Form I-407 & How to Prepare to Give Up Permanent Residency

Form I-407 & How to Prepare to Give Up Permanent Residency

Form I-407 and Expatriation with Examples & Tax Traps 

One of the biggest mistakes U.S. Taxpayers make when they are ready to give up their U.S. Person status is filing the I-407 before they are in tax compliance for the past five (5) years. This is especially important for Taxpayers who are considered Long Term Lawful Permanent Residents (LTRs) — which typically means a Taxpayer who has been a U.S. Lawful Permanent Resident for at least eight of the past 15 years. If Taxpayers file USCIS Form I-407 before they are in tax compliance, they may become a covered expatriate by default. Another important fact to consider is that the Taxpayer does not have to be a Lawful Permanent Resident for a full eight years. If they became an LPR any time during a year within eight of the past 15 years the IRS takes the position that that is sufficient to count towards making them an LTR. Taxpayers who are not in compliance can submit an offshore disclosure before submitting the form I-407 to ensure they are tax-compliant at the time they are ready to expatriate.

First, Why is Being a ‘Covered Expatriate’ Bad?

The reason why being a covered expatriate is bad it’s twofold: first, covered expatriates may become subject to an exit tax when they terminate their U.S. Person status. Second, even if the taxpayer is no longer a U.S. person for tax purposes if they are covered then they are still subject to taxes on various gifts and other transactions even though they are no longer a U.S. person.

Long-Term Lawful Permanent Resident (LTR)

When a Taxpayer is not a Long Term Lawful Permanent Resident, they are not subject to exit tax. While the Taxpayer should get into compliance before filing Form I-407 to avoid other issues (audits, fines, penalties, etc.), there is no exit tax issue.

• • • Example: David has had his green card for five years. David does not want to be a lawful permanent resident any longer, so he wants to file a form I-407. Since David is not considered a long-term resident, he does not have to worry about the exit tax — but if he is not compliant when he files his form I-407 he may be subject to fines and penalties at a future date. In addition, the U.S. government has entered into Mutual Collection Agreements with multiple countries.

    • Example: Dean has had his green card for eight years and has lived overseas for the majority of this time and filed Form 8833. Since Dean lived overseas and made consistent form 8833 treaty elections to be treated as a non-resident alien (NRA) for tax purposes, those years do not count towards the eight years required to be a long term resident. Therefore, dean is not subject to the exit tax rules.

    • Example: Danielle is a lawful permanent resident who has had her green card for 11 years. She has never filed the form 8833 to make a treaty election to be treated as a non-resident alien. Therefore, Danielle must be extra careful before filing her form I-407 to ensure that she is five years tax compliant before she files the form. Otherwise, she may be considered a covered expatriate and be subject to an exit tax even if she does not qualify for the net worth test or the net income average tax liability test.

Covered Expatriate

The IRS requires that long-term lawful permanent residents are five years tax compliant when they terminate their green card — which for most lawful permanent residents means filing a form I407. Since expatriation includes both immigration and tax components it is important to understand the timing distinction:

• • • Example: Brad is a long-term resident who is at his green card for many years and wants to terminate his US person status. On the date that Brad submits his form I-407 he is not taxed compliant for the past five years. He had received some incorrect advice that said he could become tax compliant later when he filed his final tax return – but the IRS has made it clear that the Taxpayer must be in compliance at the time of the expatriating act (filing the Form I-407).

As provided by the IRS:

• • • • • “Date of termination of long-term residency. If you were an LTR, you terminated your lawful permanent residency (and consequently, have an expatriation date) on the earliest of the following dates: 1. The date you voluntarily abandoned your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U.S. consular or immigration officer.”

    • Example: Brent is a long-term resident who is out of tax compliance because he never filed his international information reporting form such as the FBAR, Form 8938 and Form 8621 or reported his foreign income. Before submitting the form I-407, Brent submits to offshore disclosure and gets into five years tax compliance. Once Brent is in tax compliance he files Form I-407 and because he does not meet the net worth test or the net income average tax liability test, brent is not a covered expatriate.

Green Card Expired vs Form I-407

Taxpayers must be aware that just letting a green card expire is not sufficient to terminate U.S. person status (which means the Taxpayer is still subject to U.S. taxes on their worldwide income). To terminate U.S. Person status, the Taxpayer must make an affirmative act to proactively give up his lawful permanent residence status:

• • • Example: Peter is a green card holder who lives overseas and has no intention of returning to the United States. He decides to just let his green card expire instead of sending it back to the U.S. government. Peter receives an audit notice because he has not filed tax returns for several years. To Peter’s dismay, he is still considered a US person for tax purposes because he never proactively gave up his green card. Moreover, at this time when Peter does ultimately file his Form I-407, not only will he be a long term resident but he will also be a covered expatriate — which he would have not been if he had filed these documents earlier.

    • Example: Penelope is a lawful permanent resident who lives outside of the United States. Penelope makes annual treaty elections each year to be treated as a foreign person, non-resident alien for tax purposes. Once her green card expires, Penelope no longer files any tax documents with the IRS – and also did not file a form I-407. That means despite her Green Card expiring, Penelope is still a U.S. person for tax purposes and is approaching the eight year mark of being a long term resident.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.