The IRS released a new program that allows former U.S. citizens to become compliant with the U.S. tax law without risking any penalties – Relief Procedures for Certain Former Citizens. If you only recently found out about your tax filing obligation to the U.S./your second citizenship and you’re contemplating renouncing it, this program might be for you.
In this article, we will explore relief procedures available to former U.S. citizens, as well as the eligibility requirements for this new amnesty program.
What are the Relief Procedures for Certain Former Citizens the IRS offers?
The United States is one of the only two countries that taxes their citizens and permanent residents (green card holders) on their worldwide income. It means that even if you live and work abroad, you still need to report all your foreign source income and file a U.S. tax return each year.
Unfortunately, this also applies to Accidental Americans – people who weren’t even aware they are considered U.S. citizens according to the United States immigration law. They might have received their U.S. citizenship at birth or through a U.S. citizen parent. The good news is, there is a way to become compliant and avoid all the penalties, charges for late filing, and other less favorable tax implications. And if one chooses to give up their U.S. passport, he/she can do so now too.
Back in 2019, the Internal Revenue Service announced the opening of a new tax amnesty program called Relief Procedures for Certain Former Citizens. Amnesty programs are created to encourage indebted taxpayers to come forward and declare their tax liabilities. In return, they guarantee not to impose punishments on those unpaid taxes, and may even allow criminal offenses to go without prosecution.
- Relief procedures for certain former American citizens is a program designed to address the concerns of accidental Americans. The program is aimed at tax-delinquent U.S. citizens who renounced (or intend to renounce) their American citizenship without facing back taxes and penalties.
- These procedures cover individuals only. Trusts, corporations, partnerships, and other types of taxpayers are not eligible for the amnesty program.
- These procedures are limited to taxpayers who have been out of compliance due to non-willful conduct. Non-willful conduct is a result of negligence, mistake, or a good-faith misunderstanding of the requirements of the law. In short, this means that you didn’t deliberately dodge your federal tax obligations
Relief Available Under Program
If you qualify for the new program, you will not owe any taxes, penalties, or interest to the United States. You will also not be considered a “covered expatriate”, allowing you to avoid the Exit Tax as well.
Here are some of the main benefits that come with the Relief Procedures program:
- Filing delinquent Federal Tax Returns without penalty for not filing previous years
- For people with a CLN (Certificate of Loss of Nationality)
- Social Security Number / TIN not required
- Exempt from paying tax (if under the 25,000-dollar threshold)
Who is eligible to use Relief Procedures?
To qualify for the Relief Procedures program you have to meet all of the following eligibility criteria:
- You have renounced your U.S. citizenship after March 18, 2010., or are intending to do so
- You don’t have a filing history as a U.S. citizen or U.S. resident. Keep in mind, if you filed in the past as a non-resident, you are still eligible for the program.
- You did not exceed the annual threshold for average income tax in IRC 877(a)(2)(A) for the period of 5 tax years prior to the date of your expatriation.
- Your net worth was less than $2,000,000 at the time of expatriation and at the time of making your submission under relief procedures;
- Your total aggregate tax liability does not exceed the 25,000-dollar threshold over the period of 5 tax years prior to your expatriation, and in the year you expatriated.
- You agree to complete and submit all required tax returns for the 6 tax years at issue. This includes all required schedules and information returns.
This is one of those extremely rare occasions when the IRS actually wants you to be a non-filer. Being a non-filer in prior years generally means that you didn’t file an income tax return either. However, if you accidentally filed a Form 1040NR (U.S. Nonresident Alien Income Tax Return) in the past, believing that you are not a U.S. citizen, then it counts as an exception and you are still eligible to use relief procedures.
How to Claim Relief?
You are eligible to use Relief Procedures and you’re wondering what’s next?
Here’s a list of all the documents you will need to gather in order to claim relief:
- A copy of the Certificate of Loss of Nationality (CLN) of the United States. The CLN must be stamped “Approved” by the Department of State.
