IRS Form 8854 is a critical document that individuals must file when relinquishing their U.S. citizenship or long-term residency. Failure to file this form can lead to steep financial penalties and other legal consequences.
When a U.S. citizen or Permanent Legal Resident voluntarily renounces their citizenship, they will be deemed expatriates by the Internal Revenue Service (IRS). This does not let expatriates off the hook for their tax obligations. Essentially, individuals might be subject to an “exit” tax if their net worth was a certain level. However, exceptions might exist in your case that could save you thousands of dollars.
Call McCormick Tax Law at (888) 973-3503 to get your free case review with our expatriation tax attorneys.
What is IRS Form 8854 and Who is Required to File One?
Internal Revenue Service Form 8854 is a mandatory requirement for U.S. citizens and certain legal permanent residents categorized as “long-term residents.” This form needs to be filed by taxpayers while submitting their tax returns for the year they expatriated from the US.
When a taxpayer is a “covered expatriate,” exiting the U.S. can lead to certain tax implications. Net worth and net income tax value are the two primary tests for determining your responsibilities. However, many U.S. residents are unaware of the income and reporting requirements that they need to fulfill.
Moreover, the U.S. has taken a firm stand on matters related to foreign accounts compliance, which means that a person might become a covered expatriate without even realizing it. Our expatriation tax attorneys can help determine if you fall under this classification. Non-compliance can lead to severe consequences. However, taxpayers can usually rectify their situation by opting for the voluntary disclosure program, which is a safe way to get into compliance with the IRS.
Who Must File Form 8854
If you renounced your U.S. citizenship after June 16, 2008, you will be considered a covered expatriate if any of the following situations apply. Firstly, if your average annual net income tax liability for the five tax years before expatriation is greater than $178,000. Secondly, if your net worth was $2 million or more at the time of your expatriation. Lastly, if you do not certify on Form 8854 that you have fulfilled all of your federal tax obligations for the five tax years prior to your expatriation, you will be deemed a covered expatriate.
To put it simply, when certain U.S. persons relinquish their U.S. citizenship, they become subject to the U.S. exit tax as covered expatriates for tax purposes. The covered expatriate rules are applicable to U.S. citizens and Legal Permanent Residents who are long-term residents. As a result, expatriates are required by the IRS to calculate an exit tax when they leave the U.S. and submit their 1040/1040NR tax return, along with Form 8854.
Expatriating from the United States without filing the required tax forms can result in severe repercussions, including hefty fines for not reporting foreign assets (FBAR penalties), penalties for failing to comply with the Foreign Account Tax Compliance Act (FATCA), taxes on passive foreign investment companies (PFIC), loss of passport, and even imprisonment. Hence, it is crucial to comprehend the tax ramifications of expatriation and fulfill the IRS obligations to steer clear of any legal or financial complications.
How the IRS Determines the Date of Expatriation
There are four possible dates on which a citizen can be considered to have relinquished their U.S. citizenship. The first is when the individual renounces their U.S. nationality before a diplomatic or consular officer of the United States and receives approval from the U.S. Department of State through a certificate of loss of nationality.
It is also considered an act of expatriation when an individual submits a signed statement of voluntary relinquishment of U.S. nationality to the U.S. Department of State, confirming their act of expatriation.
The third is when the U.S. Department of State issues a certificate of loss of nationality to the individual.
Finally, the last way is when a U.S. court cancels the certificate of naturalization of a naturalized citizen.
When an individual who has been granted the privilege of permanent residency loses this status because of revocation or administrative or judicial determination of abandonment, they are no longer considered a lawful permanent resident.
Additionally, if a long-term resident wants to be treated as a resident of a foreign country under a tax treaty between the United States and that country and does not waive the benefits of the treaty applicable to residents of the foreign country, they will be considered to have renounced their resident status. However, the individual must notify the IRS of such treatment on Forms 8854 and 8833.
What Are the Penalties for Failing to File IRS Form 8854?
Failing to file Form 8854 or including incorrect information on the form can result in a penalty of $10,000 for the tax year in question unless it can be demonstrated that the failure was because of reasonable cause and not willful neglect. This is why it is vital to ensure that all the required information is included on the form and accurately reported to avoid this steep financial penalty and potential criminal liability.
Who is Exempt from Filing IRS Form 8854?
In most instances, individuals who hold dual citizenship or are minors at the time of expatriation will not be classified as covered expatriates. However, if they do not submit Form 8854 and confirm that they have met all their federal tax obligations for the five tax years leading up to their expatriation, they will still be deemed covered expatriates.
If you fulfill the following two conditions, you might be eligible for the exception. Firstly, if you were born a U.S. citizen and also a citizen of another country, you still hold citizenship and pay taxes in that other country as of the expatriation date. Secondly, you must also have been a resident of the United States for a maximum of 10 years within the 15-tax-year period ending with the tax year during which the expatriation took place.
To qualify for the exception described above, minors must meet two specific requirements. Firstly, they must have expatriated before turning 18 years old. Additionally, the minor must have been a resident of the United States for no more than ten tax years prior to the expatriation. Meeting these two criteria would allow you to qualify for the exception.
Our Expatriation Tax Attorneys Can Help You Understand Your IRS Form 8854 Filing Requirements
For a free evaluation of your filing requirements, contact our expatriation tax lawyers at McCormick Tax Law today at (888) 973-3503.