Smoothing the path to relinquishing your U.S. citizenship

On Sept. 6, the Internal Revenue Service (IRS) announced a new tax compliance program entitled “Relief Procedures for Certain Former (U.S.) Citizens” (Relief Procedures). This new voluntary disclosure program is a welcome addition to the existing “Streamlined Foreign Offshore Procedures” (Streamlined Procedures). Collectively, these voluntary programs provide significant relief to certain U.S. persons that are not in compliance with mandatory U.S. personal income tax filing obligations and associated information returns.

The Relief Procedures are focused exclusively on individuals who have previously relinquished, or intend to relinquish, their U.S. citizenship (also referred to as “expatriating”). These procedures provide an opportunity to submit all required U.S. tax returns and information returns in one step, including delinquent past U.S. tax filings and those required in the year U.S. citizenship is relinquished. Prior to these procedures, individuals who wished to get caught up with the IRS and relinquish their U.S. citizenship had to do so using incremental steps, including the Streamlined Procedures, which could take several years to complete before finally being able to stop filing U.S. tax returns and information returns.

The basic criteria to participate in the Relief Procedures are:

• You must be an individual (the program does not apply to estates of individuals, trusts, corporations or partnerships).
• You must have no history of filing U.S. tax returns as a U.S. citizen or resident (some exceptions apply).
• You must have relinquished your U.S. citizenship after March 18, 2010 (so the program allows for participation by individuals who have already relinquished U.S. citizenship after that date as well as those who intend to renounce but have not done so already).
• Your personal net worth must be less than USD $2,000,000 at the time you expatriate (planning exists to assist in reducing your net worth prior to relinquishing).
• Your aggregate total U.S. tax liability for the five years preceding the year of expatriation plus the year of expatriation (six years in total) must be USD $25,000 or less.
• Your submission must include all required U.S. federal tax returns and information returns for the five years preceding the year of expatriation, and the year of expatriation (six years in total), as well as other documentation as specified in the procedures.
• Your failure to file U.S. tax returns and information returns must be due to “non-willful” conduct.

The eligibility criteria listed above is summary in nature and must be reviewed carefully while contemplating any individual’s specific circumstances to determine eligibility for the Relief Procedures.

The Relief Procedures also offer unique characteristics that make it even easier to comply by adding features not contained in the Streamlined Procedures or previous voluntary disclosure programs. Specifically:

• Social Security Number: Individuals are not required to obtain a U.S. social security number to be able to make a submission under the Relief Procedures. While it may seem trivial, many U.S. citizens that have not lived in the U.S. for most of their life face a very difficult task in attempting to obtain a U.S. social security number.
• Written Confirmation of Completion: Individuals will be notified by the IRS that their submission under the Relief Procedures was received and is complete. Again, this may seem insignificant, but historically the IRS has never provided written communication of any kind to individuals using the Streamlined Procedures unless there was an issue with the information provided.
• Tax Liability of USD $25,000 or less: It would appear that individuals with an aggregate tax liability of USD $25,000 or less (over the six years of tax returns submitted under the Relief Procedures) are not required to pay this tax liability or interest (to be confirmed by the IRS as the wording in the IRS press release is not precise on this matter).

While there are several positive aspects to the Relief Procedures, there are also some limitations. Specifically:

• The Relief Procedures do not apply to Long-Term Green Card holders (individuals who have held a U.S. Green Card for any part of eight years or more).
• Individuals that have submitted U.S. tax returns and information returns to the IRS using other voluntary disclosure programs are not eligible to use the Relief Procedures.
• Individuals that exceed the USD $2,000,000 net worth threshold at the time of expatriation, or the USD $25,000 aggregate income tax limit are not eligible for the Relief Procedures.

The Relief Procedures are new and the level of detail provided by the IRS is somewhat limited. As such, we expect additional guidance to be issued by the IRS as questions and issues arise in the course of applying the procedures in practice. Generally speaking, however, the Relief Procedures are viewed as a positive step taken by the IRS to foster compliance and allow U.S. citizens with little or no ties to the U.S. a reasonable path forward to giving up their U.S. citizenship while also avoiding significant penalties for failure to file U.S. tax returns and related information returns. 

In conjunction with these programs, the IRS continues its ongoing effort to combat what it considers the “misuse” of foreign assets, including the implementation of the Foreign Account Tax Compliance Act (FATCA) which went into effect on July 1, 2014. The FATCA is intended to encourage foreign financial institutions to provide reporting to the IRS with respect to their U.S. account holders, thus assisting with the investigation and identification of U.S. taxpayers that may be avoiding tax filing, reporting and payment obligations.

Factoring in the impact of the FATCA legislation (procedures to facilitate reporting to the IRS are already well under way in Canada) and the continuing attention that the IRS and other U.S. authorities are devoting to the matter of non-compliance, there continues to be numerous reasons that support becoming compliant now, before the above mentioned programs are modified in any unhelpful way – or even worse, disbanded. Consult your local Baker Tilly U.S. tax professional to discuss your U.S. tax compliance requirements, your options for getting caught up with the IRS, and the pros and cons to giving up your U.S. citizenship.