San Francisco, CA Hyatt Regency September 11

Transcrição

International Update:
Part A:
The New Exit Tax: Not Just Crossing a Border, But a New Frontier.
Part B:
The Proposed Form 1041NR: Foreign Fiduciary Income Tax
Reporting.
Part C:
Increased Enforcement of Foreign Reporting.
American Bar Association
Section of Taxation and Section of Real Property, Trust & Estate Law, Trust &
Estate Division
San Francisco, CA Hyatt Regency
September 11-13, 2008
By Leigh-Alexandra Basha
Holland & Knight LLP
McLean, Virginia
703-720-8600
Part A:
I.
The New Exit Tax: Not Just Crossing a Border, but a New Frontier.
Introduction
a.
While some foreigners clamor for a coveted US Green Card to have access
to the land of opportunity, others are racing to turn them in to the nearest US
consulate. All this may come to a screeching halt with the passage of the Exit
Tax as revealed in the Heroes Earnings Assistance and Relief Tax Act of 2008
(the "HEART Act") especially with its draconian features—not merely the markto-market tax, but the succession tax imposed without time limitation for gifts and
bequests from a covered expatriate as well as other harsh provisions.
b.
In 1998, 232 US citizens expatriated; in 2007, that number nearly doubled
to 432 expatriates. Green card holders relinquishing their "cartes vertes" are not
published. In just looking at expatriating US citizens, there are relatively few.
However, the high profile ones get the attention and make it seems as if there is a
mass exodus to avoid US taxation through expatriation. In the last 12 years,
Congress has retooled the expatriation tax provisions three times since the
alternative tax regime was first introduced by the Foreign Investors Tax Act of
1966 ("FITA"): first, by the Health Insurance Portability and Accountability Act
of 1996 ("HIPAA"), then by the American Jobs Creation Act of 2004 ("AJCA"),
and now by the Heroes Earnings Assistance and Relief Tax Act of 2008 (the
"HEART Act"). So what are the old and new rules our clients and we must now
contend with? Clearly, for every client, we must ask if he or she was ever a
former US citizen or a former long term green card holder and when that status
changed, and then apply the appropriate set of rules in effect at the time of
"expatriation". The following is a survey of the four sets of rules that may apply,
depending on the date of expatriation.
II:
Foreign Investors Tax Act of 1966 (FITA) covering expatriates from 1966February 5,1995
a.
FITA added sections 877 and 2107 to and amended 2501 of the Code.
Section 877 imposed tax on the US source income of former US citizens who
expatriated for a principal purpose of tax avoidance for ten (10) years following
expatriation. The taxpayer had to make two calculations, one applying the rate
applicable to nonresident aliens who were not former US citizens and another at
the rates applicable to US citizens, and then pay the higher of the two
calculations. This method was known as the "alternative tax" regime. US source
income was defined to include gains from the sale or exchange of property (other
than stock or debt obligations) located in the US and also gains from the sale or
exchange of stock or debt obligations issued by domestic corporations or other US
persons.
i Leigh-Alexandra Basha 2008
b.
FITA also added section 2107 which imposed tax on an expatriate who
was subject to section 877 and died within the 10 years following expatriation. In
such a case, the expatriate's US situs property included shares held at death
comprising a 10% or greater direct or indirect interest in a foreign corporation
considered owned more than 50% by the decedent directly, indirectly or
constructively in proportion to the foreign corporation's US situated property.
c.
FITA also amended section 2501 (a) (3) which imposed US gift tax on an
expatriate during the 10 years following expatriation on expanded categories of
US situs property.
d.
The key aspect of FITA was its imposition of the alternative tax regime on
former US citizens who expatriated with a principal purpose of tax avoidance.
The burden of proof was on the expatriate (or his or her personal representative)
to prove the contrary. This test was very subjective and caused much uncertainty.
III.
The Health Insurance Portability and Accountability Act (HIPAA) Covering
expatriates from February 6,1995 - June 2, 2004
a.
HIPAA was generally applicable to expatriations on or after February 6,
1995. It introduced five (5) main changes.
b.
The key change introduced by this law was the expanded category of
expatriates to include "long term resident aliens" defined as lawful permanent
residents or green card holders who held such status for eight out of the 15 years
prior to expatriation.
c.
The second key element of HIPAA was that it introduced the concept of
"presumptive tax avoidance purpose" based on objective factors relating to
income, and net worth. Tax avoidance was presumed if an expatriating
individual's net average US income tax liability in the five years preceding
expatriation was $100,000 or more (the "income tax liability test"), or if the
expatriating individual's net worth was more than $500,000 (the "net worth test").
An expatriating individual who fell within certain categories was able to seek a
revenue ruling declaring that the principal purpose of his or her expatriation was
not tax avoidance. If the Service was not able to make a determination that the
expatriating individual was not expatriating with tax avoidance as the principal
purpose, it could issue a limited ruling , (a "complete good faith ruling"), merely
lifting the presumption, but leaving the taxpayer vulnerable to subsequent
examination.
d.
HIPAA also expanded the categories of income considered to be US
source income. These expanded categories included gains and income derived
from former controlled foreign corporations ("CFCs") considered controlled by
the expatriate within two years prior to expatriation if realized with the 10 year
period following expatriation.
) Leigh-Alexandra Basha 2008
e.
HIPAA also required limited information reporting for expatriates,
including filing an information statement, and a statement of net worth to the
Department of State when disclosing an expatriation act. A long term resident
also was required to provide the same statement to the IRS with his or her tax
return for the year of expatriation. An expatriate was required to file a US tax
return including a worldwide income statement for the 10 years following his or
her expatriation in which he or she had US source income subject to tax. HIPAA
also required that DOS report a list of expatriating US citizens by furnishing a
copy of the Certificate of Loss of Nationality to the IRS so that the names could
be published in the Federal Register.
f.
HIPAA addressed the treaty override provisions. HIPAA was intended to
override inconsistent provisions of pre existing income and estate and gift tax
treaties for 10 years following passage of HIPAA or until August 21, 2006. In
negotiating treaties since HIPAA, Treasury has in large measure added language
to treaties which excludes expatriating US citizens and former long term green
card holders from treaty benefits under the saving clause.
IV.
American Jobs Creation Act of 2004 ("AJCA") which applies to individuals
who expatriate June 3, 2004- June 16, 2008
a.
Generally, if a person is considered an "expatriating individual," he or she
is subject to the alternative income tax regime of Section 877 for the period often
(10) tax years following the date of expatriation on his U.S. source income.
Under the alternative tax regime, certain items that are tax-free under the general
rules applicable to nonresidents are reclassified as taxable. In addition, items that
are otherwise taxable to nonresidents at more favorable rates are taxed at the
higher rates that apply to residents.
b.
Under AJCA, the expatriation rules no longer linked to tax motivation
and provide an opportunity for avoiding U.S. tax following the ten-year period of
time and even during the ten-year period of time investments could be structured
to minimize U.S. tax exposure. With respect to a more unplanned event like
death, life insurance for that ten-year period of time could help buffer the impact.
Further, if an individual expatriates, he or she could later make a gift or bequest to
a U.S. individual or entity without creating a tax liability for the recipient and
without incurring a gift or estate tax if he or she used non-U.S. situs assets.
1.
The Jobs Act also made several changes
a.
The amendments to Section 877 under the Jobs Act
eliminated the subjective test for determining if an individual is
expatriating with the principal purpose of avoiding U.S. federal
income tax, gift and estate tax. As a result, expatriation ruling
requests based on certain facts and circumstances were no longer
excepted by the IRS.
b.
AJCA increased the thresholds for the determination of an
expatriating individual and added a third test. The new rules apply
to U.S. citizens and long term green card holders defined as
holders of a green card for at least 8 out of the 15 years prior to
expatriation. A U.S. citizen or long term green card holder would
be considered an "expatriating individual" unless the taxpayer
meets the following requirements which exempt an expatriating
individual from Section 877:
The taxpayer's average annual net income tax liability for the five (5)
preceding years is not more than $124,000 (indexed for inflation), and
The taxpayer's worldwide net worth does not exceed $2 million (not
indexed for inflation), and
The taxpayer certifies under penalty of perjury that he or she has
complied with U.S. tax laws for the prior five (5) years, and provides
evidence of such compliance.
c.
If the taxpayer failed to pass all three requirements, then he
or she would be considered an "expatriating individual" under
Section 877.
d.
AJCA changed the definition of an expatriating individual.
Code § 877 provides narrow exceptions to individuals who were
dual nationals at birth having no "substantial contacts" with the
U.S. and minors expatriating before age 18 1A who were born in the
U.S. to noncitizen parents and who had not been in the U.S. more
than 30 days in any of the 10 years preceding expatriation.
e.
AJCA added a short term residency rule. If an expatriating
individual subject to Section 877 is physically present in the U.S.
for more than 30 days in any calendar year during the ten-year
period, such individual will be treated as a U.S. citizen or resident
for such taxable year and will be subject to U.S. federal income tax
on his worldwide income. The 30-day limit will be monitored by
the IRS and its review of the annual tax return in Section 603 9-G
"Statement required of the Expatriating Individual." There is a
narrow exception to the 30-day rule if the expatriating individual is
present in the U.S. for an unrelated employer. However, only 30
days may be disregarded for this purpose, so the employment
exception will not avoid Section 877 for periods of extended
presence in the U.S.
f.
AJCA added a new definition for the date of expatriation
under section 770l(n). In order to start the ten-year clock ticking
> Leigh-Alexandra Basha 2008
under Section 877, the expatriating individual must provide at the
time of expatriation extensive and detailed information of his or
her tax and wealth situation as required under Internal Revenue
Code Section 6039-G. Failure to provide all requested information
triggers a $10,000 penalty. If the taxpayer is present in the U.S.
for more than 30 days in any in any calendar year during the tenyear period (so that the taxpayer is taxed as a U.S. resident for such
year), this would not restart the ten-year clock for purposes of
Section 877.
g.
