Understanding Expatriation Tax Provisions of Internal Revenue Code
International Tax Attorneys Ainer & Fraker, LLP (800) 775-7612 discuss Expatriation Tax Provisions of Internal Revenue Code
The expatriation tax provisions under Internal Revenue Code (IRC) sections 877 and 877A apply to US citizens who have renounced their citizenship and long-term residents (as defined in IRC 877(e)) who have ended their US resident status for federal tax purposes. Different rules apply according to the date upon which you expatriated.
- Expatriation on or after June 16, 2008
- Expatriation after June 3, 2004 and before June 16, 2008
- Expatriation on or before June 3, 2004
- What to do if you haven’t filed a Form 8854
- What to do if you haven’t filed an Income Tax Return
- Significant Penalty Imposed for Not Filing Expatriation Form
Expatriation on or after June 16, 2008
If you expatriated after June 16, 2008, the new IRC 877A expatriation rules apply to you if any of the following statements apply.
- Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($147,000 for 2011, $151,000 for 2012, and $155,000 for 2013).
- Your net worth is $2 million or more on the date of your expatriation or termination of residency.
- You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.
If any of these rules apply, you are a “covered expatriate.”
A citizen will be treated as relinquishing his or her U.S. citizenship on the earliest of four possible dates: (1) the date the individual renounces his or her U.S. nationality before a diplomatic or consular officer of the United States, provided the renunciation is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State; (2) the date the individual furnishes to the U.S. Department of State a signed statement of voluntary relinquishment of U.S. nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)-(4)), provided the voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State; (3) the date the U.S. Department of State issues to the individual a certificate of loss of nationality; or (4) the date a U.S. court cancels a naturalized citizen’s certificate of naturalization.
For long-term residents, as defined in IRC 7701(b)(6), a long-term resident ceases to be a lawful permanent resident if (A) the individual’s status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or if (B) the individual (1) commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, (2) does not waive the benefits of the treaty applicable to residents of the foreign country, and (3) notifies the IRS of such treatment on Forms 8833 and 8854.
IRC 877A imposes a mark-to-market regime, which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date. Any gain arising from the deemed sale is taken into account for the tax year of the deemed sale notwithstanding any other provisions of the Code. Any loss from the deemed sale is taken into account for the tax year of the deemed sale to the extent otherwise provided in the Code, except that the wash sale rules of IRC 1091 do not apply.
The amount that would otherwise be includible in gross income by reason of the deemed sale rule is reduced (but not to below zero) by $600,000, which amount is to be adjusted for inflation for calendar years after 2008 (the “exclusion amount”). For calendar year 2013, the exclusion amount is $663,000. For other years, refer to the Instructions for Form 8854.
The amount of any gain or loss subsequently realized (i.e., pursuant to the disposition of the property) will be adjusted for gain and loss taken into account under the IRC 877A mark-to-market regime, without regard to the exclusion amount. A taxpayer may elect to defer payment of tax attributable to property deemed sold.
For more detailed information regarding the IRC 877A mark-to-market regime, refer to Notice 2009-85.
Form 8854, Initial and Annual Expatriation Information Statement, and its Instructions have been revised to permit individuals to meet the new notification and information reporting requirements. The revised Form 8854 and its instructions also address how individuals should certify (in accordance with the new law) that they have met their federal tax obligations for the five preceding taxable years and what constitutes notification to the Department of State or the Department of Homeland Security.
Note. If you expatriated before June 17, 2008, the expatriation rules in effect at that time continue to apply. See chapter 4 in Publication 519, U.S. Tax Guide for Aliens, for more information.
Expatriation after June 3, 2004 and before June 16, 2008
The American Jobs Creation Act (AJCA) of 2004 amends IRC section 877, which provides for an alternative tax regime for certain, expatriated individuals. Amended IRC 877 creates objective criteria to impose the tax on individuals with an average income tax liability for the 5 prior years of $124,000 for tax year 2004, $127,000 for tax year 2005, $131,000 for 2006, $136,000 for 2007, or $139,000 for 2008, or a net worth of $2,000,000 on the date of expatriation. In addition, it requires individuals to certify to the IRS that they have satisfied all federal tax requirements for the 5 years prior to expatriation and requires annual information reporting for each taxable year during which an individual is subject to the rules of IRC 877.
Further, expatriated individuals will be subject to U.S. tax on their worldwide income for any of the 10 years following expatriation in which they are present in the U.S. for more than 30 days, or 60 days in the case of individuals working in the U.S. for an unrelated employer.
