updated 6:36 PM CET, Mar 18, 2023

Comment: Is the new IRS 'Relief Procedures' initiative really better than existing options?

Comment: Is the new IRS 'Relief Procedures' initiative really better than existing options? Photo by Carol M. Highsmith, Library of Congress Catalog

On September 6, the U.S. Internal Revenue Service introduced an enhanced streamline program aimed at enabling “certain former citizens” to extract themselves more easily than has been the case till now, from American citizenships that they never used and typically, only found out about recently...

Here, Kevin E. Packman, a partner with the Holland & Knight law firm in Miami, Florida, who specializes in tax and citizenship issues, considers the merits of the new Relief Procedures.

Some observers saw the new “Relief Procedures for Certain Former Citizens” – which is limited to individuals who haven’t filed U.S. tax returns as U.S. citizens or residents, owe a limited amount of back taxes, and have net assets of less than US$2 million – as the faintest glimmer of an acknowledgement on the IRS’s part that America’s citizenship-based tax regime is unfair to such “accidental Americans”, as growing numbers of such “accidentals” have been arguing.

Among the features of the new Procedures that have attracted the most interest is that it will enable individuals to qualify for the scheme, and go through with it until they are no longer U.S. citizens and are free of outstanding tax obligations to the U.S., without having to get a Social Security number, if they don’t already have one -- unlike prior IRS programs.

Until now, having a U.S. Social Security number, or “Tax Information Number” (TIN) as the authorities sometimes call it, has been an important part of being U.S. tax-compliant.

The IRS's new Relief Procedures for Certain Former Citizens relieves taxpayers of their back tax obligations including income tax, penalties and the exit tax associated with expatriation. Though Social Security numbers may not be required, such individuals must still file six years of tax returns.

This latest IRS initiative has its origins, of course, in the 2010 Foreign Account Tax Compliance Act, which requires all U.S. citizens to file U.S. tax returns annually to the IRS, in which they are obliged to report their worldwide income. 

In addition to the tax return, such taxpayers also often have an obligation to file one of countless information forms reporting the existence of their foreign assets, including but not limited to bank and investment accounts, connection to foreign entities, gifts or inheritances.

Although the law was aimed at cracking down on U.S.-resident tax evaders, it has made life difficult for Americans around the world, who, owing to America's unique citizenship-based tax regime, have been swept up in an aggressive global crackdown on any "U.S. person" who isn't fully up-to-date on their U.S. tax obligations. 

Most tax and advisory industry practitioners who have represented would-be American taxpayers resident overseas are intimately familiar with the difficulties and time associated with helping such taxpayers to get these numbers.

It's interesting to note that the lack of SSNs has typically not prevented many individuals who managed to remain outside of the U.S. tax net  until now from being able to get U.S. passports when they needed to. (U.S. embassy staff are said to have advised passport applicants to write all zeros in place of the social security number on their forms, which apparently did the trick.)

For many U.S. citizens resident overseas – “accidental Americans” as well as expats who found their way abroad for career or personal reasons – it was only after the passage and subsequent implementation of FATCA that they learned of their legal obligation to file U.S. tax returns annually, even though this obligation had always been there. 

FATCA, in other words, was the final nail in the proverbial coffin that delivering the message that the IRS really was serious about seeing to it that Americans paid their taxes.

Perhaps not surprisingly, the arrival of FATCA coincided with a growth in the number of Americans who have been renouncing their citizenships, as has been evident in the quarterly list of names published by the Treasury, as required by law. The rush to renounce post-FATCA was also highlighted in a U.S. Government Accountability Office report in April, which noted a "nearly 178%" increase in the rate of citizenship renunciations between 2011 and 2016.

Meanwhile, as this publication has been reporting for months, Europe’s banks have been warning of the difficulties U.S. taxpayers resident across the EU have been having in maintaining their foreign bank accounts, and expect to have as a grace period that enabled non-U.S.financial institutions not to have to include the Tax Information Numbers of their American clients in their FATCA reports is set to end on Dec. 31. 