How Does One Expatriate?
1.
Firstly, the taxpayer should be certain to have
another satisfactory other nationality.
2.
Secondly, the taxpayer should be sure that all
current tax filings are up to date for the preceding five
years.
3.
Thirdly, the taxpayer should book an appointment
with counselor office (Note: Some counselor's offices
have a several month waiting period).
4.
Fourthly, an individual continues to be treated as a
U.S. citizen or a long-term resident for U.S. federal tax
purposes until he gives notice of an expatriating act or
termination of residency (with the requisite intent to
relinquish citizenship or terminate residency) to the
Secretary of State (DOS) or the Secretary of Homeland
Security (DHS), respectively, provides a statement in
accordance with the reporting rules in section 603 9G, and
files Form 8854, Annual Expatriation Information
Statement, as revised in May 2005. The existing practice
for taking an oath of renunciation is to file one original
with the Counselor Officer at the Embassy outside of the
United States and the second with the IRS Service Center
in Philadelphia.
h.
Filing Requirements
1.
For those individuals who are subject to the
alternative tax regime, in each of the ten years following
citizenship relinquishment or residency termination, they
must file an annual return even if no federal income tax is
due. The return includes certain information on the
permanent home of the individual, the individual's country
of residence, the number of days the individual was present
in the United States for the year and detailed information
about the individual's income and asset that are subject to
the alternative tax regime. The penalty for failure to file or
correctly include all required information is $5,000. It is
not clear whether such an individual must also file the nontax FBAR forms.
2.
AJCA strengthened the filing and reporting
requirements. Expatriating individuals subject to Section
877 were required to file a U.S. federal return and Section
603 9-G statement for every year during the ten-year period
following his or her expatriation, even if no U.S. federal tax
is due. The annual return requirement is satisfied by filing
Form 8854, as revised. However, if the expatriate also has
U.S. source income to report, he or she must file 1040 NR
(and attach Form 8854).
i.
AJCA includes special estate tax rules applicable to
expatriating individuals subject to the alternative tax regime under
Section 877, if the individual dies within the ten-year period
following expatriation. Under these rules, certain closely held
foreign stock owned by the expatriating individual would be
includible in his or her gross estate for U.S. estate tax purposes to
the extent that the foreign corporation owns U.S. situated assets.1
Furthermore, if the expatriating individual dies while present in the
U.S. for more than 30 days in any year during the ten (10) years
following expatriation, such individual will be subject to U.S.
estate tax on his or her world wide estate.
j.
AJCA added a special gift tax rules applicable to
expatriating individuals subject to the alternative income tax
regime under Section 877, with regard to gifts made by the
individual during the ten-year period following expatriation.
Specifically, the individual is subject to gift tax on transfers of
U.S.-situated intangibles (such as U.S. stock or securities).
Previously, a non-resident alien could make a gift of U.S. stock
without it being subject to US gift tax. The Jobs Act also imposed
a gift tax on gifts of stock of certain closely held foreign
corporations to the extent that the foreign corporation owns U.S.
situated assets. Furthermore, if the expatriating individual is
present in the U.S. for more than 30 days in any year during the ten
(10) years following expatriation, and makes a gift during that
calendar year, such individual will be subject to the U.S. gift tax no
matter where the gifted property is situated.
1
In such a case, the expatriating individual would not have the $2 million estate tax exemption currently applicable
to U.S. citizens, but only the $60,000 exemption applicable to nonresident aliens.
© Leigh-Alexandra Basha 2008
7
k.
The U.S. Model Income Tax Treaty contains a "saving
clause" which permits the U.S. to tax its residents and citizens
regardless of any tax treaty provisions the U.S. may have with the
treaty country. The tax treaties of most countries are consistent
with Section 877 in that the definition of "resident" and "citizen"
for purposes of the saving clause includes former citizens or
residents who expatriated from the U.S. for a period often (10)
years following expatriation. Therefore, during the ten-year period
following expatriation, any relief provisions contained in such
treaties would be overridden by the alternative tax regime rules of
Section 877. However, some treaties (generally those negotiated
before HIPAA in 1996) did not cover former U.S. long-term
residents under the savings clause (e.g., the tax treaty with
Belgium (1970)). The original HIPAA Section 804 contained a
treaty override provision for the application of Section 877. This
treaty override expired on August 21, 2006 (10 years from
enactment of HIPAA). Congress has not extended it. There is
some confusion on the tie breaker rules and whether a dual resident
triggering the tie breaker rules commits an expatriating act for
purposes of Section 877.
2.
The Reed Amendment:
a.
In 1996, Congress enacted amendments to the immigration
law prohibiting individuals who renounce U.S. citizenship for
purposes of avoiding taxation from entering the United States.
This is referred to as the Reed Amendment. The Reed Amendment
rule however, has never been applied to exclude any individual.
The reason being, the Attorney General has never been authorized
to obtain the necessary tax returns and other information in order
to enforce it. Nevertheless, it was a disincentive for U.S. citizens
to expatriate. It was not applicable to long-term resident aliens
who relinquished their long-term resident status.
3.
Published List:
a.
Published in the Federal Register are the names of all
former citizens (not former green card holders) who have
renounced or otherwise lost U.S. citizenship. In the last quarter of
2005 there were roughly 100 such citizens who lost their
citizenship within the meaning of Section 877(a).2
2
IRS Section 6039G as amended by the Health Insurance Portability and Accounting Act (HIPAA) of 1996 requires
its publication.
g
VI.
The Heroes Earnings Assistance and Relief Tax Act of 2008 ("HEART")
Covering Expatriations from June 17,2008 through the present
Effective June 17, 2008, the Heroes Earnings Assistance and Relief Tax Act of 2008 (the
HEART Act), expatriating individuals who are "covered expatriates" will be subject to two new
provisions, Internal Revenue Code Section 877A (mark-to-market tax provision) and section
2801 (succession tax provisions.
1.
Individuals covered:
a.
The new provisions apply to a "covered expatriate who is a U.S.
citizen who relinquishes citizenship and any long term resident who
terminates U.S. residency if such individual (1) has an average annual net
income tax liability for the five preceding years ending before the date of
the loss of U.S. citizenship or residency termination that exceeds $124,000
(as adjusted for inflation after 2004). Note: it is $139,000 in 2008; (2) has
a net worth of $2 million or more on such date (not indexed for inflation;)
or (3) fails to certify under penalties of perjury that he or she has complied
with all U.S. Federal tax obligations for the preceding five (5) years or
fails to submit such evidence of compliance as the Secretary may require.
2.
Exceptions:
a.
An individual will not be classified as a covered expatriate under
(1) or (2) above but not (3) in two instances:
b.
The first exception applies to an individual who is born with
citizenship both in the United States and in another country who provides
that (1) as of the expatriation date, the individual continues to be a citizen
of, and is taxed as a resident of, such other country, and (2) the individual
has been a resident of the United States (under the substantial presence test
of Section 7701(b)(l)(A)(ii)) for not more than ten (10) taxable during the
15-year taxable year period ending with the taxable year of expatriation.
This is an expansion of the exception prior to HEART.
c.
The second exception applies to a U.S. citizen who relinquishes
U.S. citizenship before reaching age 18 l/2 provided that the individual was
a resident of the United States (under the substantial presidents test of
Section 7701(b)(l)(A)(ii) for no more than ten (10) taxable years before
such relinquishment. This, too, is an expansion of the exception from preHEART. Note under the Child Under 18 !/2 exception, this does not apply
to a green card holder.
d.
A long term resident is still defined as it was under pre-HEART.
As under present law, an individual is considered to terminate long term
U.S. residency when the individual ceases to be a lawful resident of the
United States (i.e. loses his or her green card status through revocation or
has been administratively or judicially determined to have abandoned such
status). An individual ceases to be treated as a lawful permanent resident
of the United States for all tax purposes if such individual commences to
be treated as a resident of a foreign country under a tax treaty between the
United States and such foreign country, does not waive benefits of the
treaty applicable to residence of such foreign country, and notifies the
secretary of the commencement of such treatment (presumably by filing
Form 8833 Treaty-Based Return Position Disclosure.)
3.
Date of Expatriation:
a.
U.S. Citizen: To officially expatriate, a U.S. citizen will be treated
as having relinquished his or her U.S. citizenship on the earliest of four
possible dates: (1) the day that the individual renounces U.S. nationality
before diplomatic or counselor or officer of the United States (provided
that the voluntary relinquishment is later confirmed by the issuance of the
certificate of loss of nationality); (2) the date that the individual furnishes
to the State Department a signed statement of voluntary relinquishment of
U.S. nationality confirming the performing of an expatriating act (again
provided that the voluntary relinquishment is later confirmed by the
issuance of the certificate of loss of nationality); (3) the date that the State
Department issues a certificate of loss of nationality; or (4) the date that a
U.S. court cancels a naturalized citizen's certificate of naturalization.
Notwithstanding these rules, relinquishment may occur earlier under
Treasury regulations with respect to an individual who became at birth a
citizen of the United States and of another country.
b.
Long Term Resident: The expatriation date for a long-term
resident is the date that the long term residency is terminated. .
c.
Individuals who expatriate subsequent to HEART are required to
file Form 8854, but they no longer have to continue file it for 10 years
following expatriation as was the case before June 17, 2008.
4.
Mark-To-Market Taxation:
a.
How is the covered expatriate taxed for income tax purposes? A
covered expatriate is deemed to have sold his or her property on the day
before expatriation is to take effect. This is known as the mark- to- market
tax. However, the first $600,000 of gain is exempt. The $600,000 amount
is increased by a cost of living adjustment factor for calendar years after
2008. Any gains or losses subsequently realized or to be adjusted for
gains and losses are taken into account under the deemed sales rules
without regard to the $600,000 exemption. The mark to market tax
applies to most types of property interest held by the individual on the date
of relinquishment of citizenship or termination of residency with certain
exceptions. Deferred compensation items, interest in non-grantor trusts
10
and specified tax deferred accounts are excepted from the mark- tomarket tax, but are subject to special rules.