Finally, even if they do not meet the monetary thresholds for imposition of the IRC 877 expatriation tax, IRC 7701(n) provides that individuals will continue to be treated as U.S. citizens or long-term residents for U.S. tax purposes until they have notified both the Internal Revenue Service (via Form 8854) and the Secretary of the Department of State (for former U.S. citizens) or the Department of Homeland Security (for long-term permanent residents) of their expatriation or termination of residency.
Also, for individuals who expatriated after June 3, 2004, and before June 16, 2008, IRC 6039G requires annual information reporting for each taxable year during which such an individual is subject to the rules of IRC 877. Form 8854 is due on the date that the individual’s U.S. income tax return for the taxable year is due or would be due if such a return were required to be filed.
Form 8854, Initial and Annual Expatriation Information Statement, and its Instructions have been revised to permit individuals who expatriated after June 3, 2004, and before June 16, 2008, to meet the new notification and information reporting requirements under IRC 6039G.
- Notice 2005-36, Form 8854 and Expatriation Reporting Rules
- Press Release IR-2005-49 (issued 4/22/05), IRS, Treasury Release Guidance on Expatriation Reporting Requirements
Expatriation on or before June 3, 2004
The expatriation tax provisions (prior to the AJCA amendments) apply to U.S. citizens who have renounced their citizenship and long-term residents who have ended their US residency for tax purposes, if one of the principal purposes of the action is the avoidance of U.S. taxes. You are presumed to have tax avoidance as a principle purpose if:
Your average annual net income tax for the last 5 tax years ending before the date of the expatriation act is more than $124,000, or
Your net worth on the date of the expatriation act is $622,000 or more.
If you meet either of the tests shown above, you may be eligible to request a ruling from the IRS that you did not expatriate to avoid U.S. taxes. You must request this ruling within one year from the date of expatriation. For information that must be included in your ruling request, see Section IV of Notice 97-19. If you receive this ruling, the expatriation tax provisions do not apply.
The expatriation tax applies to the 10-year period following the date of the expatriation action. It is figured in the same way as for those individuals expatriating after June 3, 2004, and before June 17, 2008. Individuals who renounced their US citizenship, or long-term residents that terminated their US residency, for tax purposes on or before June 3, 2004, must file an initial Form 8854, Initial and Annual Expatriation Information Statement. For more detailed information refer to Expatriation Tax in Publication 519, U.S. Tax Guide for Aliens.
Individuals who renounced their U.S. citizenship or terminated their long-term resident status for tax purposes on or before June 3, 2004, must file a Form 8854, Initial and Annual Expatriation Information Statement (PDF), to comply with the notification requirements under IRC 877. For more detailed information refer to Expatriation Tax in Publication 519, U.S. Tax Guide for Aliens.
What to do if you haven’t filed a Form 8854
For more detailed information on how, when and where to file Form 8854, refer to the Instructions for Form 8854.
What to do if you haven’t filed an Income Tax Return
Among the various requirements contained in IRC 877 and 877A, individuals who renounced their US citizenship or terminated their long-term resident status for tax purposes after June 3, 2004 are required to certify to the IRS that they have satisfied all federal tax requirements for the 5 years prior to expatriation. If all federal tax requirements have not been satisfied for the 5 years prior to expatriation, the individual will be subject to the IRC 877 and 877A expatriation tax provisions even if the individual does not meet the monetary thresholds in IRC 877 or 877A.
Individuals who have expatriated should file all tax returns that are due, regardless of whether or not full payment can be made with the return. Depending on an individual’s circumstances, a taxpayer filing late may qualify for a payment plan. All payment plans require continued compliance with all filing and payment responsibilities after the plan is approved.
For more detailed information on what to do if you have not filed your required federal income tax returns, refer to Filing Past Due Tax Returns.
The Internal Revenue Service reminds practitioners that anyone who has expatriated or terminated his U.S. residency status must file Form 8854, Initial and Annual Expatriation Information Statement (PDF). Form 8854 must also be filed to comply with the annual information reporting requirements of IRC 6039G, if the person is subject to the alternative expatriation tax under IRC 877 or IRC 877A. A $10,000 penalty may be imposed for failure to file Form 8854 when required.
IRS is sending notices to expatriates who have not complied with the Form 8854 requirements, including the imposition of the $10,000 penalty where appropriate.
The Instructions for Form 8854 provide details about the filing requirements, related definitions and line-by-line instructions for completing the form. Failure to file or not including all the information required by the form or including incorrect information could lead to a penalty.
- U.S. Citizens and Resident Aliens Abroad
- Form 8854, Initial and Annual Expatriation Information Statement (PDF)
- Instructions for Form 8854 (PDF)