- Form DS-4083, or a copy of the court order canceling a naturalized citizen’s certificate of naturalization (described in IRC 877A(g)(4)(D))
If you supply Form DS-4083, the date in the field “That: he/she thereby expatriated __self on (Date) ______ under the provisions of Section…” must be after March 18, 2010.
- A copy of your passport or a birth certificate and government-issued identification.
- Final Tax Return (Dual-Status Return). You will still be taxed on your United States-sourced taxable income for your period as a non-resident. You are required to submit the following information returns as well:
– Initial and Annual Expatriation Statement – Form 8854.
– Form 1040 (to declare worldwide income you had prior to the date of expatriation)
– All other forms you might be required to file.
- Five delinquent returns before the tax year of expatriation: Form 1040
On the first page of the documents you prepare for submission, you need to write “Relief for Certain Former Citizens”. You should write this at the top of the page using red ink.
The Internal Revenue Service is aware that some United States embassies and consulates have limited or suspended various services, including processing renunciation of citizenship requests. Make sure to contact the U.S. embassy or consulate in the foreign country of your residence and follow their post-specific instructions.
WHAT NOT TO DO?
In the meantime, do not send partial or incomplete submissions!
If you’re missing any documents and decide to file partial or incomplete submissions, the IRS will process your tax returns using normal processing procedures. This will make you liable for all applicable taxes, penalties, and interest associated with the submission. Also, you should under no circumstances apply for this program if you are not eligible, as that will also trigger normal processing procedures.
A Note on FBAR
FBARs are filed with the Department of Treasury, not the IRS. Although a Report of Foreign Bank and Financial Accounts is not important when it comes to Relief Procedures eligibility, you still need to include FBAR in your submission, if you have an FBAR filing requirement. To avoid FBAR penalties, you will need to file FBARs before your submission (or contemporaneously with your submission).
What happens if you don’t file FBARs? If your submission is selected for examination and you didn’t file your FBARs, you are most likely to become subject to FBAR penalties. To file your FBARs, you will have to use the electronic form available at FinCEN.
Covered Expatriate Status
Relief Procedures for Certain Former U.S. Citizens will help you to come into compliance with your U.S. income tax and reporting obligations without being taxed as a covered expatriate. Being a covered expatriate in the United States can be disadvantageous because it generally means that you will be subject to rules and restrictions that do not apply to other taxpayers, including the Exit Tax, as well as other citizenship issues.
A covered expatriate has to pay a mark-to-market Exit Tax on all their worldwide income at the time of expatriation. Aside from the exit tax, they can also be subject to further restrictions on their ability to claim tax credits and deductions.
The main deterrent of Covered Expatriate Status is that certain transactions that covered expatriates have with United States citizens after their expatriation are still subject to taxation. This is especially true in situations involving covered gifts and bequests to United States citizens — which may result in an immediate income tax consequence.
Who qualifies as a covered expatriate?
There are three different methods commonly used to determine whether a taxpayer qualifies for covered expatriate status: average income tax liability test, net worth test, and certification test.
With some exceptions that are not applicable in the context of these procedures, you qualify as a covered expatriate if you meet one of these requirements:
- Your average annual income tax liability for the 5 years preceding the year of expatriation exceeds a certain amount, known as the “average income tax liability test”
(for example, $161,000 for 2016, $162,000 for 2017, $165,000 for 2018, and $168,000 for 2019)
- Your net worth is at least $2 million on the date of expatriation (“net worth test”)
- You can’t certify that you have met the requirements of United States tax law for the 5 preceding tax years or can’t submit evidence of your compliance (“certification test”). To meet the requirements of this test, you need to file Form 8854 (Initial and Annual Expatriation Statement) with your tax return.