5.
Deferral of payment of mark to market tax:
a.
An individual may elect to defer payment of the mark-to-market
tax imposed on the deemed sale of property. Interest will be charged for
the period the tax is deferred at the rate normally applicable to individual
underpayments. The election is irrevocable and may be made on a
property by property basis. Under the election, the deferred tax
attributable to a particular property is due when the return is due for the
taxable year which the property is disposed (or if the property is disposed
of in a transaction in which gain is not recognized in whole or in part at
such other time as the Secretary may prescribe). The deferred tax
attributable to a particular property is an amount which bears the same
ratio to the total mark-to-market tax as the gain taken into account with
respect to such property bears to the total gain taken into account for the
mark to market tax. The deferral of the mark- to- market tax may not be
extended beyond the due date of the return for the taxable year which
includes the individual's death. Thus, death will accelerate the payment of
the tax. In order to elect deferral of the mark-to-market tax, the individual
is required to furnish a bond to the Secretary. The details regarding the
bond and adequate security are to be set forth as the secretary may
prescribe. Thus, it is not clear at this time.
6.
Deferred compensation items:
a.
A deferred compensation item is any interest in a plan or
arrangement described in Section 219(g) (5), any interest in a foreign
pension plan or similar retirement arrangement or program, any item of
deferred compensation, and any property or right to property, which the
individual was entitled to receive in connection with the performance of
services to the extent not previously taken into account under Section 83.
b.
If a deferred compensation item is an eligible deferred
compensation item, the payor must deduct and withhold from a taxable
payment to the covered expatriate a tax equal to 30% of such taxable
payment. Query whether these items of income will be double taxed in
the United States and in the foreign country to which the covered
expatriate moved.
c.
If a deferred compensation item is not an eligible deferred
compensation item (and is not subject to Section 83) an amount equal to
the present value of the covered expatriate's deferred compensation item is
treated as having been received on the day before the expatriation date.
d.
For deferred compensation items that are subject to Section 83, the
item is treated as becoming transferable and no longer subject to a
substantial risk of forfeiture on the day before the expatriation date.
Appropriate adjustment shall be made to subsequent distributions to take
into account the foregoing treatment. In addition, these deemed
distributions are not subject to early distribution tax.3 An "Eligible
Deferred Compensation Item" is a deferred compensation item with
respect to which (1) the payor is either a U.S. person or a non-U.S. person
who elects to be treated as a U.S. person for purposes of withholding and
who meets the requirements prescribed by the Secretary to ensure
compliance with the withholding requirement, and (2) the covered
expatriate notifies the payor of his status as a covered expatriate and
irrevocably waives any claim to a withholding reduction under any treaty
with the United States. The foregoing taxing rules regarding eligible
deferred compensation items and items that are not eligible deferred
compensation items do not apply to deferred compensation items to the
extent attributable to services performed outside the United States while
the covered expatriate was not a citizen or resident of the United States.
In other words, a covered expatriate will not be subject to these taxation
rules on deferred compensation items if they are attributable to services
performed outside the United States while the covered expatriate was not a
citizen or a resident of the United States.
7.
Specified Tax Deferred Accounts:
a.
If a covered expatriate holds any interest in a specified tax deferred
account on the day before the expatriation date, such covered expatriate is
treated as receiving a distribution of his entire interest in such account on
the day before the expatriation. Deemed distributions will not be subject
to early distribution tax. The terms specified tax deferred account means
an individual retirement plan (as defined in Section 7701 (a) (37), a
qualified tuition plan, a Coverdell education savings account, a health
savings account and an Archer MSA account. However, simplified
employee pensions and simplified retirement accounts of a covered
expatriate are treated as deferred compensation items and not as specified
tax deferred accounts.
8.
Interests in Grantor Trusts:
a.
If a covered expatriate has an interest in a grantor trust as
determined immediately before the expatriation date, the assets held by
that portion of the trust are subject to the mark- to- market tax. If a trust
that is a grantor trust immediately before the expatriation date
3 Early distribution tax means any increase in tax imposed under Section 72(t); 220(e)(4), 220(f)(4); 409(A) (a)(l) (B), 529(c) (6) or
530(d)(4).
12
subsequently becomes a non-grantor trust, such trust remains a grantor
trust for purposes of the provision. HEART makes no distinction between
foreign trusts and domestic trusts.
9.
Interests in Non-Grantor Trusts:
a.
The mark- to- market tax does not apply to the portion of any such
trust not treated under the grantor trust provisions of the Code as owned
by a covered expatriate immediately before the expatriation date. Instead,
any direct or indirect distribution from such a portion of a trust
(nongrantor trust) to a covered expatriate, the trustee must deduct and
withhold from the distribution an amount equal to 30% of the portion of
the distribution which would be includable in the gross income of the
covered expatriate if the covered expatriate continued to be subject to tax
as a citizen or resident of the United States. The covered expatriate is
treated as having waived any treaty benefits to reduce that withholding.
b.
If a non-grantor trust distributes appreciated property to a covered
expatriate the trust must recognize gain as if the property was sold to the
covered expatriate at its fair market value. If a trust that is a non-grantor
trust immediately before the expatriation date subsequently become a
grantor trust of which a covered expatriate is treated as the owner directly
or indirectly, such conversion is treated under the provision as a
distribution to such covered expatriate to the extent of the portion of the
trust of which the covered expatriate is treated as the owner.
10.
Special Rules:
a. If the covered expatriate is in the middle of a deferred like kind
exchange or an involuntary conversion, the rule will not apply.
Additionally, any extension for payment of tax ceases to apply on the day
before relinquishment of citizenship or termination of residency and the
unpaid portion of such tax will become due and payable at the time and in
the manner prescribed by the Secretary.
b.
For determining the mark- to- market tax, an individual's basis in
property will be not less than the fair market value of such property on the
date the individual first became a resident of the United States. An
individual may make an irrevocable election not to have this rule apply.
c.
If a domestic trust becomes a foreign trust due to the expatriation
of an individual, the general income tax rules pertaining to transfers by
U.S. persons to foreign trusts (i.e., Section 684) apply before the
provisions of HEART.
\3
11.
Transfer Tax:
a.
What is the transfer tax treatment for gifts and bequests from a
former citizen or former long-term resident? If a U.S. citizen or resident
receives a covered gift or bequest special transfer tax will apply. A
covered gift or bequest is any property acquired 1) by gift directly or
indirectly from an individual who is a covered expatriate at the time of
such acquisition or 2) directly or indirectly by reason of the death of an
individual who was a covered expatriate immediately before death.
b.
Exceptions: A covered gift or bequest does not include: 1) any
property shown as a taxable gift on a timely filed gift tax return by the
covered expatriate; 2) any property included in the gross estate of the
covered expatriate for estate tax purpose and shown on a timely filed
estate tax return of the estate of the covered expatriate; and 3) any
property with respect to which a deduction would be allowed under
Sections 2055, 2056, 2522 or 2523 (these sections allow for deductions for
charitable purposes or to spouses).
c.
The succession tax is calculated as a product of the highest
marginal rate of tax specified in the tax table applicable to estate tax (i.e.
Section 200 l(c)), or if greater, the highest marginal rate of tax specified in
the table applicable to gift tax (i.e. Section 2502(a)) both as in effect on
the date of receipt of the covered gift or bequest, and 2) the value of the
covered gift or bequest.
d.
The tax is imposed upon the recipient of the covered gift or
bequest and is imposed on a calendar-year basis. The first $12,000 is
exempt under Section 2503(b). The tax on covered gifts and bequests is
reduced by the amount of any gift or estate tax paid to a foreign country
with respect to such covered gift or bequest. For covered gifts or bequests
made through a domestic trust, the tax applies as if the trust is a U.S.
citizen and the trust is required to pay the tax. For a covered gift or
bequest made to a foreign trust the tax applies to any distribution from
such trust (whether from income or principal) attributable to such covered
gift or bequest to a recipient that is a U.S. citizen or resident in the same
manner as if such distribution were a covered gift or bequest. For
purposes of these rules, a foreign trust may elect to be treated as a
domestic trust but such election may not be revoked without the
Secretary's consent.
12.
Coordination with Section 877-alternative tax regime:
a.
The present rules under new section 877A are prospective. For
those who expatriated prior to HEART, they will continue to follow the
rules under section 877 and the alternative tax regime for 10 years
J4
following their expatriation. Thus, 877 will continue to apply until the 10
years runs out, presumably no later than June 16, 2018
13.
•
Problems with the New Exit Tax:
Some problems and outstanding Issues include:4
a.
Guidance is needed on what constitutes "adequate Security" for
purposes of electing to defer the payment of tax and on what terms the
election can apply to property disposed of in non recognition transactions.
b.
There is no income cap on taxable amounts received from non
grantor trusts.
c.
There is no wealth cap on taxable amounts received from a
covered expatriate subject to the succession tax.
d.
There is no coordination between the new tax mark-to-market
regime and US tax treaties
e.
Guidance is needed on information reporting by covered
expatriates as existing Form 8854 will be insufficient.
f.
The treaty override provision remained in tact only until August
21, 2006 (10 years from HIPAA's enactment). A number of pre HIPAA
treaties remain without a saving clause that includes former long term
residents as well as former citizens
g.
The Reed amendment should be addressed.
h.
HEART does not exempt children who were long term residents
even if there expatriating US citizen counter parts can escape the Exit Tax
by expatriating before attaining the age of 18 1/2 and who did not qualify
as a US resident under the substantial presence test for more than 10 years
out of the 15 years period ending with expatriation. (The prior rules
denied the exemption to a dual citizen child if either of the child's parents
was a us citizen or the child was in the US for more than 30 days in any of
the 10 years preceding the expatriation).
4
Pfeifer, Michael G., The Final State of Expatriation?, ALI-ABA Course of Study International Trust and Estate
Planning, Santa Fe, New Mexico, (July 31 - August 1, 2008).
