How to Get into Tax Compliance and Renounce U.S. Citizenship

Tax Compliance and Renouncing U.S. Citizenship

Being a dual citizen of the United States can come with many unwanted tax and international information reporting ramifications (FBAR and FATCA), especially in situations such as when:

• • • a person earns significant income,

    • has no intention of returning to the United States, or

    • Was unaware they were a U.S. person until recently (Accidental Americans)

When a person comes to the realization that they no longer want to be a U.S. citizen, the formal process is referred to as ‘renouncing’ United States citizenship and/or ‘expatriation.’ One of the biggest problems for taxpayers who are dual citizens and either have not lived in the United States for several years or never lived in the United States and possibly only recently learned that they have U.S. citizenship status is that they first must be tax-compliant in order to file the Form 8854 expatriation statement — or risk automatically becoming a covered expatriate. Let’s walk through the basic processes of what a taxpayer should do if they are a dual citizen of the United States and are seeking to get into compliance and then renounce US citizenship.

How to Get into Tax Compliance and Renounce U.S. Citizenship

First, Worldwide Income

The first important fact to keep in mind when it comes to U.S. taxation is that, unlike most other countries across the globe, the United States follows a worldwide income/citizenship-based taxation model. That means even if a Taxpayer lives overseas, and all of their income is sourced from overseas the United States still taxes them on their worldwide income.

*Taxpayers may be able to reduce or eliminate the tax implications by qualifying for the foreign earned income exclusion and/or foreign tax credits.

Form 8833 Treaty Election Trap

Taxpayers who are not U.S. Citizens but have to do the equivalent of renouncing (aka relinquishing their ‘Green Card’ because they are Long Term Lawful Permanent Residents (LTR) may want to consider filing a Form 8833 treaty election to be treated as a foreign person so that those years are not counted towards the long term residency status.

The biggest hurdle to contend with is that if the person is already a LTR and they file a Form 8833 that will be considered a form of expatriation and may come with unwanted tax consequences.

Exit Tax Planning to Avoid Covered Expatriate Status

When if at all possible, taxpayers should try to plan ahead for their expatriation. That may include preparing certain gifts to family members, charitable donations, or possibly qualifying for the limited dual citizen exception.

Tax Return Filings for 5 Prior Years and Current Year

In order to renounce U.S. citizenship, a taxpayer must confirm under penalty of perjury that they have been tax compliant for five years with their U.S. tax filings. Taxpayers should not submit Form 8854 until they are tax compliant — or else they will automatically be determined to be covered expatriates. Being a covered expatriate may result in an exit tax implication as well as potential future issues with covered gifts and bequests.

International Information Reporting and FBAR

As part of U.S. the tax filing process, taxpayers who have foreign accounts, assets, investments, and income from overseas may have to also file several international information reporting forms to be compliant. While there is the potential argument that filing the FBAR should not be considered — because it is covered under Title 31 Money and Finance and not Title 26 Internal Revenue Code –the other international tax forms such as Forms 3520, 5471, and 8938 do fall under Title 26. If they are not filed properly, the IRS may take the position that the Taxpayer was not tax-compliant when they renounced their U.S. citizenship.

Relief Procedures or Streamlined + 2 Years

In order to get into compliance, there are various programs developed by the Internal Revenue Service. Some of the more common programs include the Streamlined Procedures (SFCP, SFOP, and SDOP), the IRS Voluntary Disclosure Program (IRS VDP), and Reasonable Cause. For taxpayers who have never filed a US tax return, they may qualify for a separate program referred to as the Relief Procedures as well. The latter are special procedures for taxpayers seeking to give up their US person status. The relief procedures have very specific requirements that can be difficult for a taxpayer to meet in order to qualify for the program.

Form 8854 Final Year Tax Return

Even after the Taxpayer renounces their U.S. Citizenship, they still have to file their final tax return along with Form 8854. The Form 8854 Initial and Annual Expatriation Statement. Some taxpayers who maintain US investments after expatriating may have an ongoing form 8854 annual expatriation filing requirement. This is common for taxpayers who may maintain US 401K investments.

Interested in Expatriation from the U.S.?

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