Other Tax Amnesty Programs
As we already explained, IRS amnesty programs are special programs created to encourage taxpayers to come forward and voluntarily disclose any unreported income or unpaid taxes. Aside from relief procedures, there is a number of other Tax Amnesty Programs:
- The most popular is Streamlined Filing Compliance Program. It is an amnesty program the IRS offers to those who did not know about their filing obligation. Taxpayers can become compliant without risking any penalties for failure to file before.
- Internal Revenue Service also offers a voluntary disclosure program for specific tax issues, called Offshore Voluntary Disclosure Program (OVDP). Both programs were set up to motivate taxpayers who didn’t report foreign source income or pay taxes on foreign assets to stay compliant with U.S. tax legislation. As FATCA (Foreign Account Tax Compliance Act) was implemented, and more countries began cooperating with the U.S., the program gained traction and became increasingly popular.
In conclusion, IRS tax amnesty programs give people with tax problems a chance to get rid of their tax burden before matters become more severe. If you are still trying to figure out what sort of federal tax amnesty program you need and the potential consequences of noncompliance, it is important to consult with a tax professional. We provide free tax advice to all. Simply, contact us.
Relief Procedures FAQ
- How long will Relief Procedures be available?
Internal Revenue Service is offering relief procedures without a specific termination date. A formal announcement will be issued prior to the termination of the relief program.
- Will I get a confirmation from the IRS that I have complied with the relief procedures?
You will. Once they review your submission, the Internal Revenue Service will be notifying you that your submission was accepted and complete.
- How long will it take to receive this confirmation?
There is no specific deadline but the Internal Revenue Service will process all notifications as quickly as possible. If you haven’t received any response to your submission, you should wait for at least two months before contacting the IRS.
- How will the eligibility criteria be applied?
Is your net worth above or below the annual threshold? Can you claim Foreign Tax Credit? The IRS has prepared a number of examples and hypothetical situations to help you better understand eligibility criteria and closely answer how these eligibility parameters apply to your particular case.
- Does filing history as a U.S. citizen or permanent resident include filing a Form 1040NR?
No. If you filed a Form 1040NR under the good faith belief that you were not a U.S. citizen, you may use these procedures.
- What if I don’t have a Social Security Number (SSN)?
If you don’t have social security number, you can still make a submission under these procedures. Just leave the boxes blank where your social security number is requested. In case you already applied for ITIN in the past, make sure to include your ITIN on your submission.
- How does the $2,000,000 “net worth” threshold apply to these procedures?
For purposes of these procedures, the $2,000,000 net worth test applies without any exceptions, including the exceptions to covered expatriate citizenship status under IRC 877A(g)(1)(b)
- Do I have to send in a check for the amount shown on the tax returns?
No. If you are eligible to use relief procedures you don’t need to make any payments.
- What if I have withheld taxes for tax years included in my submission?
Don’t worry – your tax withholding won’t be taken into consideration because these procedures primarily focus on aggregate total tax liability.
- If I file under these procedures, will I automatically be placed under examination?
No. If you apply for this program, your tax returns will not automatically undergo the IRS audit, but they may be selected for audit under the existing audit selection processes and verification procedures.
- How does IRS choose who gets audited?
The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income. IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review. In short, the higher your DIF score is, the more likely it is to be selected for an audit.
- Who is considered a United States citizen?
All people born or naturalized in the United States became American citizens at birth (with very limited exceptions for individuals born with diplomatic officers level immunity). This even includes those who are unaware of their citizenship status and federal tax requirements, like people born in the United States to foreign parents, or born outside the United States to U.S. citizens.
- Can minors renounce their United States citizenship and use these relief procedures?
In most cases, no, as several of the potentially expatriating acts listed in INA 349(a) require that the person be at least 18 years old to take an oath of renunciation. Renunciation does not have an age requirement, but it is extremely unlikely that the Department of State would approve a Certificate of Loss of Nationality for a person who takes an oath of renunciation while under the age of 16. Parents may not renounce their children’s U.S. citizenship.