\5
14.
Planning Suggestions:5
a.
Taxpayers considering expatriation should ensure they are
compliant with the filings of other miscellaneous forms including the TD
F 90-22.1 (Foreign Bank Account Report), the Form 3520 for receipt of
foreign gifts and transfers to and distributions from foreign trusts.
b.
Taxpayers considering expatriation should considering bringing
their net worth below the $2 million threshold by gifting assets away using
the $1 million exemption and annual exclusions.
c.
Taxpayers could also seek removal from trusts so the trust assets
are not included in determining the taxpayer's net worth.
d.
For US green card holders, they should consider relinquishing
their green cards prior to the eighth year.
e.
For dual citizens who may be able to meet the exceptions to the
Exit Tax by having minimal contacts with the US, they should monitor
those contacts.
VII. Conclusion
Very few countries have an "Exit Tax" although many have a nominal airport departure
tax. Several countries have it in their history including Soviet Russia, Apartheid South Africa
and Nazi Germany. Recently France and Germany tried to enact an Exit Tax, only to have it
stricken down as either unconstitutional or against the European Union directive. It still prevails
in Canada whose Exit Tax regime provided the basis of ours. Whether the Exit Tax will raise the
revenues anticipated is yet to be seen. Does our exit tax really become America's Berlin Wall?6
Whether intended or not, it may be perceived as such by US expats and others.
VIII. Appendices
1. Form I 407
2. Form 8854
3. Comparison Chart
5
Packman, Kevin E., The Rules Just Changed Emotions Aside, Does Expatriating Make Financial Sense?, AM. J.
TAX'N, Aug. 2008.
6
America's Berlin Wall, THE ECONOMIST, Jun 12th 2008, available at http://www.economist.com/finance/
display story, cftn ?story_id= 11554721
\ ft
Appendix 1: Form 1-407
1-407, Abandonment of Lawful
Permanent Resident Status
Department of HcisMl.md Security
U.S. Citizenship sad amaiixstkn Serkes
— -"-—
~~
^*"
l.Un.^MW.M.MMOi^rM.i*
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•M
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3.D3teofBsiii;>Hm'ASa'.>:,j^
Coonm-ofBinh
iDitesrftel^BSBeassiii*
Oy$a$ Stoas $w$$|$3^
J4ai»rf'Vi8»ri,*«fflt«rfttelilBai»ofDm«aHt
wo«
Couaay af Ciaieaship
PortofDepaiftireFirem
*e:U»t«d States
^S^MÂdrtSw*-*^*^
j^tet Cf ^B$ J^^ffit ^^BK ^K^SBfC
w^p/, tjjgytaiimsff^ <3«8siK«*B*isa*
ISfO DSt$?^!FA%'!H&?felifllfn8iBf ffif StSSMtlK ifuwfel fNtttttaSHWHtsfewMof tbff $^tPfl$tSfP?
fiWtfdfflffiW)'
<5id}. Remarks of Immijraneis Cooiul.ir Officer: If you wsivs your r.ffc 10 > bsarai? ixw you an have a heanug ST aisy niae Isereaftertefore aaluEBigraooa
Ju4ge K> detenume VOKT adzsus-ibtliry b>' prtsea^n? yoajself at 3 pott of ezKry to d2B Usit«d Statas sad êekui^ «ctr>~. If y^xi da see^ a 3atg^ feeanag . Hie Immigrssois
Jiaiie caa and td3 tsk« into accouni sll raoiaeaa yoc tan-* laade ccocensrg >^KT abmdonmeci of rasideoca in the Uaised SatH.
Sipafttre:
Office:
S(e;. I ba« iesd aad tnderitsad 'ie abm« statsaaoti, or £jey lax'e tesc read :o me, aadfeeittteiaeas ss mis and correct. ! sslso sadessad {if I am ss ttes.tiajeSE
afj)Lic«at for sdcmssioa icio ibs Ucttd Stern} dat I hive 5berighrto appear before sa IcEui|rsaoa Jadge to a hesirmg to dsteraaae jay srfraissatUS)- iot» tta Ucilsd
States as a rsumaif Issi'SiI paraianen: resiatett I freely waive lay riga: to a hearing be!6» m Tmmigatian Judga
Signature, or Alieu.
»*^«^:
For Goveramât Use Only
7. I lit rtby certify tbat th* .ibave iijm.itor.' wav ptnooally uiten-iwtcj bv UK sad that lie (or) slie fully under; tandi the D.irar» of tint; atcion.
SIpssture of lajjsjsfjatKsi'Qassjlsr Offlcs:
Stgnatsn of UlfflMs:
Sigsatore of lotstpreier:
Laagirage
Mtanrfbapner
agMtâfS^n^:
•.DJv.itatfJtan.il:
(Fc» lacteiai
m Afisa's File)
9. Ta Kiss Corao! Offi.ce:
(City)
10. Copry Riraisbeil
Alieis
JJase mm-tict^-iiv)
(SOie)
IhsrdPirsoa'Affiocvoa
Dat* ftuPuMajjjjV
Foan 1-407 (Rsv.
17
Instructions
Form 1-407 is designed to pronde a simple procedure to record the ab&ndoarnea: of residence of a lawful permanent resident alien
of die United States. I: is used to assure that the alien is accorded due process of law and has voluntarily, willingly and
affirmatively abandoned lawful permanent resident status. It also assures that the alien is informed of the right of hearing and has
intelligently waived that right (m cases involving applicants for admission).
Form 1-407 is used by consular officers and inanigrarioa officers. It may be used for recording the facts relating to aliens
interviewed in pen-on; or by aliens who abandoned states by correspondence; 01 as an acknowledgement from a third person or
agency.
If*ja 1. Insert name as it appears OB the Permanent 'Resident Card if the document is presented or Se information is known.
Spanish surnames should be written in tccordaoc* with AM 2703.05.
Item 2. List actual residence, rather than mailing address.
Item 3. List by month, day and year
fmm/'ddfyjyy).
Item 4. This item refers to the date the alien last departed from the United. Slates and not necessarily when he or she
abandoned kwM permanent residence.
Item 5. Indicate mailing address as well as actual domicile, if different.
Item <sa. This item requires a clear and concise statement in the alien's own words. It must establish beyond any reasonable
doubt that the alien has voluntarily, willingly and affirmatively abandoned stains as t lawful permanent resident.
Item 6c. List the date the alien actually abandoned status (not necessarily the date of his or her departure from the United
States).
Item 6d. If the alien is not interviewed, facts relating to information received concerning abandonment of status muss be
explained in addition to -any other pertinent information.
It*m 6t, Signature must be obtained in ail ease? in which the alien is interviewed. The officer should make every effort to
assure that me alien truly understand? what abandonment of lawful penaaaeat resident saws means.
Item 7. If the alien B interviewed, the interviewing immigration/consular officer must sign the appropriate line. If feasible,
the signatures of a witness, interpreter., if any, and supervisor should be obtained.
Item 8. Foi example: "1-551 No. ATO WO 000 destroyed (Serial No. 7611459)."
Item 9. Route Form 1-407 to the Files Control Office where the alien's file is located. The "date" block should indicate the
date this form is forwarded to the Files Control Office.
Item 10. If the alien is interviewed in persoa. a copy of the completed form shall be famished to him or her it the coachman
of the interview. If abandonment of residence is accomplished through correspondence or gs an acknowledgement
from a third person or agency, a copy of the completed form shall be furnished upon request.
Form 1-407 (Rm-. Q3.-03.-US) Y Pap 2
\g
Appendix 2: Form 8854
^ 8854
Initial and Annual Expatriation Information Statement
Defsarlmefir. cf the Treasury
Internet Rsvfinu» Smic«
Ifc- Se«l3<m refetwKses on ihfe fwfm are to tb® Internal R«venu& C@d&«
OMB No, 1545-Q074
07
> See separate instf uctions. ft- Pteas* print or type.
^Jtt£Khm»nt
Sequemehto. 112
Qst* E»f Wrtti (mo,, *y, yr.)
Name
Tax Vsa
Initial or Annual Information Statement. Check the box that applies.
D Initial Information Statement, Complete Parts I, II, and 111. and Schedules A and B,
D Annual Information Statement. Comptete Parts I and III and Schedules A and B. Skip Part N (see instructions).
iJjnil
General information. Al! filers must complete Part I. See Instructions.
1
Identifying number (see Instructions) I*
2
Mailing address and telephone number where you can be reached after expatriation
3
Address of principal foreign residence (if different from line 2)
4
Country of tax residence (if different from line 3) ....
5
Date of notification of expatriating act, termination of residency, or claim of treaty benefits. Check the box that applies
and enter the appropriate date,
a D Citizen. Date notification given to Department of State
(see instructions).
b D Long-term resident. Date notification given to Homeland Security
(see instructions),
C O Long-term resident with dual residency In a treaty country. Data commencing to be fretted, for tax purposes, a® a
resident of ths treaty country
,
Initial Expatriation or Termination Information Statement
6
Enter your U.S. income tax liability (after foreign tax credits) tor the 5 tax years ending before the date of expatriation.
1 st Year
Before Expatriation
2nd Year
Before Expatriation
3rd Year
Before Expatriation
4th Year
Before Expatriation
5th Year
Before Expatriation
7
Enter your net worth on ths date of"your expatriation for tax purposes
8
Did you become at birth a U.S. citizen and a citizen of another country, and do you continue to be
a citizen of that other country?
D Yes
D No
Do you have substantial contacts with the United State®? (See instructions.)
Q Yes
D No
10
Are you a minor described in section 877(05(3)? pee instructions.)
[U Y«s
D No
11
Do you certify under penalty of perjury that you have complied with all of your tax obligations for
the S precedingfernyearn"! (See instructions.)
9
For Pafwwerk RMjuctfafli Act Notice, »® separate imirueflons.
