Accidental Americans: 'not enough'

The president of the Paris-based Accidental Americans Association, Fabien Lehagre, said the IRS's just-unveiled procedures for "certain expatriated individuals" were a "step in the right direction", but didn't go far enough.

"The vast majority of accidental Americans, most of whom were born in the U.S. but left at an early age, and have no ties with the country, would not owe US$25,000 in taxes" as detailed in the procedures set out on Friday.

Meanwhile, the IRS measure "ignores the high cost to accidentals of hiring experts to help file tax declarations, or to ex-accidentals and other Americans to find out whether they qualify for the new tax break," Lehagre said.

"It takes no account of the US$2,350 charge for giving up U.S. nationality, and the fact that banks may close the accounts of up to 300,000 Euro-American citizens based in the European Union by Dec. 31, when a moratorium on the requirement for all American citizens abroad to provide a Social Security Number or other Tax Information Number to their banks under the U.S. 2010 Foreign Accounts Tax Compliance Act (FATCA) ends. 

The end of the moratorium means that banks will have to choose between closing the accounts of US citizens with no identification number, which would violate EU law, or maintaining the accounts and paying a 30% withholding tax on all their U.S. dollar transactions. The latter could drive banks to bankruptcy, according to the European Banking Federation.

"The IRS also makes no mention of capital gains taxes to be paid on property sold abroad, as British Prime Minister Boris Johnson found out to his cost in 2015, and is no help to high-earning accidental Americans.

"Most accidentals did not know until very recently that they were liable to make tax declarations to the IRS."

 

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