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A New Deal for United States Citizens Who Renounce Their Citizenship
The Internal Revenue Service (“IRS”) on September 6, 2019, announced a major addition to its international voluntary disclosure options; good news for US citizens who have not filed US tax returns but who have recently renounced their citizenship or are contemplating doing so. The announcement raises several questions and places some significant limits on eligibility, but in the short term, the new option should prove beneficial to many non‑compliant “accidental Americans” and former US citizens living outside the United States.
The IRS’s new Relief Procedures for Certain Former Citizens (“Relief Procedures”) offer the most generous incentives for an international voluntary disclosure program in recent memory. In addition to the abatement of penalties currently available to filers under the Streamlined Foreign Offshore Procedures (“Streamlined Program”), the rules essentially forgive up to $25,000 (USD) in tax, carry no interest charges, and offer avoidance of “covered expatriate” status and the corresponding US “exit tax.” Unlike the Streamlined Program, the Relief Procedures also offer a confirmation letter once the IRS has processed the returns and they do not require individuals who do not have US Social Security Numbers (SSNs) to apply for Individual Taxpayer Identification Numbers (ITINs). In short, individuals who previously renounced but did not file the required US tax returns, or those who have been deterred from renouncing by the potential tax costs of getting caught up with their US filings, should seriously consider getting compliant under this new IRS program.
The Relief Procedures are not for everyone. Participants must have renounced on or after March 18, 2010; have a total US federal income tax liability of $25,000 USD or less for the six years ending in the year of renunciation; and have had a net worth of $2 million USD or less at the time of both renunciation and submission of returns. These tax and net worth limits apply regardless of whether the renouncer was eligible for the “dual at birth” exception available under Sec. 877A(g)(B) of the Internal Revenue Code (IRC). Further, only individuals who have not previously filed an IRS Form 1040 may participate; it does not appear that renouncers who previously became compliant under the Streamlined Procedures or the Offshore Voluntary Disclosure Program (“OVDP”) can use the Relief Procedures to claim a refund for tax or interest already paid. The Relief Procedures also are not open to long-term green card holders who terminated that status, and–like the Streamlined Program–are only for taxpayers whose failures to file were due to “non‑willful” conduct, such as negligence, ignorance, or a misunderstanding of the law.
The creation of the Relief Procedures raises some interesting questions. First, the focus on “relief” uniquely for renouncers seems to signal IRS acknowledgment of the burden that the unique US combination of birthright citizenship and citizenship-based taxation can impose on individuals living outside the United States, especially those who may not have even realized they held US citizenship. Second, while the IRS has not specified for how long this new option will remain available, it seems that it is not intended to be open indefinitely; in its FAQs, the IRS notes that it will “make an announcement prior to terminating these procedures.” One wonders if the generous terms of the Relief Procedures, combined with relatively low limits on net worth and tax liability, may signal that the IRS plans to pursue wealthier non‑compliant renouncers in the near term more aggressively, and perhaps all non‑compliant renouncers in the future. Third, the Relief Procedures raise intriguing questions about the limits of IRS powers under the general administrative rule-making authority granted it by Congress under IRC Sec. 7805. Perhaps emboldened by its recent successes in court challenges to the Streamlined Program and empowered by the information now available under the Foreign Account Tax Compliance Act (FATCA), the IRS appears willing to offer increasingly targeted programs to encourage voluntary disclosure of any previous non‑compliance.
In any case, the new Relief Procedures present an excellent opportunity for US citizens who are considering renouncing their citizenship with the right facts to come forward, get compliant, and deal with any lingering US tax obligations at a minimal cost.
To learn more on if renouncing your US citizenship is right for you, consider attending one of our complimentary renunciation seminars taking place across the globe. Click here to find a seminar near you.