Intentional Relief for “Accidental Americans”: Foreign Assets & New Relief Procedures

General Law - Law Blog
October 25, 2019

Intentional Relief for “Accidental Americans”: Foreign Assets & New Relief Procedures

Rajan Basi - Blog Avatar - Law Firm Victoria BC
Rajan Basi

The United States of America taxes on a citizenship basis where a U.S. citizen is required to file U.S. tax returns reporting their worldwide income. However, what is not widely known is that the definition of a U.S. citizen can also include those were born in the U.S. to foreign parents or whose U.S. citizen parents gave birth outside of the United States of America. These individuals are known as “Accidental Americans”.

The Foreign Account Tax Compliance Act (“FATCA”) was implemented as a response to the 2009 UBS off-shore banking scandal. It was found that many Americans were guilty of holding a substantial amount of finances in secret Swiss bank accounts without reporting or paying the associated U.S. taxes. FATCA also implemented a new legal mandate on all foreign financial institutions to figure out who among their clients are considered to be “U.S. Persons”, and an obligation to report this information to the IRS. With this sweeping legislation designed to target those avoiding the tax implications of their offshore holdings, a set of rules were designed to increase tax compliance. This legislation also brought forth increased penalties for failure to comply with the new system.

However, on September 6, 2019, the IRS put forth a new procedure that will aid certain individuals that have chosen to renounce their U.S. citizenship after March 18, 2010. Those who do, have a way to meet the compliance requirements with U.S. tax filing obligations without having to pay any additional taxes, penalties, and without being targeted by fees charged to those individuals who have chosen to renounce their citizenship. The fee is based on the value of a taxpayers property in the U.S. on the day before their expatriation. Because many people who expatriate do so to avoid tax laws regarding their assets, the IRS imposes stiffer tax implication for expatriates. However, the expatriation tax does not apply to individuals who are able to prove to the Secretary of Treasury that the reason for expatriation is not for evading taxes. This would include individuals who have dual citizenship who are choosing to make another country their permanent residence.

These new procedures have been titled the Relief Procedures for Certain Former Citizens (Relief Procedures).

The FATCA Effect

FATCA has resulted in countries worldwide, including Canada, sharing information on financial accounts of U.S. citizens within their borders with the IRS. Foreign financial institutions are required to report directly to the IRS the name, address and account numbers of all clients deemed to be a U.S. person.

There are many U.S. citizens who have made the choice to renounce their U.S. citizenship. Although some have gone this route with the hope of not having to file the appropriate tax obligations, one must fulfill this obligation for U.S. tax filings up until the time of their renunciation.

Are You Eligible For Relief?

The new Relief Procedures for Certain Former Citizens allows individuals who have gone the expatriation route to become tax compliant, offering a confirmation letter from the IRS once the returns are processed. It is important to note that the Relief Procedures are only applicable to individuals. Unlike previous programs, such as the expired Offshore Voluntary Disclosure Initiative and the current Streamline procedure, this new relief structure is solely focused on those who have become expatriates.

These procedures are only available to individuals who meet the following criteria:

  • have renounced or relinquished their U.S. citizenship after March 18, 2010;
  • have not previously filed a U.S. Individual Income Tax Return (Form 1040) as a U.S. Citizen or resident;
  • U.S. citizens with a net worth of less than USD $2 million (at the time of expatriation and at the time of making their submission under these procedures);
  • average annual net income tax liability of the five years preceding the year of expatriation is less than USD $168,000 for 2019 (adjusted for inflation);
  • have an aggregate total tax liability of USD $25,000 or less for the five tax years preceding expatriation plus the year of renunciation (previous six years total);
  • agree to complete and submit all required U.S. federal income and gift tax returns, including all required schedules and information returns, for the five years preceding the year of renunciation plus the year of renunciation; and
  • not have willfully failed to comply with U.S. income tax and information return filing obligations.

If you are an applicable individual, submit the information set out above to the IRS and if you are able meet the requirements, you will no longer be “covered expatriates” under IRC 877A, nor will you be liable for any unpaid taxes and penalties for these years or any previous years;

If an individual has submitted a gift tax return, information return (including Form 8938), or a Report of Foreign Bank and Financial Accounts (FBAR) under the good faith belief that they were not a U.S. citizen, they may still be afforded the Relief Procedures.

If you are thinking of renouncing your U.S. citizenship or believe these issues may effect you, please feel free to contact us through our website, or call us at (250) 385-6004 / (888) 385-6004.

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