Expatriates May File within the IRS Offshore Voluntary Disclosure Program & Streamlined Filing Compliance Procedures

February 19, 2015

There is more to expatriating for U.S. federal tax purposes than relinquishing U.S. citizenship or a U.S. green card.  It is necessary to comply with certain expatriation requirements in order to be cleared of any continuing U.S. federal tax reporting and payment obligations.  The date of expatriation for U.S. federal tax purposes is the later of the date when the U.S. federal Form 8854 expatriation statement is first filed with the IRS or the date when the individual notifies the U.S. Department of State or the U.S. Department of Homeland Security of the expatriating act.  A former U.S. individual continues to be subject to U.S. federal tax reporting requirements on their worldwide income until the Form 8854 is filed with the IRS and the relevant U.S. federal agency is notified of the expatriation.

U.S. federal expatriation tax rules apply to covered expatriates.  The definition of a covered expatriate includes an individual whose net worth is $2 million or more U.S. dollars on the date of expatriation.  A covered expatriate generally must file U.S. federal tax returns for the five years preceding the date of expatriation, including the Form 8854 expatriation statement, and pay any exit tax that is due.  A dual citizen is subject to the expatriation rules, including the exit tax applicable to covered expatriates unless they file the Form 8854 and U.S. federal tax returns for the five years preceding the date of expatriation.

The IRS has certain amnesty programs available for U.S. taxpayers who are delinquent in reporting offshore assets, foreign accounts and any corresponding taxable income.  Currently, the IRS Offshore Voluntary Disclosure Program (OVDP) is open to U.S. taxpayers with willful or intentional foreign reporting delinquencies.  The IRS also has streamlined domestic and foreign offshore filing compliance procedures available for non-willful foreign reporting delinquencies.

Due to the enactment and implementation of the Foreign Account Tax Compliance Act (FATCA), there are many foreign financial institutions that are in the process of transferring information regarding their U.S. account holders either directly or indirectly to the U.S. government.  Individuals who hold U.S. citizenship or U.S. green card status while living in foreign countries are now facing the serious consequences of not complying with U.S. foreign reporting requirements.  The severe penalty risk and exposure have motivated an increasing number of individuals to voluntarily relinquish their U.S. citizenship or U.S. green cards.  In some cases, such individuals may have expatriated for U.S. immigration purposes but their final U.S. federal tax reporting and payment obligations remain unfulfilled

The IRS has advised that it will allow a former U.S. citizen or U.S. green card holder to file their final five years of U.S. federal tax returns, including the Form 8854, and pay any exit tax due within the scope of either the OVDP or the streamlined filing compliance procedures.  This option provides the opportunity for former U.S. citizens and U.S. lawful permanent residents to come into compliance with their U.S. federal tax filing obligations.  The benefit is that the former U.S. individual will be able to travel to the United States on approved visa status for business or personal reasons without having to live in the shadows with the risk of criminal liability, being denied entry into the United States or having U.S. property or assets seized by the U.S. government.

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