Hold onto your hats because the Internal Revenue Service (IRS) just dropped some major news that could impact “Accidental Americans” looking to renounce their U.S. citizenship. On September 6th, 2019, the IRS unveiled the “Relief Procedures for Certain Former Citizens,” providing a potential lifeline for those navigating the murky waters of expatriation.
Let’s take a walk down memory lane and revisit the constitutional foundation of U.S. citizenship. The 14th Amendment dictates that anyone born or naturalized in the United States automatically becomes a citizen. However, children born abroad to U.S. citizen parents also acquire citizenship, subject to specific conditions outlined in the U.S. Immigration and Nationality Act. Many individuals inadvertently find themselves in this category without fully understanding the tax obligations tied to their citizenship.
Here’s where things get complicated: U.S. citizens, no matter where they reside, are required to report and potentially pay taxes on their worldwide income to the IRS. The introduction of FATCA in 2010 further amplified this by mandating foreign financial institutions to divulge any U.S. citizen clients and report their information to the U.S. government. To relinquish their U.S. citizenship, individuals must pay a fee, take an oath of renunciation before a U.S. diplomatic officer, and certify that they’ve met their federal tax obligations for the expatriation year and the five preceding tax years.
But fear not, for the IRS has introduced Relief Procedures to offer a reprieve for eligible individuals from being labeled as “Covered Expatriates” under IRC 877A. This alternative route aims to ease the tax compliance burden for those seeking to sever ties with their U.S. citizenship.
Here’s a breakdown of who can benefit from these Relief Procedures and the stipulations that accompany them:
- Citizens who expatriated after March 18th, 2010 are eligible.
- Individuals with no U.S. filing history as a citizen or resident.
- Citizens with a net worth below $2 million at the time of expatriation.
- Aggregate tax liability for the expatriation year and five prior years must not exceed $25,000.
- Completion and submission of all federal tax returns for six years, including FBARs, are mandatory.
- Non-wilful conduct led to failure to file required tax returns, gift tax returns, information returns, and FBARs.
- Renouncing U.S. citizenship is an irreversible decision.
The Relief Procedures do not have a specified end date, and the IRS aims to acknowledge receipt and completeness of submissions within two months. Despite the lifeline provided, renouncing U.S. citizenship remains a significant decision, and seeking guidance from a knowledgeable Enrolled Agent or specialized attorney is paramount.
Taking steps towards renouncing U.S. citizenship can be daunting, but with the Relief Procedures in place, individuals facing this decision now have a clearer path forward. Make sure to consult with a tax professional before embarking on this journey.
