Consequences of late filing Form 8854

Mar 24, 2023

US Expatriation Tax: Exit Tax After Renouncing Citizenship

You might already have given up US citizenship and just found out you are required to file form 8854. You might then wonder: What are the consequences of filing form 8854 late? Fear not; this article will explain it all.
Form 8854 allows you to exit the US tax system when you renounce your US citizenship or permanent resident status (as a long-term resident).

A long-term resident has had a green card for at least 8 of the past 15 years.

Obviously, none of this conversation would apply to a green card holder surrendering a green card who has held it for less than 8 out of the past 15 years and is not a long-term resident.

Let’s look at the procedural aspects of this mandatory document:

Why do you need to file Form 8854?
When do you need to file Form 8854?
What happens when you file for 8854 late? 

Legal requirements for data collection

Form 8854 exists because of IRC § 6039G. Form 8854 is an information reporting form. Information returns (tax documents that provide certain information to the IRS but are not accompanied by an actual tax calculation or tax liability report) are common. A W-2 form showing your salary is an example of an information return. Subtitle F of Title 26, United States Code, chapter 61, subchapter A, part III contains all information that Congress has deemed important. Section 6039G of the Internal Revenue Code requires expatriates to file an information return:

Notwithstanding any other provision of law, any individual to whom section 877(b) or 877A applies for any taxable year shall provide a statement for such taxable year which includes the information described in subsection (b).1
IRC § 6039G(a)

Form 8854 was created to collect this data

The IRS (actually the Secretary of the Treasury, the boss of the IRS) has general authority to create tax rules and forms to enforce tax laws:

Every person subject to or required to collect any tax under Subtitle A of the Code shall make such returns or statements as are required by the regulations in this chapter. The return or statement shall include the information required by the applicable regulations or forms.
Reg. § 1.6011-1(a). See also IRC § 6011(a).

Therefore, as long as Form 8854 is “required by the provisions of this chapter,” the IRS can effectively require a taxpayer to file it. Without Form 8854, the IRS cannot perform the work required by IRC § 6039G, and the IRS cannot determine whether the expatriate’s tax return is correct.

What is the deadline?
When not otherwise provided for by this title, the Secretary shall, by regulations, prescribe the time for filing any return, statement, or other document required by this title or regulations.?

Congress gave the IRS discretion to set filing deadlines:

When not otherwise provided for by this title, the Secretary shall, by regulations, prescribe the time for filing any return, statement, or other document required by this title or by regulations.
IRC § 6071(a).

Since Congress has not provided clear guidance regarding the requirement for expatriates to submit information under IRC § 6039G, the IRS has the authority to set filing deadlines. The due date is the same as that for your tax return, as found in the instructions for Form 8854.
Likewise, if you are granted an extension to file your tax return, the extended deadline applies to form 8854.

Who should file Form 8854?

Now that we know why Form 8854 exists and when it must be filed let’s examine who should file it. This question is not as simple as it seems.

Covered Expatriate

The way IRC § 6039G(a) is written is interesting. It defines who must provide information to the IRS:

Notwithstanding any other provision of law, any individual to whom section 877(b) or 877A applies for any taxable year shall provide a statement for such taxable year, which includes the information described in subsection (b).

Who is the individual “to whom” section 877(b) or 877A applies”? For me, the answer is “only covered expatriates.” Follow my reasoning and see if you agree with me:

• Section 877A(a). These are market value valuation rules. They are only available to covered expatriates.

• Section 877A(b).) is an election to defer payment of tax due under section 877A(a). This means that only expatriates can use this deferral mechanism.

• Section 877A(c). This means that certain property types are not taxed under the general mark-to-market rules of section 877A(a) but rather under special rules. Because only covered expatriates are taxed using the mark-to-market rules of section 877A(a), only those who are taxed using these exclusions will also be covered expatriates.

