Expatriation of Individuals

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IRC § 877 provides guidelines for the taxation of expatriates. As a result of the American Jobs Creation Act of 2004 (hereinafter referred to as the "Act"), IRC § 877 generally applies, without regard to tax motivation, to any former U.S. citizen or long-term resident if:

1) The individual's net worth as of the date of loss of citizenship or termination of long-term resident status equals or exceeds $2,000,000,

2) The individual's average annual net income tax liability for the five preceding taxable years exceeds $124,000 (as adjusted annually for inflation), OR

3) The individual failed to certify under penalty of perjury that all of his or her federal tax obligations for the five preceding taxable years have been met.

The Act also contained new rules for former U.S. citizens or long-term residents who are subject to IRC § 877(a) and who return to the United States during the 10-year period described in IRC § 877(a). Subject to a limited exception for work in the United States for an unrelated employer, a former U.S. citizen or long-term resident will be treated for federal tax purposes as a citizen or resident of the United States, as the case may be, for the taxable year in which the individual is physically present in the United States more than 30 days during the taxable year.

Under IRC § 7701(n), which was also brought about by the Act, an individual who loses U.S. citizenship or terminates long-term resident status will continue to be treated for federal tax purposes as a citizen or long-term resident of the United States, as the case may be, until the individual:

1) Gives notice of an expatriating act or termination of residency (with the requisite intent to relinquish citizenship or terminate such status) to the Department of State or the Department of Homeland Security AND

2) Provides a statement to the IRS in accordance with the revised requirements of IRC § 6039G (“initial expatriation information statement”).

Until such an individual complies with the notification and information reporting requirements of IRC § 7701(n), the individual will continue to be treated as a citizen or long-term resident of the United States for federal tax purposes regardless of the individual's status under U.S. immigration law.

IRC § 6039G also requires annual information reporting for each taxable year during which an individual is subject to the rules of IRC § 877(a). The annual information statement, which requires detailed income, asset and liability information, is due on the date that the individual's U.S. income tax return for the taxable year is due or would be due if such a return were required to be filed.


Special Rules For Individuals Filing Form 8854 Before June 15, 2005 per IRS Notice 2005-36

Form 8854 has been revised so that individuals may comply with the new information reporting requirements in IRC § 7701(n) and 6039G. In particular, Form 8854 has been expanded so that it functions as both the initial expatriation information statement for purposes of IRC § 7701(n) and as the annual expatriation information statement under IRC § 6039G. Revised Form 8854 and its instructions also address how individuals should certify (in accordance with IRC § 877(a)(2)(C)) that they have met their federal tax obligations for the five preceding taxable years and what constitutes notification to the Department of State or the Department of Homeland Security for purposes of IRC § 7701(n).

The revised Form 8854 provides a procedure for individuals who lost U.S. citizenship or terminated long-term resident status after June 3, 2004, to certify that they have satisfied their federal tax obligations within the meaning of section 877(a)(2)(C), to notify, in accordance with IRC § 7701(n), the Department of State or the Department of Homeland Security of their expatriating act or termination of residency, and to file a statement in accordance with IRC § 6039G. Because an individual must provide a statement to the IRS in accordance with IRC § 6039G to meet the requirements of IRC § 7701(n), any individual who loses U.S. citizenship or terminates long-term resident status after June 3, 2004, must file a revised Form 8854 with the IRS. Although there is no due date for the initial filing of revised Form 8854, until an individual that loses U.S. citizenship or terminates long-term resident status completes and files that form with the IRS, the individual will continue to be treated as a citizen or long-term resident of the United States, as the case may be, for federal tax purposes.

Treasury and the IRS recognize that, until the revised Form 8854 was released, individuals who lost U.S. citizenship or terminated long-term resident status after June 3, 2004, did not know how to comply with the notification and information reporting requirements of IRC § 7701(n). Accordingly, if an individual who loses U.S. citizenship or terminates long-term resident status after June 3, 2004, files the revised Form 8854 by June 15, 2005, the IRS will treat that form as if it were filed for purposes of § 7701(n) on the date on which the taxpayer provided the requisite notice to the Department of State or the Department of Homeland Security.

If an individual who loses U.S. citizenship or terminates long-term resident status after June 3, 2004, does not file a revised Form 8854 on or before June 15, 2005, the individual's loss of citizenship or termination of long-term resident status for federal tax purposes will be the later of the date on which a revised Form 8854 is filed with the IRS or the date on which the taxpayer provides the requisite notice to the Department of State or the Department of Homeland Security.

The special rule provided by IRS Notice 2005-36 for Forms 8854 filed before June 15, 2005, applies only to individuals who file Form 8854 as an initial expatriation information statement. The due date for the filing of Form 8854 as an annual expatriation information statement is not affected.

Source: IRS Notice 2005-36

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