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Expatriation to Avoid U.S. Taxes

Although there is a general misconception that U.S. citizens can relinquish their citizenship in order to escape high U.S. taxes, most of the time this is not true. If you are contemplating such a move, it is essential to understand the basic rules relating to expatriation for purposes of tax avoidance, as the taxes and fines can be costly. Under IRS rules, U.S. citizens who renounce their citizenship, as well as long-term lawful permanent residents (also know as “green card” holders), can still be taxed on their worldwide income provided that statutory exceptions are not met.

Expatriation Tax Rules Explained

U.S. citizens and resident aliens generally must pay income taxes on worldwide income, regardless of where individuals live. Under the Internal Revenue Code (IRC) Sections 877 and 877A, U.S. citizens who renounce their citizenship within ten-years of earning U.S.-source income are still subject to U.S. taxes on such income if citizenship was relinquished for tax avoidance purposes.

In addition, pursuant to IRC Section 877(a)(1), nonresident aliens (generally defined to be individuals who are not citizens or residents of the U.S.) who, within a ten-year period immediately preceding the close of the taxable year, lost U.S, citizenship may also be subject to taxes on their U.S.-source income if the purpose of their expatriation was to avoid U.S. taxes. It is presumed that tax avoidance was the purpose if any of the following criteria are met:

1) the average annual net income tax (as defined in IRC section 38(c)(1)) of such individual for the period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $124,000 (subject to adjustments)

2) the net worth of the individual as of such date is $2,000,000 or more, or

3) such individual fails to certify under penalty of perjury that he has met the relevant requirements of IRC for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.

The tax provisions of IRC Section 877 also apply to long-term lawful permanent residents who cease to be taxed as U.S. residents. A long-term permanent resident is defined to be any individual (other than a citizen of the United States ) who is a lawful permanent resident of the United States in a least 8 taxable years during the 15-years ending with the taxable year in which an individual ceases to be a lawful permanent resident of the U.S. However, generally, an individual shall not be treated as a lawful permanent resident for any taxable year, if such individual is treated as a resident of a foreign country for the taxable year under an income tax treaty between the U.S. and the other country, and does not waive the benefits of such treaty.

Additionally, there are exceptions for certain individuals with dual citizenship, or who are minors.

Form 8854

Individuals will continue to be treated for tax purposes as U.S. citizens or residents until Form 8854 (expatriation notification form) and other required information is filed. There are different rules noted in the form depending upon the date of expatriation. In certain specified cases, Form 8854 must also be filed on an annual basis.

There is a potential $10,000 fine for failure to file the form, if required.

Conclusion

This is a general overview of the taxation rules relating to individuals who expatriate in order to avoid U.S. taxes. There are many other complex issues that may apply, depending upon the circumstances. Are you facing taxes or possible fines relating to expatriation issues? Sherayzen Law Office can assist you with these matters. Call us to set up a consultation with an experienced international tax attorney today!

Voluntary Disclosure Program: Possible Renewal With Modifications

On December 9, 2010, in his prepared remarks before the “23rd Annual Institute on Current Issues in International Taxation IRS” (in Washington, D.C.), Commissioner Doug Shulman hinted that the IRS is considering whether to renew the Voluntary Disclosure Program. The new Voluntary Disclosure Program would have tougher penalties that the original Program that ended in October of 2009, but it would still offer a way for U.S. taxpayers to comply with the U.S. tax laws while avoiding the worst consequences of tax noncompliance.

Here is a relevant excerpt from Commissioner Shuman’s speech:

“Given its success, we are seriously considering another special offshore Voluntary Disclosure program. However, there will be some fundamental differences. Taxpayers will not get the same deal as those who came in under the original program. To be fair to those who came in before the deadline, the penalty – and thus the financial cost to participate – will increase. Let me say too that we expect to make the terms of any new program available to those who have already come in after October 2009 when that program expired. Stay tuned for more details as they become available.”

Voluntary disclosure is usually the best way to bring your tax affair in full compliance with the U.S. tax laws. Moreover, voluntary disclosure process often reveals nonconformity with other U.S. tax compliance requirements, such as FBARs, Form 5471, Form 8865, Canadian RRSP disclosure, et cetera.

Sherayzen Law Office has helped the taxpayers throughout the United States to voluntarily disclose their income and assets, negotiate their tax obligations, and bring their tax affairs in full compliance with U.S. tax laws. At the same time, we have helped our clients to resolve such issues as delinquent FBARs, Form 5471/8865 filings, foreign trust income disclosure, Canadian RRSP reporting, and other relevant tax compliance issues. We will guide you every step of the way, draft the necessary documents and negotiate with the IRS.

Call NOW (612) 790-7024 to discuss your tax issues with an experienced tax attorney! Remember, your consultation is confidential and protected by the attorney-client privilege.

FBAR Penalties

In this essay, I would like to discuss some of the penalties that may be imposed as a result of the failure to file the FBAR even though you were required to do so. In particular, I will focus on three general scenarios describing specific penalties commonly attributed to each of them. The first scenario is where you willfully failed to file the FBAR, or destroyed or otherwise failed to maintain proper records of account, and the IRS learned about it when it launched an investigation. This is the worst type of scenario which carries substantial penalties. The IRS may impose civil penalties of up to the greater of $100,000, or 50 percent of the value of the account at the time of the violation, as well as criminal penalties of up to $500,000, or 10 years of imprisonment, or both.

Another scenario is where you negligently and non-willfully failed to file the FBAR, and the IRS learned about it during an investigation. Unlike the first scenario, there are no criminal penalties for non-willful failure to file the FBAR; only civil penalties of up to $10,000 per each violation (unless there is a pattern of negligence which carries additional civil penalties of no more than $50,000 per any violation). In this situation, you are likely to fare much better, and you may even be able to obtain lower penalties by showing of reasonable cause for the failure to file.

The third scenario is where you non-willfully fail to file the FBAR, accidentally discover your mistake, and come to an attorney to file a delinquent FBAR before the IRS commences its investigation of your finances. This is the most favorable of all scenarios due to the fact that you may qualify for the benefits of a voluntary disclosure program, despite the fact that the position of the IRS regarding civil penalties for voluntarily filed but delinquent FBARs is uncertain following the October 15, 2009 voluntary disclosure deadline. The best strategy for addressing delinquent FBARs, however, varies depending on the facts and circumstances of the particular case.

A word of caution: this discussion focuses solely on the penalties associated with the failure to file the FBAR. This essay does not address the various strategies that may be employed in dealing with the delinquent FBAR filings in the post-October 15, 2009 world, including qualification for the voluntary disclosure program. In certain situations, there may also be other relevant significant tax issues outside of the FBAR realm – the most important of which is non-payment of taxes on undisclosed income by the U.S. taxpayers – which may significantly alter the amount of penalties, interest, and taxes due to the IRS.