• Section 877A(d). 877A (d) is the first of the exclusion rules. Deferred compensation is taxed subject to specific rules herein. In this subsection, you will find references to the types of individuals—covered expatriates—who are taxed on deferred compensation under these special rules.

• Section 877A(e). This is the second time the mark-to-market tax system excludes “certain tax-deferred accounts.” Likewise, the paragraph addresses how these assets are taxed on protected expatriates.

• Section 877A(f). 877A (f) is the third exemption from the mark-to-market tax system for beneficial interests in non-grantor trusts. Again, these tax rules only apply to protected expats.

• Section 877A(g). These are the definitions.

• Section 877A(h). These are other tax rules, bits and pieces. They can only apply to covered expatriates.

• Section 877A(i). In this subsection, Congress directs the Department of the Treasury to develop regulations interpreting section 877A.

From what I see, IRC §877A (the exit tax rules) do not apply to those who are merely expatriates. Only covered expatriates are people “to whom Section 877A applies”, so only covered expatriates will trigger the requirement built into IRC §6039G to report information to the government on Form 8854.

The same conclusion would be reached by Notice 2009-85, more specifically Section 877A: only covered expatriates must file Form 8854:

Background. Section 301(e) of the Act amended section 6039G to impose a requirement on any individual to whom section 877A (the exit tax rules) applies for any taxable year to provide a statement that includes certain information as provided in section 6039G, including details of the individual’s worldwide income, worldwide assets, and liabilities. The Treasury Department and the IRS intend to issue regulations under section 877A that will require covered expatriates liable for tax under section 877A to report certain information in connection with their expatriation. Until the issuance of such regulations, covered expatriates must report information in compliance with the rules outlined in this notice and any other information that the IRS may require. Emphasis added

Non-covered Expatriate

Notice 2009-85 does not address reporting requirements for Non-covered Expatriates. Silence means nothing but silence. Therefore, we cannot assume that Notice 2009-85 is intended (for covered expatriates only) to relieve Non-covered Expatriates from the requirement to file Form 8854. If my logic is correct, there is no legal requirement for a Non-covered Expatriate to comply with the requirements of IRC § 6039G. (This is probably wrong). However, the IRS has general authority to design forms and collect data necessary to enforce federal tax laws to support the requirement that uncovered expatriates file Form 8854. How does the IRS know whether a taxpayer is a Non-covered Expatriate? Quite simply, enough information must be provided to the IRS via a form for the IRS to understand it. In order to determine whether a taxpayer is a Covered Expatriate or a Non-covered Expatriate, the IRS must know whether various IRC § 877A statutory thresholds are met:

–          Your average tax liability for the five tax years preceding your year of disposition is $165,000 or more (assuming disposition in calendar year 2016) [IRC §§877A(g)(1)( A), 877(a)(2)(A). ); Review procedures. 2017-58, section 3.32]; Or

–          Net worth as of date of emigration is $2,000,000 or more [IRC §§877A(g)(1)(A), 877(a)(2)(B)], using the fair market value on that day; Or

–          Failure to demonstrate full compliance with all federal tax obligations, reporting, and payment obligations for the five years preceding the year of expatriation IRC §§877A(g)(1)(A), 877(a)(2) (VS)].

Part IV of Form 8854 is designed to help the IRS obtain this information. Without it, it would be impossible to determine the exact amount of tax payable by a person who renounces U.S. citizenship or permanent resident status. Therefore, although IRC § 6039G does not specifically require non-covered expatriates to file an information return, the IRS’s general authority to ask you to provide documents justifies the filing requirement for non-covered expatriates.

Late submission of Form 8854

Back to the question of late filing Form 8854. What if you miss a deadline?

Covered expatriate: $10,000 penalty

IRC §6039G is very clear on penalties. If a “person to whom section 877A applies” fails to file Form 8854 or if you file it late:

These people will have to pay a penalty of $10,000 unless it is proven that this failure was due to reasonable cause and not willful negligence.