In July, for example, the head of the French Banking Federation formally warned France's finance minister that the country's banks could be forced to close as many as 40,000 bank accounts belonging to French citizens with perceived U.S. tax obligations who lack the requisite TINs.

Earlier, in February, the head of the Brussels-based European Banking Federation, which represents some 3,500 banks across Europe, warned U.S. Treasury officials about the problem, and said Europe's banks were increasingly having to choose between “[continuing] to provide financial services, including basic banking services” to these European citizens who are also U.S. citizens, but who lack a TIN – “or stop doing so."

‘Not everyone has
expatriated properly’

But while FATCA may have had a direct result on the number of U.S. citizens residing abroad who have been electing to expatriate, it seems that not everyone who has expatriated has complied with the Internal Revenue Service Code.

This results from the fact that to expatriate, an individual must voluntarily and with intent to relinquish U.S. citizenship, (i) appear in person before a U.S. consular or diplomatic officer, (ii) in a foreign country at a U.S. Embassy or Consulate; and (iii) sign an oath of renunciation.

This approach contrasts with Section 6039G of the Code, which also requires an individual who has given up his or her U.S. citizenship with immigration to file Form 8854, the Initial and Annual Expatriation Statement, to expatriate for tax purposes.

It was against this backdrop, then, that the IRS has finally taken steps to help ameliorate the financial cost and difficulties many accidental Americans have encountered when trying to become compliant with the Code.

The Relief Procedures for Certain Former Citizens (Expat Relief) relieves these “certain” U.S. citizens of having to pay tax, interest, penalties and the exit tax upon relinquishing their citizenship.
In exchange, these taxpayers need to file six years of tax returns along with all required information returns.

The six years is really five years of back tax returns, with the sixth comprising the final return for the year of the expatriation. This sixth year must also include Form 8854, the “Initial and Annual Expatriation Statement”.

The Expat Relief is designed to address two distinct but interrelated issues: (i) a taxpayer’s noncompliance with U.S. income tax return filing requirements as well as (ii) a taxpayer’s failure to file Form 8854.

While the failure to file tax returns leaves the statute of limitation open indefinitely, in which the IRS could assess and collect the tax, the failure to file Form 8854 keeps an individual who relinquished his or her U.S. citizenship for immigration purposes liable for U.S. income tax indefinitely.

The interesting aspect of the Expat Relief is that in some ways it is more limited than the existing options that are already available through the Streamlined Foreign Offshore Procedures and Section 877A.

Who the Expat Relief
is aimed at helping

The Expat Relief is only available to individuals. It does not apply to any U.S. entities (such as businesses or trusts) or to long term permanent residents (i.e., those with green cards). 

Only a certain group of U.S. citizens who expatriated after March 18, 2010 (the date FATCA was signed into law) will be eligible to satisfy the eligibility criteria.

Moreover, such individuals must meet these requirements:

1. No U.S. income tax returns were filed as a U.S. citizen or resident (i.e., no Forms 1040). If an individual filed a Form 1040NR, with the good faith belief that he/she was not a citizen, the Expat Relief is still available.

2. Their average annual net income tax for the five years prior to expatriation must not exceed the annual threshold in Section 877(a)(2)(A). For 2019, the threshold is US$168,000.

Notwithstanding this amount, the Expat Relief states that the individual’s aggregate income tax liability after applying all deductions, exclusions, exemptions, and credits for all six years of income tax returns being filed, must not exceed US$25,000.

Therefore, there does not appear to be any reason to reference the Section 877(a)(2)(A) amount, which is completely irrelevant when the total aggregate tax must not exceed US$25,000.

3. Their net worth must be less than US$2 million on the date of the expatriation, and the date that the Expat Relief submission is filed.

4. Their failure to comply with the Code was due to “non-willful conduct”.

Similar to the manner in which it is defined in the Foreign Streamlined procedures, non-willful conduct means, "conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law."

What is required
to be filed

The following documents need to be sent to the IRS:

1. Loss of Nationality: Expat Relief is premised upon the individual already having relinquished their citizenship under the Immigration and Nationality Act. Therefore, the Expat Relief is only available to individuals who have already expatriated.