19
$
Cat No. 24126N
D Ye®
D No
Form 8854 £007)
forra aesj 007}
Annual Information Reporting under Section 6039<5
Do not complete this part if:
* Your average annual net income tax liability for years 1-5 (line 6) was not more than tte limit listed under Taxation Under
Section 377 on page 1 of the instructions and your net worth on line 7 was under $2,000,000, and you checked 'Yes* to
line 11, or
* You checked "Yes" to line 8 and "Ho" to line 9, and you checked "Y«s" to line 11, or
* You checked "Yes" to line 10, and you checked "Y«s" to line 11,
12
List all countries (ottw than the United States) of which you are a eitizsn.
a Name of country
b How you became a citizen
_
c Dot© you became 3 cittern
13 Number of days you wore physically present in the Un ited State® during the current year. If you were
present in the United States more than 60 days, skip line 14
14
Ww« you physically present in the United States for more than 30 days but not more than 60 days
during thetewyear?
D Yes
D No
D Yes
D No
b if you checked "Yes" to line t4a, are you m citizen or resident, fully liable for income tan, in the
country in which you were born, your spouse was born, or either of your parents were bom? . D Yes
d No
a Were you performing services for an unrelated employer?
Under penalties of perjury, 1 dedans that 1 have anamined this term, including aeeornp
anting schedules and statements, and to the beet
of my knawledge and belief, it is true, correct, and complete. Declaration of preperar f other than filsij is based on all inforrnatfon of which
pr sparer has arry knowledge.
Sign
Her©
Your signature
D819
Preparer's ggnaiure
Dais
RSTO 8854 (BOOT)
20
foim
Page 3
8540007)
Bafanco Sheet
*
If this is an initel information statement, list in U.S. dollars the fair market value (column (ail and the U.S. adjusted basis (column
|b)j of your assets and liabilities as of the date of your expatriation for tast purposes.
•
If this is an annual informattan statement, Ife* in U.S. ddtars the fair marked value (column fa) and the U.S. adjusted basis
loolumn (b)) of your aaaste and liabilities as of the end of the tax. year for which you are filing this form.
» If you are a former U.S. long-term resident 0-TR), it may benefit you to complete column jd). Qnfy former LTRs should do so.
For more details, sea the separate instructions.
Assets
1
2
3
4
S
U Fair Mn k^
falus (pMV)
Q4 U.a adjusted
h&si&
je) Can 01 iLssai.
Subtract column >W
from eolum (ai
IdS FMV on teflinning
cteS* of U.S. iMKterey
(options!, for LTRs only)
Cash, including bank deposits
Marketable stock and securities issued by
U\3* companies
Marketable stock and securities issued by
for&igjn companies
Nonmarketable stock and securities iisued by
U.S. companies
Nanmarketabte stock and securities issued by
foreign companies
a Separately state stock issued by foreign
companies that would be controlled foreign
corporations if you were still a U.S. citksn or
permanent resident fsee instructions)
b Prwide the name, address, and EIN, if any, of
.any such company
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Pensions from services performed in the
United States
Pensions from services performed outside
the United States
Partnership interests (see instructions)
Assets held by trusts you awn under
sections 671-679 (see instructions)
Beneficial interests in nongrantor trusts
(see instructions)
Intangibles used in the United State® .
Intangibles used outside the Unitid States .
Loans to U.S. persons
Loans to foreign persons
Real property located in the United States
Real property located outside the United
States
Business property located in the United
States
Business property located outside the
United States
Other assets fsee instructions)
....
Total assets. Add lines 1 through 5 and lines
6 through 19. Do not include amounts on line
5a in this total
Liabilities:
Amount
Installment obligations
Mortgages etc
Other liabilities (see instructions)
Total liabilities. Add lines 21 through 23
Net worth. Subtract line 24 from line 20,
column (a)
Fctrn 8854 52007)
21
Page 3
Fcmi 6854 &2GO?)
Schedule B
Income Stateraant
* if this is an initial information statement, provide income information for that portion of the year that ends on the
date of your expatriation for tax purposes.
» if this is an annual information statement, provide income information for the tax year for which you are filing the
form.
1
U.S. source gross income not effectively connected with the conduct of a U,S, trade or business,
a Interest
b Dividends
">*»
1c
c Royalties
d Pension dfeiribuflons
. .
e Other
f Totaf. Add lines a through e
2
Gross income that is effectively connected with the conduct of a U.S. trade or business.
3
Income from the performance of services in the United State®
2
.
4 Gains from the sale or exchange of;
a Property (other than stock or debt obligations) located in the
United States
b Stock issued by a U,S. domestic corporation
c Debt obligations of U.8, persons or of the United States, a state or
political subdivision thereof, or the District of Columbia
d Total. Add lines a through c
5
Income or gain derived from certain foreign corporations to the extent of your share of earnings
and profits earned or accumulated before the date of expatriation (see instructions)
8
Gains on certain exchangee of property that would ordinarily not be recognized (see instructions)
7
Income received or accrued by certain foreign corporations êe instructions)
7
8
Add lines 1f, 2, 3, 4d, 5, 6. and 7
.8
9
Gross income f r o m a l l other sources _
_
_
_
.
.
.
_
Total. Add lines 8 and 9
.
.
_
_
.
.
.
.
_
_
.
I !_
10
Form 88S4 (2007)
22
Department of the Tre
Internal Revenue Sei
Instructions for Form 8854
Initial and Annual Expatriation Information Statement
Section references are to the internal Revenue Code unless
otherwise noted.
General Instructions
Purpose of Form
If you expatriated or terminated your long-term resident
status after June 3, 2004, use Form 6854 to provide the
information required by sections 6039G and 7701 (n).
* If you were a dual resident of the United States and
country with which the United States has an income ta
treaty, on the date you commenced to be treated as a
resident of that country and you determined that, for
purposes of the treaty, you are a resident of the treaty
country. See Treas. Reg. Section 301.7701 (b)-7 for
information on other filing requirements for such indivit
Definitions
Expatriation or Termination of Residency
For purposes of immigration and nationality lav/, the date of
your expatriation or termination of residency depends on
when certain acts occurred. The specific acts that must have
occurred depend on whether you are a former U.S. citizen
or a former U.S. long-term resident (LTR). The specific acts
are described below.
Former U.S. Citizens
If you were a U.S. citizen, you expatriated:
» On the date you renounced your U.S. citizenship outside
the United States before a diplomatic or consular officer of
the United States pursuant to paragraph (5) of section 349
of the Immigration and Nationality Act, provided there is a
determination of loss of citizenship by the Secretary of
State, as reflected by your receipt of an approved Certificate
of Loss of Nationality, or
* On the date you voluntarily performed an act of
expatriation with the specific and contemporaneous intention
of giving up your U.S. citizenship, provided there is a
determination of loss by the Secretary of State, as reflected
by your receipt of an approved Certificate of Loss of
Nationality. An act of expatriation is any act defined aa a
potentially expatriating act either by paragraph (1), (2), (3),
or (4) of section 349(a) of the Immigration and Nationality
Act or by any other Act of Congress defining expatriating
acts.
While your citizenship may have ended because a
federal court revoked your naturalization under section 340
of the Immigration and Nationality Act, this type of loss of
citizenship is not treated as an expatriating event for
purposes of section 877 and this form, if after the
revocation, you hold the status under the Immigration and
Nationality Act of an alien lawfully admitted for permanent
residence.
Former U.S. Long-Term Residents (LTRs)
If you were a U.S. long-term resident (LTR) (see Definsions
below), you terminated your residency:
* On the date you voluntarily abandoned your lawful
permanent resident (LPR) status by filing Department of
Homeland Security Form 1-407 with a U.S. consular or
immigration officer, and the Department of Homeland
Security determines that you have, in fact, abandoned your
LPR status,
* On the date you became subject to a final administrative
order for your removal from the United States under the
Immigration and Nationality Act and you actually left the
United States as a result of that order, or
Former U.S. LTR. You are a former U.S. LTR if you)
lawful permanent resident of the United States for at le
of the 15 consecutive tax years ending with the date a
termination of residency.
LPR. You are an LPR of the United States if you havi
given the privilege, according to U.S. immigration laws
residing permanently in the United States as an immig
You generally have this status if you have been issuec
alien registration card, also known as o "green card."
Date of Tax Expatriation
If you expatriated or terminated your long-term resider
status on or before June 3. 3304, see Pub. 519.
If you expatriated or terminated your long-term resk
status after June 3. 2004, until you file Form 8854 and
the Department of State or the Department of Homeloj
Security of your expatriating act or termination of resid
your expatriation or termination of residency for imniig
purposes will not relieve you of your obligation to file I
tax returns and report your worldwide income as a citi;
resident of the United States. For purposes of U.S. tax
the date of your expatriation or termination of nssidenc
be the later of the date you notify the relevant agency
your expatriating act or termination of residency, or th«
this form is filed in accordance with these instructions,
purposes of determining the date on which this form is
apply the rules of section 7502. Generally, this is the
postmark date.
Who Must File
You must file Form 8854 to:
* Establish that you have expatriated or terminated ye
LTR status for tax purposes, or
* Comply with the annual information reporting
requirements of section 6039G, if you are subject to ta
under section 877.
Note. If you were a naturalized citizen, but lost your
citizenship because a federal court revoked your
naturalization under section 340 of the Immigration an
Nationality Act, you do not need to complete this form
after the revocation, you hold the status under the
Immigration and Nationality Act of an alien lawfully adt
for permanent residence. You must complete this fern"
hoy/ever, if you were a naturalized citizen and you gav
your citizenship by expatriation under section 349 of tf
Immigration and Nationality Act.
Taxation Under Section 877
You are subject to taxation under section 877 if you ar
former U.S. citizen or former LTR, and any one of the
following applies to you.
Cat NO. 24874 E
23
1. Your average annual net income tax liability for the 5
years ending before the date of your expatriation or
termination of residency is more than the amount listed
below.
a. $127,000 if you expatriated in 2005.
b. $131,000 if you expatriated in 2006.
c. $138,000 if you expatriated in 2007.
