The U.S. Internal Revenue Service (IRS) recently announced new relief procedures for certain individuals who have relinquished or are considering relinquishing their U.S. citizenship. The relief is available to individuals who relinquish U.S. citizenship (or have already relinquished U.S. citizenship) at any time after March 18, 2010, and who meet other eligibility criteria. It will enable eligible individuals to come into compliance with their U.S. tax and filing obligations and receive relief for unpaid taxes and penalties.
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On September 6, 2019, the U.S. Internal Revenue Service (IRS) announced new relief procedures for certain individuals who have relinquished or are considering relinquishing their U.S. citizenship.1 The relief is available to individuals who relinquish U.S. citizenship (or have already relinquished U.S. citizenship) at any time after March 18, 2010, and who meet other eligibility criteria. It will enable eligible individuals to come into compliance with their U.S. tax and filing obligations and receive relief for unpaid taxes and penalties.
With very limited exceptions, all persons born in the United States acquire U.S. citizenship, and persons born outside the United States to a U.S. citizen parent may acquire U.S. citizenship at birth if the parent meets certain conditions. Individuals who have lived the majority of their lives overseas are sometimes unaware that they are U.S. citizens, and that as U.S. citizens they are required to report and pay U.S. income tax on their worldwide income and to report certain non-U.S. financial assets.
Many individuals seek to relinquish their U.S. citizenship – thereby expatriating – when they become aware of these ongoing tax and reporting obligations. However, doing so without first coming into compliance with U.S. tax obligations may subject them to the U.S. exit tax, and coming into compliance may require paying a large tax bill. These new relief procedures provide a way for certain individuals to relinquish citizenship without triggering the U.S. exit tax or paying any unpaid federal income tax or penalties.
The new relief procedures are only available to taxpayers whose past compliance failures were due to non-willful conduct (i.e., 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) and who relinquished U.S. citizenship after March 18, 2010. Additionally, a taxpayer must meet all of the following eligibility criteria:
1.) Have no filing history as a U.S. citizen or resident;
2.) Have an average annual net income tax liability for the period of five tax years ending before the date of expatriation below a certain annually-adjusted threshold (for 2019, the threshold is $168,000);
3.) Have a net worth less than $2,000,000 at the time of expatriation and at the time of making a submission under these relief procedures;
4.) Have an aggregate total tax liability of $25,000 or less for the five tax years preceding expatriation and in the year of expatriation;
5.) Agree to complete and submit with the relief submission all required federal tax returns for the six tax years at issue, including all required schedules and information returns.
Provided a taxpayer meets the criteria above and files all required federal tax returns for the six tax years at issue (including all required schedules and information returns), the taxpayer is relieved from paying U.S. taxes and will not be assessed penalties and interest. In addition, the taxpayer will not be treated as a “covered expatriate” for purposes of the U.S. exit tax under section 877A of the U.S. Internal Revenue Code.
The above information is not intended to be "written advice concerning one or more Federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 as the content of this document is issued for general informational purposes only.
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