More and more United States citizens are renouncing their US citizenship. Many, thanks to the havoc that FATCA is wreaking on their lives. We understand the gravity of making this decision. These are common questions our clients ask when considering renunciation.
If I expatriate for tax purposes am I a covered expatriate? How does the IRS determine if I am doing this for tax purposes?
What you are referring to is the old rule on what established ‘covered expatriate’ status. This rule was quite terrible as it depended on your subjective intent, something that is difficult to prove or disprove. The new rules are objective tests, which are still complicated.
Did you fail to file an IRS Form 8854?
Do you have more than $2 million in assets?
Is your average tax liability the last 5 years over approximately $162,000?
Answer yes to any of these questions and you are likley a covered expat.
What is so bad about being a covered expat?
You become subject to the exit tax.
If I am subject to the exit tax does it mean that I have to pay an exit tax?
No. There is an approximate $700,000 exemption on the first capital gains. Also, if your basis in your property is high enough you might not have a capital gain the first place.
Also, there are exemptions for certain types of people. You could be a multimillionaire, yet as a covered expat not have to pay a cent. Again, the rules are complicated.
Are there ways to avoid being a covered expat?
Yes. The exit tax is a hybrid of income tax, estate tax and gift taxes. There are exceptions and tools you might be able to exploit to avoid covered expat status. These require flexibility, some creativity and sometimes risk tolerance.
Does the IRS audit form 8854 and covered expats?
Like all current threats and claims coming from the IRS, their bark is worse than their bite. There are very few audits. However, if they do happen to latch on to you, they bite extremely aggressively.
I am Green Card holder living overseas who just realized that I am still a US person. Why should I bother with doing this?
We can’t tell you what the exact risk is for non compliance but we can tell you there is a risk. We also can tell you there is a likely exemption you have to the exit tax; even if you are a covered expats with large amount of assets you could have no exit tax due.
Why should I bother with this at all? Let them come and find me!
When you renounce, your name will be published for all to see, including the IRS. That might attract attention. If the IRS does catch up to you, you won’t have a massive liability ready to explode if you take care of it now.
The IRS does have mutual enforcement agreements with other countries for unpaid taxes.
What should my next step be?
Contact us. We prefer if we can get started planning before a client makes the renunciation act. But even if you already did renounce, the quicker you act the better. Call for our exit tax consultation service and our tax attorneys will give you all the answers you need. Call us at 888-727-8796 or email firstname.lastname@example.org.