This amount is subject to cost-of-living adjustments. The
IRS will announce the amounts applicable to future years in
annual revenue procedures that will be published in the
Internal Revenue Bulletin. The Internal Revenue Bulletins
can be accessed at wv/wjrs.gov/irb.
2. Your net worth is $2 million or more on the date of
your expatriation or termination of residency.
3. You fail to certify on Form 8854 that you have
complied with all of your U.S. federal tax oblations for the
5 years preceding the date of your expatriation or
termination of residency.
When To File
Initial Information Statement
ff you are filing this form because you ceased to be a U.S.
cftizen (expatriated) or terminated your U.S. residency
during the tax year, there is no due date for filing this form.
However, until you both file this form with the Internal
Revenue Service and notify either the Department of State
or the Department of Homeland Security of your expatriation
or termination of residency, you will continue to be treated,
for tax purposes, as if you were still a U.S. citizen or
resident. The date of your tax expatriation (the date you are
no longer subject to U.S. taxation on a worldwide basis) is
the date on which you have satisfied both requirements.
Annual Information Statement
If you are a nonresident alien filing this form to comply with
the annual information reporting requirements of section
6Q39G, this form should be attached to a timely filed Form
1040NR, U.S. Nonresident Alien Income Tax Return, and a
copy should be sent to the address below. If you are not
required to file Form 1040NR. submit this form to the
address below by the due date for filing Form 1040NR.
If you are present in the United States following your
expatriation and are subject to tax as a U.S. citizen or
resident, file Form 8854 with your Form 1040 and send a
copy to the address below.
If you are subject to tax under section 877, you are no
jonger taxed as a citizen or resident on your worldwide
income. However, you must compute your tax as a
nonresident in accordance with the special rules of section
877. These rules expand the categories of income and gain
on which you owe tax. You are also subject to special rules
for gift and estate tax purposes that differ from those
applicable to other nonresident aliens.
Exceptions to section $77. Provided you have certified
that you have met your tax. obligations for the 5 tax years
prior to your expatriation or termination of residency, you will
not be subject to tax under section S77(b) if either of the
following exceptions applies,
* You became at birth a U.S. citizen and a citizen of
another country, you continue to be a citizen of the other
country, and you have no substantial contact® with the
United States.
* You became at birth a U.S. citizen, neither of your parents
was a U.S. citizen at the time of your birth, your loss of
citizenship occurred before you attained age 181»4. and you
were not present in the United States for more than 30 days
during any of the 10 calendar years preceding your loss of
citizenship.
See the instructions for lines 9 and 10 on page 3.
Where To File
Internal Revenue Service
P.O. Box 331
Drop Point S607-F8854
Bensalem, PA 19003
Specific Instructions
Initial or Annual Information
Statement
Check the tniual informsaan Statement box if you are filing
this form as your initial expatriation information statement to
establish that you have expatriated or terminated your LTR
status for tax purposes. Check the Annual Information
Statement box if you have already expatriated or terminated
your LTR status, are subject to the tax rules of section
877(b), and are filing this form as your annual expatriation
information statement.
Tax Consequences of Presence in the
United States After Expatriation or
Termination of Residency
If, for any tax year during the 10-year period in which you
are otherwise subject to section 877, you are present in the
United States for more than 30 days in a calendar year
ending in such tax year, you will be treated as a U.S. citizen
or resident for that tax year. You will be subject to U.S. tax
on your worldwide income unless the following exception
applies.
Exception. You can be present in the United States for up
to 60 days without being treated as a U.S. citizen or resident
if you are performing personal services in the United States
for an employer who is not related (within the meaning of
sections 267 and 707) to you and you meet either of the
following requirements.
* You were a U.S. citizen and, within a reasonable period
following your expatriation, you became a citizen or resident
fully liable to tax in the country in which either you. your
spouse, or either of your parents were born, or
* For each year in the 10-year period ending on the date of
expatriation or termination of residency, you were physically
present in the United States for 30 days or tass.
See Pub. 519, U.S. Tax Guide for Aliens, for details
about what constitutes a day of presence in the United
States.
Part I-General Information
This section is to be completed by all filers.
Line 1
Generally, this number is your U.S. social security number.
An incorrect or missing identifying number may result in
failure to expatriate or terminate residency and/or a penalty
of $10.000. If you were never issued a social security
number, please attach a statement explaining the reason.
Lin© 2
If you have a P.O. box, enter your box number instead of
your street address onty if your post office does not deliver
mail to the street address.
LineS
Enter the information in the following order: street address,
city, province or state, and country. Follow the country's
practice for entering the postal code. Do not abbreviate the
country name.
-2-
24
Line 4
Line 9
Enter the country of which you are considered a resident for
tax purposes if different from the country in which your
principal foreign residence is located.
You have no substantial contacts with the United States if
you (a) were never a resident of the United States {as
defined in section 7701(b)}, (b) never held a U.S. passport,
and (c) were not present in the United States for more than
30 days during any of the 10 calendar years preceding your
loss of U.S. citizenship.
Line 5
Date of notification, term) nation, or c la! in. In ord@r to
expatriate for tax purposes {to no longer be subject to U.S.
tax as a U.S. citizen or LTR). you must (a) give notice of an
expatriating act or termination of residency (with the
requisite intent to relinquish citizenship or terminate
residency) to the Secretary of State or the Secretary of
Homeland Security, and (b) provide a statement in
accordance with the information reporting requirements of
section 6039G. The date of your expatriation is the date on
which the latter of these two events occurs.
You will be considered to have given notice of on
expatriating act (with the requisite intent to relinquish
citizenship) to the Secretary of State as of the date that you
either
* Renounced your U.S. citizenship outside the United
States before a diplomatic or consular officer of the United
States pursuant to paragraph (5) of section 349(a) of the
Immigration and Nationality Act, or
» Submitted to a U.S. Embassy or consulate a signed
statement affirming your voluntary and intentional
relinquishment of U.S. citizenship accompanied by
documentation confirming the performance of an act defined
as potentially expatriating by paragraph (1), (2), (3), or (4) of
section 349(a) of the Immigration and Nationality Act
provided that such notification is ultimately confirmed by the
issuance of a Certificate of Loss of Nationality from the
Department of State.
You will be considered to have given notice of a
termination of residency (with the requisite intent to
terminate residency) to the Secretary of Homeland Security
as of the date that you complete Form I-407, Abandonment
of Lawful Permanent Resident Status, before a diplomatic or
consular officer of the United States or at a Port of Entry of
the United States before a U.S. immigration offfcial.
You should retain written evidence of your notification.
Box a. Check this box if you are a former U.S. citizen, and
enter the date on which you gave notice of your expatriation
to the Department of State.
Box b. Cheek this box if you are a former LTR. and enter
the date on which you gave notice of termination of your
LPR slatus to the Department of Homeland Security.
Box c. Check this box if you ore an LTR with dual
re&idency in a treaty country, and enter the date you
commenced to be treated for tax purposes as a resident of
the treaty country (see Former U.S. Long-Teim Residents
(L TRs) on page 1).
If you have not yet notified the Secretary of State or
Secretary of Homeland Security in connection with your
expatriating act or termination of residency, you must file an
amended Form 8854 stating the date on which such
notification occurs.
Line 10
Check the "Yes" box if:
* You are a minor who became a U.S. citizen at birth,
* Neither of your parents was a U.S. citizen at the time of
your birth,
* Your loss of citizenship occurred before you attained age
18Vs, and
* You were not present in the United States for more than
30 days in any of the 10 calendar years preceding your loss
of U.S. citizenship.
Lin© 11
Check the "Yes" box if you have complied with your tax
obligations for the 5 tax years ending before the date on
which you expatriated or terminated your residency,
including but not limited to, your obligations to file income
tax, employment tax, gift tax, and information returns, if
applicable, and your obligation to pay all relevant tax
liabilities, interest, and penalties. You will be subject to tax
under section 877 if you have not complied with these
obligations, regardless of whether your average annual
income tax liability or net worth exceeds the applicable
threshold amounts.
Part III-Annual Information Reporting
Under Section 6039G
If section 877 applies to you. you must complete Part III and
Schedules A (Balance Sheet) and B (Income Statement) for
the 10 tax years beginning with the year that includes the
date of your expatriation or termination of residency,
whether or not you owe tax under section 877 for the tax
year. This means that if you perform an expatriating act or
terminate residency, you must complete both Parts II and III
of this form for the year in which that event occurs.
Exceptions to Filing Part ill
Section 877 does not apply to you if your net worth is less
than $2 million as of the date of your tax expatriation, your
average annual net income tax liability for the 5 tax years
prior to the date of your tax expatriation was not more than
the amount listed under Taxation Under S&ction 877 on
page 1, and you certify that you have met your tax
obligations for the 5 years prior to expatriation.
If you exceed these dollar thresholds and you certify that
you have met your tax obligations, section 877 may etiH not
apply to you if you meet one of the exceptions for dual
citizens at birth with no substantial presence or for certain
minors. See Exceptions to section 877on page 2.
Part ll-lnitial Expatriation or
Termination Information Statement
You do not need to complete Part III of this form if:
» Your average annual net income tax liability for the 5 tax
years ending before the date of expatriation (see line 6 on
the form) was not more than the amount listed under
Taxation Under Section 877 on page 1, your net worth on
line? was less than $2 million, and you checked the 'Yes"
box on line 11.
* You cheeked the "Yes" box on line 8, and the "No" box on
line 9, and you checked the "Yes" box on line 11, or
* You cheeked the 'Yes" box on lines 10 and 11.
This section and Schedules A (Balance Sheet) and B
(Income Statement) must be completed by all individuals
who expatriate or terminate residency during the tax year.
Line 7
Use the balance sheet in Schedule A to arrive at your net
worth.
-3-
25
became a U.S. LPR. For details on U.S. residency (including
the substantial presence test), see Pub. 519.
