A new amnesty programme from the IRS is good news, but only for those who use it correctly, writes Suzanne M. Reisman
Accidental Americans, your voices have been heard! On 6 September this year, the US Internal Revenue Service (IRS) announced a new programme, ‘Relief for Certain Former Citizens’. The programme allows certain individuals to satisfy their tax filing obligations after they expatriate without paying any tax.
This relief is available to US citizens whose noncompliance was not wilful and have:
- Expatriated after 18 March 2010 and received a Certificate of Loss of Nationality or CLN from the U.S. Department of State;
- Never filed any US tax or information returns (including FBARs) as a US person;
- An aggregate US income tax liability of less than $25,000 for the year of expatriation and the prior five years; and
- A new worth of less than $2 million on the date of expatriation, the date of receipt of the CLN and the later date on which a submission is made to the IRS
The IRS acted in response to the plight of ‘accidental Americans’ and Americans born outside of the United States whose ability to conduct routine banking relationships have been adversely impacted by FATCA. In both cases, the tax relief is available to those who expatriated after 18 March 2010 or wish to expatriate in the future.
The new programme enables eligible US citizens to save up to $25,000 and sever ties quickly. It also obviates the need to obtain a social security number.
However, taking advantage of the new amnesty is not without risks.
In particular, individuals who are beneficiaries of trusts or foundations or have interests in other structures should proceed with care.
The statutory US expatriation tax regime imposes an exit tax on ‘covered expatriates’. Individuals who have a net worth of less than $2 million, an average annual tax liability for the five taxable years prior to expatriation of less than the threshold amount ($168,000 in 2019) and who have complied with their US tax liabilities for the five taxable years prior to expatriation, are not covered expatriates.
In addition, certain dual citizens and minors are excepted from the rules applicable to covered expatriates, regardless of net worth or tax liabilities.
If US citizens expatriate using the statutory rules, their tax liabilities are based on their position as of the date of expatriation; changes in factors such as net worth and tax liabilities are irrelevant after that date.
However, individuals who incorrectly predict their position post-expatriation could end up paying a range of taxes, interest and penalties. Take the example of an accidental American who attempts to use the tax relief believing she will meet the criteria on all relevant dates. Due to a change in circumstances (such as inheritance, or a significant change in fx rates), she fails to fulfil the criteria before she submits her CLN and compliance to the IRS.
This could result in the accidental American being subject to the expatriation exit tax regime as well as tax, interest and penalties. The exceptions for dual citizens and certain minors do not apply to this new programme.
As a result, individuals who would be excepted from rules applicable to ‘covered expatriates’ if they had expatriated outside of the programme may be subject to the exit tax regime if they attempt to use the programme and fail.
In my view, the programme is a welcome recognition of the complexities facing US citizens living abroad. And, while, it is not a panacea, it provides much-needed relief to individuals who have nominal tax liabilities, limited assets and have never filed a U.S. tax return.
Suzanne M. Reisman is an international private client and philanthropy lawyer based in London.