Tax Implications of US Expatriation; Internal Revenue Code 877A

I was brought in on another interesting file this week involving a US Citizen seeking expatriation that I was strongly advised to run away from by my mentors and friends simply because it is easy to paint a picture of these types of folks as having a criminal intent and I am not a criminal lawyer (thank you baby Jesus). However it turns out this taxpayer is NOT A CRIMINAL in any regard and that he is legitimately expatriating for medical reasons. Which by the way was probably the most interesting lesson learned.

OTHER COUNTRIES PRACTICE MEDICINE MORE EXPERIMENTALLY THAN THE USA – WHO DA KNEW.

Complicating matters the taxpayer failed to report his foreign bank accounts in the past as a result of poor advice and has subsequently been hit with multiple hurdles to overcome as part of expatriation. The most difficult of which is stating under penalty of perjury that he has compliantly (in all regards) filed tax returns for the 5 year period prior to renouncing US Citizenship, including FBAR.

The tax implications of expatriation are for the most part governed by Internal Revenue Code Sections 877, 877A, and to a significantly lesser extent 6039G, and 7701(n).I studied every single word in an effort to apply the code to an interesting real life scenario. The following are the the 10 most salient resonating points gleaned:

1. IRS Form 8854 – US Expatriation Statement has no provisions for people expatriating in the current year. This is validated via IRS Form 8854 Instructions.
2. A Certificate of Loss of Nationality is a necessary component of filing IRS Form 8854. There is a LOT of chatter in the blog-sphere that the State Department via the White House has been instructed to not issue this certificate until next year for any current year applicants. The State Department denied this when I called and asked. Point of fact though I am quite active on line and not a single tax practitioner engaged has successfully processed any IRS Form 8854 in the current tax year.
3. When you renounce US Citizenship you must attest under penalty of perjury that you have reported all assets including accounts outside of the US with reporting requirements to the US Treasury under the FBAR regulations.
4. FBAR reporting is done electronically via www.fincen.gov and goes back 6 years. Based on what is known to date generally speaking you are best served simply filing your delinquent 114 forms to FinCen satisfying the FBAR requirement vs. entering the Offshore Voluntary Disclosure Initiative (OVDI) or the Stream lined settlement process IF AND ONLY IF YOU ARE CONFIDENT THAT YOU ARE NOT UNDER EXAMINATION BY THE IRS, JUSTICE DEPARTMENT OR THE US TREASURY AND YOU REPORTED ALL INCOME INCLUDING FOREIGN INCOME ON IRS FORM 1040.
5. Point 4 is based on a series of interviews conducted with the Treasury Department. Their phone operators ARE instructed to tell callers that if taxpayers are not under investigation by the IRS, JUSTICE DEPARTMENT or the US Treasury and they reported all world wide income all that they really need to do is file the delinquent FBARs going back 6 years and declaring as part of the process ‘unawareness of the filing requirement’ to avoid penalization, which is actually one of several explanation items in a pull down description field on the web site.
6. The problem is that the IRS Criminal Investigation (CI) function will not disclose if you are under investigation unless specifically asked.
7. So the issue becomes, either you are fully confident that you are not under investigation or you endure the potential risks of actually inquiring with IRS CI as to whether you are under investigation subsequently drawing attention to yourself.
8. Before filing the FBAR 114 form electronically with the US Treasury you will need to amend taxes going back 6 years to account for ALL previously unreported income so that you can assert full defensible compliance with previous reporting obligations.
9. This is where it gets critical as the IRS seems to be intent on quickly allowing simple oversights in under reporting of foreign financial income to rise to the threshold of being criminal in nature. Why? Because technically most any pinhead in international tax law can effectively argue that most any under reporting oversight has a criminal intent component and by the way IT IS THE LAW. Coming forth voluntarily if you are not under investigation and filing amended income tax returns and FBAR reporting going back 6 years is the absolute best course of action. Generally speaking the streamlined application seems to be the solution if you qualify as a ‘quiet disclosure’ (filing amended returns before filing 114 form) seems like playing Russian Roulette with the Examination function.
10. Tread lightly as this can get seriously complicated very quickly but on the same note recognize that this is relatively new turf for most all tax practitioners regardless of professional designation. I have heard stories about $1000/hour New York punks so young and stupid that their bravado inappropriately led delinquent taxpayers into the OVDI costing millions of dollars paid in avoidable penalties. The point is don’t be a chump.