Llne12a
List at! foreign countries of whteh you are a citizen,
Line 12b
Line 5a
indicate how you became a U.S. citizen. For example, if you
acquired citizenship at birth, write "At Birth." If you acquired
citizenship through naturalization, write "Naturalized
Citizen."
Line 12c
Liatthe appropriate amount in each column for all
nonmarketable stock and securities issued by foreign
corporations that would be controlled foreign corporations if
you were atilt a U.S. citizen or resident. Note that these
amounts are already included on line 5. Do not include
amounts on this line in the total on line 20.
Provide the date on which you became a citizen of each
country listed on line 12a.
LineS
List the total value of all your partnership interests, if you
hold an interest in one or more partnership®, you must
attach a statement to Form 8854 that lists each partnership
separately. Include the employer identification number
(EIN). if any, for each partnership. Describe the assets and
liabilities of each partnership (using the categories on the
balance sheet on page 3 of Form 8854) attributable to your
interest in the partnership.
Line 13
ff you were physically present in the United States for more
than 60 days during the tax year, you will be taxed as a U.S.
citizen or resident and must file Form 1040 for the current
tax year. If in a subsequent year within the 10-year period
you are not physically present more than 30 days during the
year, you will again be subject to section 877 and file Form
1040N R. If you were present more than SO days during the
year, skip line 14.
Lino 9
List the total value of all assets held by trusts that you are
considered to own for tax purposes. You must attach a
statement to Form 8854 that lists each trust separately.
Include the EIN (if any) for each trust. Describe the assets
and liabilities of each trust (using the categories on the
balance sheet on page 3 of Form 6654) attributable to your
interest in the trust.
Line 14
tf you were physically present in the United States more
than 30 days but not more than 60 days during the tax year,
complete lines 14a and b. tf you answer "No" to either
question, you will be taxed as a U.S. citizen or resident and
must file Form 1040 for the current tax year. If you answer
"Yes" to both questions, you remain subject to section 877
for the tax year.
Note. To determine if you are an owner of a trust, see
sections 671 through 679.
Signature
Form 8854 is not considered valid unless yoy sign it. If you
have someone else prepare Form 8S54, you are still
re&ponsible for its correctness.
PaW preparers. Generally, anyone you pay to prepare
Form 88-54 must sign M in the space provided. The preparer
must give you a copy for your records. Someone who
prepares Form 8854 but does not change you a fee should
not aign it.
Lin© 10
Liat the total value of all assets held by nongrantor trusts in
which you are considered to have a beneficial interest. You
must attach a statement to Form 8854 that lists each trust
separately. Include the EIN (if any) for each trust. Describe
the assets and liabilities of each trust (using the categories
on the babnce sheet on page 3 of Form 8854) attributable
to your interest in the trust.
Mote. To determine if you are a beneficiary of a nongrantor
trust, you must allocate the property interests of the trust
based on all relevant facts and circumstances. To determine
the value of your beneficial interest, use the valuation
principles under section 2512. See Section 111 of Notice
97-19 for examples of how the property interests of a
nongrantor trust should be allocated to the beneficiaries of
the trust You can find Notice 97-19 on page 40 of Internal
Revenue Bulletin 1997-10 at wtviv.irs.gov/puMra-ifbs/
irb97-10.pcff.
Schedule A-Balance Sheet
Note. If there have been significant changes in your assets
and liabilities for the period that began S years prior to your
expatriation and ended on the date that you file Form 8854,
you must attach a statement explaining the changes. Also,
attach a similar statement if you expect significant changes
in the 10-year period after expatriation or termination of
residency.
Columns (a) and (b)
Lines 11 and 12
List the fair market value (in U.S. dollars) of each ctaas of
assets and your U.S. adjusted basis (in U.S. dollars) in the
class of assets. You can use good faith estimates of fair
market value and basis. Format appraisals are not required.
Intangible property includes any of the following items that
have substantial value independent of the services of any
individual.
* Patent, invention, formula, process, design, pattern, or
know-how.
* Copyright, literary, musical, or artistic composition.
* Trademark, trade name, or brand name.
* Franchise, license, or contract.
* Method, program, system, procedure, campaign, survey,
study, forecast, estimate, customer list, or technical data.
* Any similar item.
Column (c)
Subtract the amounts in column (b) from the amounts in
column (a) and show the gain or (loss) in column (c). Enter
negative amounts in parentheses.
Column (d)
If you are a former U.S. LTR, it may benefit you to complete
column (d). For more details, see section 877(e)(3)(B). Only
former U.S. LTfls should complete column (d).
Enter in column (d) the fair market value of each asset on
the date you first became a U.S. resident for tax purposes.
Note. The date you first became a U.S. resident for tax
purposes is not always the same as the date you first
Lin© 19
Attach a statement describing and feting the total value of
any other assets you have that are not included on lines 1
through 18.
-4-
' Leigh-Alexandra Basha 2008
26
in accordance with Section V of Notice 97-19,1997-1 C.8.
394. The removal of appreciated property with an aggregate
fair market value in excess of $250,000, from the United
States is an exchange of property covered by this provision.
Enter on line 6 the total amount of gain resulting from any
such exchanges during the tax year, and if you have elected
to enter into a gain recognition agreement with the IRS
deferring the gain, attach a copy of the agreement to your
Form 1040NR. If you dispose of any property covered by a
gain recognition agreement during the tax year, also list the
gain realized on this line. See Section V of Notice 97-19, for
additional information on exchanges and gain recognition
agreements.
Line 20
Add lines 1 through 5 and 6 through 19, not includinQ any
amounts on line 5&. The amounts on line 5a are included in
determining the amounts on line 5.
Line 23
Attach a statement describing and listing the total value of
any other liabilities you have that are not included on line®
21 and 22.
Schedule B-Income Statement
Schedule B is required to satisfy the requirements of section
6039G(b)(5), and must be completed without regard to
whether you have income subject to tax under section 877
for the tax year.
Note. If you are subject to section 877 for all or a portion of
the tax year, and you derive income subject to tax under
section 877 for the taxable year, you are liable for to on
that income as provided in section 1 or section 55. if the tax
computed under such sections exceeds the tax that would
be imposed on you under section 871. This generally means
that you must report all income subject to tax under section
877 on Form 1040NR, whether or not it is effectively
connected with the conduct of a trade or bu&iness in the
United States, and you are not permitted to exclude certain
types of income, such as portfolio interest or capita] gains,
which normally would be exempt from tax in the hands of a
nonresident alien.
Line 7
If, during the 10-year period beginning on the date of your
expatriation or termination of residency, or during the 5-year
period prior to your expatriation or termination of residency,
you contributed U.S. source property to a foreign
corporation that would be a controlled foreign corporation
had you remained a U.S. citizen or LTR, any income or gain
on that property received or accrued by the foreign
corporation during the tax year is treated as received or
accrued by you. See Section VI of Notice 97-19 for
additional information.
LineS
Add lines 1f through 7 to report your total income from U.S.
sources.
Treaty Residents
Lin© 9
Most U.S. tax treaties do not prevent the United States from
continuing to tax former citizens and former LTRs under
domestic law. Unless the treaty prevents it, you will be
subject to the rules of section 877.
List the total amount of all other income or gain for the tax
year.
Penalties
If you are subject to section 877 and required to file Form
8854 for any tax year, and you fail to file or do not include all
the information required by the form or the form includes
incorrect information, you will owe a penalty of $10,000 for
that year, unless it is shown that such failure is due to
reasonable cause and not willful neglect.
Specific Line Instructions
Lines 3 through 6 require reporting of income which, but for
the application of section 877(d), would be income from
sources outside the Unhed States. If you report income on
these lines, you must also report this income as taxable
income on Form 1040NR.
Paperwork Reduction Act Notice. We ask for the
information on this form to carry out the Internal Revenue
jaws of the United States, You are required to give us the
information. We need it to ensure that you are complying
with these laws and to allow us to figure and collect the right
amount of tax.
You are not required to provide the information requested
on a form that is subject to the Paperwork Reduction Act
unless the form displays a valid OMB control number. Books
or records relating to a form or its instructions must be
retained as long as their contents may become material in
the administration of any Internal Revenue taw. Generally,
tax returns and return information are confidential, as
required by section 81Q3.
The average time and expenses required to complete
and file this form will vary depending on individual
circumstances. For the estimated averages, see the
instructions for your income tax return.
If you have suggestions for making this form simpler, we
would be happy to hear from you. See the instructions for
your income tax return.
Line 5
If you owned (within the meaning of section 958(a) or (b)) at
any time during the 2-year period ending on the date of your
expatriation or termination of residency, more than 5G% of
the vote or value of a foreign corporation, income or gain
you receive from the foreign corporation during the tax year
will be treated as from sources within the United States, to
the extent such income or gain is not more than the
earnings and profits from such stock which were earned or
accumulated before the date of your expatriation or
termination of residency while such ownership requirements
were met.
LineS
If, during the current tax year, you exchanged any property,
and (a) the gain would not (but for this paragraph) be
recognized on such exchange in whole or in part, (b) income
derived from such property was from sources within the
United States (or, if no income was so derived, would have
been from such sources), and (c) income derived from the
property acquired in the exchange would be from sources
outside the United States, then the property will be treated
as sold for its fair market value on the date of the exchange,
-5-
27
Appendix 3: Comparison Chart
FITA
(1966)
Time Period
Name of
Legislation
Code Section
affected
Who is
Covered?
1966 -Feb. 5,
1995
Foreign
Investors Tax
Act ("FITA")
HIPAA
(1996)
AJCA
(2004)
Feb. 6, 1995June 2, 2004
Health Insurance
Portability &
Accountability
Act ("HIPAA")
§877
June 3, 2004 June 16, 2008
American Jobs
Creation Act of
2004 ("Jobs Act"
or "AJCA")
§877
New7701(n)
Amended 603 9G
Eliminated
subjective test.