Non-covered expatriate: No $10,000 Penalty

Non-covered expatriates who fail to file Form 8854 on time will face an interesting loophole in the law. It is unclear what sanctions, if any, might be imposed. If IRC § 6039G applies only to covered expatriates, the $10,000 penalty imposed by IRC § 6039G(c) will apply only to covered expatriates.

Non-covered expatriate: IRC § 6651(a) Penalties?

There is a general penalty rule for failure to file a required tax return. In the event of non-declaration, you will be subject to a penalty of 5% of the tax due per month for each late filing of your tax return, up to 25% of the tax due. 5 The 5% per month penalty (up to 25%) does not apply to information returns required by Chapter 61, Subchapter A, Part III.6 of Title 26, United States Code, Chapter F, found here, IRC § 6039G. Therefore, if Form 8854 is required by IRC § 6039G, the 5% monthly penalty does not apply to Form 8854. But for Non-covered expatriates, my theory is that IRC § 6039G does not require Form 8854.

Does a late filing make you a covered expatriate?

Let’s look at the real risks. Assume the Non-covered expatriate does not file Form 8854 by the deadline. Does this mean that there is an automatic conversion from uncovered expatriate status to covered expatriate status? I do not think so.

IRC §877A(g)(1) is very clear. The only way to become a covered expat is to meet one of the following three conditions (the expat’s net worth as of the previous day, the expat’s average income tax liability over the previous five years, or failure to provide five correct years of taxes)

If congress had wanted to impose covered expatriate status through a late-filed Form 8854, it would have done so. However, the conclusion is uncertain, and certification testing creates some uncertainty for us.

Certification tests

Remember, you are a covered expatriate unless you prove that your life for the past five years has fully complied with all requirements of 26 U.S.C. IRC §§877A(g)(1)(A), 877 (a)(2)(C). Let us believe that IRC § 6011(a) gives the IRS the authority to dictate how this specific obligation (i.e., your duty to prove) must be satisfied in writing. We also believe that IRC § 6071(a) gives the IRS the authority to specify when this document must be filed with the IRS. Section 2.A of Notice 2009-85 states that the IRS has decided to use Form 8854 to satisfy certification testing requirements.

Under Notice 2009-85, a person is a covered expatriate if he or she:

(3) Fails to demonstrate compliance with all U.S. federal income tax obligations for the five taxable years preceding the taxable year, including the date of expatriation, including but not limited to the tax return, employment taxes, gift taxes, information returns (if applicable), and the payment of all obligations relating to tax payable, interest and penalties (“Certification Test”).

The certification must be made on Form 8854 and filed by the due date of the taxpayer’s federal income tax return for the tax year (including the day before the expatriation date)This certification must be made on Form 8854 and must be filed by the due date of the taxpayer’s Federal income tax return for the taxable year that includes the day before the expatriation date.

IRC § 877(a)(2)(C) provides that an expatriate will be classified as a covered expatriate unless the expatriate demonstrates that he or she is in full compliance with his or her tax obligations during the last five years. There is no equally rigid requirement regarding deadlines in the Code.

IRC §877(a)(2)(C) provides that certification is a prerequisite for avoiding covered expatriate status.

Opinion No. 2009-85 appears to require that certification be carried out on time. Of course, the government will demand action within a set time frame. However, Opinion No. 2009-85 did not mention the consequences of non-compliance with the deadline. For the IRS to impose a penalty, legal authorization must be granted. To my knowledge, the Code does not contain any authority that would penalize late certification by permanently changing the status of expatriate to covered expatriate. I think this is just a loophole in the law. No one has yet seriously thought about this problem. We will not have an answer to this question until we have action from Congress (in the form of an amendment to the Internal Revenue Code) or the Treasury Department (in the form of Treasury regulations ).

What is my advice to non-covered expatriates? Please submit Form 8854 late. The government does not have explicit laws that can impose financial penalties or change you from non-covered expatriate to covered expatriate status. Make the most of the fog.

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