As such, they must provide a copy of Form DS-403, which is the Certificate of Loss of Nationality of the United States to the IRS, and the form must be stamped Approved by the Department of State.

This document is only available to those who paid the US$2,350 U.S. consular fee for "Administrative Processing of Request for Certificate of Loss of Nationality."

2. Six years of tax returns: As noted above, five years of back tax returns inclusive of all information returns.

The Expat Relief also indicates that un-filed gift tax returns can be filed through the submission. In the year of expatriation, there needs to be two tax returns.
A Form 1040 reporting worldwide income up through the date of expatriation, and a Form 1040NR.

Both returns should include all required information returns. Form 8854 must accompany the returns in the sixth year.

To assist with the processing, on the top of the first page of each of these documents submitted, the individual should write in red ink, "Relief for Certain Former Citizens."

3. Identification: For identification purposes, the individual must provide a copy of their valid passport or birth certificate and a government issued identification.

These documents need to be mailed to the IRS at the below address, which is the same one that was used for the numerous iterations of the Offshore Voluntary Disclosure Programs:

Internal Revenue Service
3651 South I-H 35
Mail Stop 4301 AUSC
      Attention: Relief for Certain Former Citizens
Austin, Texas 78741

There is no payment required under the terms of the Expat Relief. Thus, no income tax liability, no interest, no late filing or late payment penalties.

Similarly, there is no exit tax liability. IRS, however, indicates that the returns may be selected for audit under the normal section process.

Additionally, IRS states that individuals who fail to meet the criteria and yet submit the above referenced documentation will be liable for all taxes, penalties and interest.

Furthermore, the tax returns will be examined under normal procedures.

Interestingly, unlike the terms of the Foreign or Domestic Streamlined programs, the IRS will acknowledge receipt of the submission after reviewing the submission package, to make certain that it complies with the eligibility criteria.

In conclusion

The Expat Relief assists a certain number of noncompliant U.S. citizens residing abroad. Based upon the eligibility parameters, a successful entrepreneur or retired executive is unlikely to qualify by virtue of the US$2 million net worth threshold. 

Similarly, an individual resident in a low- or no-tax jurisdiction will be unable to benefit from the foreign tax credit, and therefore exceed the aggregate tax liability of US$25,000 over six years.

However, such individuals could still qualify for the foreign earned income exclusion that might help reduce the taxable income to the required threshold.

For any U.S. citizens failing to qualify for the Expat Relief, but who still wish to receive the benefit, all is not lost. The Foreign Streamline program remains available.

Although the IRS does not waive the actual tax in this program, it does waive all penalties.

A taxpayer simply files three years of back tax returns, inclusive of information returns and six years of FBARs. The taxpayer only pays the tax and interest due.

Of course, this program is premised upon the individual’s noncompliance also being based upon non-willful conduct.

Moreover, if such a taxpayer wishes to expatriate, it is possible to do so and avoid the exit tax.

There are two exceptions that the taxpayer can meet so as to avoid being classified as a covered expatriate. But even if one of the exceptions is met, the individual must be compliant with their taxes for the past five years to successfully expatriate and avoid the exit tax.

An individual can avoid being a covered expatriate even without meeting an exception, though. They would need to have a net worth below US$2 million, and their average annual net income tax for the five years prior to expatriation must not exceed the annual threshold in Section 877(a)(2)(A).

As noted above, for 2019, the threshold is US$168,000.

Consequently, it seems to us that the only thing the new Expat Relief Procedures accomplishes that the existing Foreign Streamline program and Section 877A does not, is that it saves the taxpayer the necessity of paying the income tax on the six years of filed tax returns.
Kevin Packman Holland Knight croppedKevin Packman Holland Knight croppedThe article above was adapted from a piece originally published on the website of Miami, Florida’s Holland & Knight LLP, written by one of the firm's partners, Kevin E. Packman, who is chairman of the firm's International Private Wealth and Tax Controversy groups.  The views expressed in the article are for general information purposes only and should not be construed as recommendations or advice for any individual, nor should any action be taken on account of the information presented. Further information may be obtained by contacting Holland & Knight, at www.hklaw.com.