"Expatriating
Individual" is a
citizen or long
term green card
holder : Increased
thresholds:
(1) Average
§877
§2107
§2501
US citizens who Added long term
green card
expatriated for
holders (8 out of
principal
1 5 years)
purpose of tax
avoidance
Added
presumptive tax
avoidance
purpose based on
HEART
(2008)
"Exit Tax"
June 17, 2008present
Heroes Earnings
Assistance &
Relief Tax Act of
2008 ("HEART")
§877A
§2801
"Covered
Expatriate"
Citizens:
(1) Average
annual net income
139K (indexed)
(2) Net worth $2M
(not indexed)
(3) 5 years
US income tax
liability test
Annual net income compliant with US
tax liability for 5
tax laws
($100,000) and
net worth test
($500,000)
preceding years is
124,000 (indexed
for inflation) or
(2) Net worth test
$2M (not
indexed); or
(3) 5 years not tax
compliant
Green card
Holders:
8/15 years and 1, 2
and 3 above
Exception: if
considered resident
or domiciliary
under treaty tie
breaker rules, don't
count the year
Resident
Aliens(non green
card holders)
N/A
28
Who is
Excepted?
US citizens who Get a rulingprove they did
subjective test to
not expatriate
determine if an
with principal
expatriating
individual is not
purpose being
expatriating for
tax avoidance
tax avoidance
purposes
Children
No exception if
child was a dual
citizen if
(1) either parent
was US citizen or
(2) Child in US
more than 30 days
during any of 1 0
years before expat
Dual notice
requirement
[§7701(n)]>
2 steps:
(1) long term
green card holder
file 1-407 for
immigration
purposes
(2) long term
green card holder
file 1-407 for tax
purposes
(3) File form 8854
and each of 10
years thereafter
should file 1040-C
sailing permit
If in US 30 days or
How to
Expatriate?
Exceptions
877 n/a to dual
citizens with no
substantial
contacts with US
Substantial
(1) US resident
under SPT
(2) Had a US
passport
(3) Physical
presence in US
>30 days in any of
1 0 years before
expatriating
29
Exceptions for
Citizens:
(l)Dual citizens at
birth
(a) Duals at birth
(b) Expat, dual
citizen must
remain citizen and
income tax resident
of other country
(c) Expat was not
US resident under
the SPT for more
than 10/15 years
(2) Children who
expat
(a) Before 18 1/2
(b) Not qualify as
US resident under
SPT for more than
10/15 years
*No exemption for
child who is a long
term green card
holder
New Rule
Renouncing US
citizenship=
Effective on earlier
of 4 dates
(1) Renounces US
nationality before
US counselor
(2) Provides DOS
signed statements
of voluntary
renunciation
(3) DOS issues
Certificate of Loss
of Nationality
(4) US citizen's
Certificate of
Naturalization is
cancelled
more/year treated
as a US resident
(60 for
employment)
Income Tax
Implications
Apply two
calculations and
pay the higher.
Apply alternative
tax regime
Taxed for 10
years following
expatriation
Subject to US
income tax
(without benefit of
treaty reduction)
on certain
expanded
categories of
income
(retroactive for (1)
or (2)
Renouncing US
Residency^
Effective on earlier
of
(1) Loss of green
card through
revocation or
administratively or
judicially
determined to have
been abandoned.
File form 1-407; or
(2)taxpayer begins
to be taxed as
resident of foreign
country under
treaty
(2) Does not waive
treaty benefits
(3) Notifies IRS of
start of foreign
residency under
treaty (770 l(b)(c))
Both should file
form 8854 but only
1 time
Mark to Market tax
= income tax on
unrealized gain on
property deemed
sold on day before
expatriation
l s t 600Korgainis
exempt
Special NonGrantor Trust rules
Special treatment
for certain deferred
accounts
30
Addressed treaty
override
provisions;
Reed Amendment
introduced.
Other
Estate and
Gift Tax
Implications
Transfer tax
imposed on
expatriate who
made gifts
(2501(a)(3)or
died (2 107)
within 10 years
of expatriation
Filing
Requirements
30 days of
presence in a year
triggers world
wide taxation for
that year and gift
& estate tax if gift
or die in such year
Required Published list in
Federal Register
Estate tax applies
Same
for 1 0 years
following
expatriation on
certain expanded
categories of
assets, e.g. certain
closely held
foreign stock.
Same for gift tax
(including gifts of
stock in US
corporations)
File US tax return File 6039-G
if have US source statement and US
tax return
income
(1040NR) every
year for 10 years
following
expatriation even
if no US source
income
File Form 8854
every year for 1 0
years
1
Leigh-Alexandra Basha 2008
31
No 30 day issue
Reed Amendment
still in force?
Gifts or bequests to
a US person from a
"covered
expatriate" incurs
US successions tax
at highest marginal
estate/ gift tax rate.
Some exceptions:
gift or estate tax
return filed. Credit
for foreign tax paid
File form 8854 in
year of expatriation
only
Part B:
The Proposed Form 1041NR: Foreign Fiduciary Income Tax
Reporting
I.
Currently there is no Form 1041NR or IRS form to report a US
beneficiary's share of income from a foreign nongrantor trust. Currently,
taxpayers must use Form 1040NR for a foreign nongrantor trust earning US
source or effectively connected income. For example, under the current Form
1040NR there is no section to calculate the DNI and the distribution deduction
nor designated schedule K-l for the beneficiaries. The AICPA Task Force has
been working with and assisting the IRS in developing a new form. The ABA
Real Property Probate and Trust Section- International Tax Planning Committee
has assisted the Task Force with this project and provided comments and
suggested changes to the Form 1041NR. Once Form 1041NR is developed,
together with a set of instructions, it will help taxpayers and their preparers
considerably.
Part C:
I.
Increased Enforcement of Foreign Reporting
The Joint Committee on Taxation Staff Proposal:
The Joint Committee on Taxation Report dated August 3, 2006, entitled
Additional Options to Improve Tax Compliance, contains a proposal intended to
enhance Foreign Bank Account Report (FBAR) compliance. It is a two-part
proposal, one addressing legislative changes and the other administrative changes.
a.
Legislative Changes: Regarding legislative changes under the JTC
proposal, income tax preparers would be subject to a statutory due
diligence requirement in Section 6695(g) relating to the earned income
credit in determining whether the preparer's client is required to file an
FBAR or Form 3520. As a result, the return preparer would be required to
explain to the client the reporting requirements pursuant to the FBAR or
Form 3520, and definitions (such as "financial interests" and "signature
authority") that are used in determining whether the forms are required to
be filed, and the applicable penalties, civil and criminal if the client
negligently fails to file the forms when required to do so. The preparer
would also be required to document the client's responses and retain the
documentation for possible use in an audit with respect to the client's
income tax return. A preparer's penalty for failure to follow the due
diligence rules would be specified in the statute but should be generally
greater than the $100 penalty for failures with respect to the earned
income credit.
II.
Recommended Administrative Changes:
a.
The JTC proposal would require the FBAR form and its
accompanying instructions to be updated so that the form itself would not
be an obstacle to compliance. The form would be revised to broaden the
32
scope of what should be reported even though it arguably falls outside the
literal language of the instructions.
b.
The JTC proposal would also require that the FBAR instructions
be expanded to cover foreign trusts established by US persons for which a
trust protector, usually a foreign person, is appointed. The JTC proposal
would attribute the duties and powers of a trust protector to the US person
for FBAR reporting purposes.
III.
The Bush Administration Proposal:
a.
The Bush administration in its fiscal year 2009 budget proposed
that the Code provisions imposing a penalty for failure to file Form 3520
be amended to impose an initial penalty equal to $10,000 or 35% of the
gross reportable amount if the gross reportable amount is unknown. The
additional $10,000 penalty for continued failure to report would remain
unchanged. Thus, even if the gross reportable amount is not known, the
IRS would be able to impose a $10,000 penalty on a person who fails to
report correctly as required and would be able to impose a $10,000 penalty
for each 30-day period or fraction thereof that the failure to report
continues. If a person provided enough information for the IRS to
determine the gross reportable amount, the penalties would be capped at
the gross reportable amount as under current law.
IV.
Other Proposals:
a. In addition to the proposals discussed above, several other proposals
have been advanced to facilitate IRS enforcement efforts. One such
proposal would be to file FBAR forms with Forms 1040 or 1120.
b. On July 24, 2008, the Senate Finance Committee indicated the intention
to introduce six new measures to curb offshore tax evasion, including
lengthening the statute of limitations for prosecuting individuals who fail
to report foreign bank accounts. Some of the proposals include (1) giving
IRS more authority to enforce reporting requirements, (2) clarifying
information that must be reported, (3) requiring the reports to be filed with
individual and corporate tax returns, (4) revising the definition of
ownership to include beneficial ownership of a corporations, and (5)
including the reports under a tax code section ensuring that when
taxpayers do file the information, the state of limitations will not expire
until three years afterwards. The report stated there is a wide-spread
offshore abuse problem, including the 19,000 business entities registered
at the Ugland House in the Cayman Islands or the 500,000 incorporations
in the British Virgin Islands. To counter that, some have indicated that
there are half a million business entities registered in Delaware, not one
with a physical office.
33
IV.
IRS Fact Sheet:
a.
The IRS issued a fact sheet on foreign trust reporting requirements.
Tax Analysts TM has published a summary. The fact sheet as was
released by the IRS and explains the reporting and filing requirements and
income tax treatment for foreign trusts. The fact sheet is part of the IRS'
program to improve voluntary compliance with international tax
provisions and to reduce the international tax gap. It was released on
August 4, 2008.
V.
Incorporation Transparency and Law Enforcement Assistance Act:
a.
This Act proposed by Carl Levin in the spring, has not yet passed
is one to monitor. If passed, it will require states to obtain a list of the
beneficial owners of each corporation or LLC formed under their laws.
The purpose is to protect the United States from US corporations being
misused to commit terrorism, money laundering, tax evasion or other
misconduct. If enacted, the state would have until October to implement
its provisions.
#5567510 vl
34

San Francisco, CA Hyatt Regency September 11

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