Biden 2024 Green Book: Message To Accidental Americans – Either comply or renounce!

Part I – Summary of post:

The proposals for Americans abroad include:

1. A provision to (and presumption of) heighten enforcement of the 877A exit tax through changes in the Internal Revenue Code

2. A possible “carve out” from the 877A exit tax for certain Americans abroad with limited ties to the United States (under rules prescribed by the Treasury Secretary)

3. NO RELIEF whatsoever from U.S. citizenship taxation and the way that the rules apply to Americans abroad. This assumes a continuation of U.S. citizenship taxation with no evidence of change.

In other words: Either comply or renounce!

Part II – The Biden 2024 Green Book

On March 9, 2023 the Biden Administration released its proposed budgent- AKA “The Green Book” for 2024. It contained a very large number of tax increases that would impact Americans generally and Americans abroad specifically. The next day Secretary Yellen appeared before the Ways And Means Committee to answer questions. The hearing was interesting and may be watched here:

The Complete Text of the Green Book is here:

https://home.treasury.gov/system/files/131/General-Explanations-FY2024.pdf

The Revenue Tables are here:

https://home.treasury.gov/system/files/131/General-Explanations-FY2024-Table.pdf

Part III – Provisions specifically aimed at Americans abroad

Although the Green Book contains MANY provisions that would impact Americans abroad, it includes a specific section which recognizes the reality of citizenship renunciations. The proposal includes provisions that:

(1) Are designed to increase enforcement of the 877A Exit Tax (the bad news)

(2) Provides a mechanism for certain Americans Abroad to simply “Renounce U.S. Citizenship” without being subjected to the complexity of the Exit Tax Regime (the “good news”)

The proposal appears to be the same (or very similar) to the proposals in the 2023 Biden Green Book. The purpose of this post is to comment on how the proposal (if enacted) “might” impact those Americans abroad who renounce U.S. citizenship.

The proposals are found here:
Greenbook 2024-Proposal Accidental Americans

Part IV – Thoughts on the two proposals directly affecting Americans abroad

Strengthening enforcement of the 877A Exit Tax – the “bad news”

First, the proposal would provide that, in the case where a taxpayer is required to provide Form 8854 to the IRS with their tax return, the time for assessment of tax will not expire until three years after the date on which Form 8854 is filed with the IRS. This will create parity with the current statute of limitation rules for tax returns when other information returns relating to various international transactions or assets are required to be filed with the return. The proposal will reduce abuse and noncompliance with respect to high net wealth expatriates.

JR Commentary: The obvious purpose is to ensure that the time for audit doesn’t expire until three years after the Form 8854 is actually filed. Because the 8854 is the mechanism to certify five years of tax compliance, this means that the those who renounce without filing the Form 8854, will never be safe from audit and possible assessment of the 877A Exit Tax. This is true for ALL those who relinquish U.S. citizenship and is NOT restricted to “high net wealth expatriates”. That said, the reference to “high net wealth expatriates” (whatever that is) provides a clue to the second part of the proposal, to provide relief for “certain” “Americans abroad”.


Providing relief as designated by the Treasury Secretary to “certain” Americans abroad – covered expatriates for a narrow class of lower-income dual citizens with limited U.S. ties. – the “good news”

To provide relief from the rules for covered expatriates for a narrow class of lower-income dual citizens with limited U.S. ties.

Second, the proposal will grant the Secretary and her delegates authority to provide relief from the rules for covered expatriates for a narrow class of lower-income dual citizens with limited U.S. ties. This relief would apply only to taxpayers that have a tax home outside the United States and satisfy other conditions that ensure that their contacts with the United States are limited, and whose income and assets are below a specified threshold. Evidence of limited contacts with the United States may include a demonstration that the taxpayer’s primary residence has been outside the United States for an extended period. Evidence of the taxpayer’s income and assets may include a foreign tax return, information about the value of property owned by the taxpayer and the taxpayer’s sources of income, or information demonstrating that a certain amount of income earned from working outside the United States is excludable from U.S. tax. No inference would be intended that the evidence acceptable to the Secretary under this provision constitutes the filing of a U.S. tax return.

JR Commentary: This is potentially very significant. At it’s core this proposal appears to allow the Treasury Secretary to exempt certain Americans abroad from the 877A exit tax regime. Note that it applies to “covered expatriates”. The term “covered expatriate” is defined in IRC 877. A person can be a “covered expatriate” for any of the following three reasons:

(A) the average annual net income tax (as defined in section 38(c)(1)) of such individual for the period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $124,000 (indexed to inflation and is now approximately $180,000)
(B) the net worth of the individual as of such date is $2,000,000 or more (not indexed to inflation), or
(C) such individual fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.

Presumably the Treasury Secretary is granted the authority to provide relief in any of the above three circumstances. It appears that relief can be granted for certain individuals with a net worth that exceeds 2 million USD.

The condition for providing the relief is that the individual has a “tax home” outside the United States and that the individual has limited contact with the United States. Evidence of “limited contact” may include having a primary residence outside the USA, length of time living outside the USA, income sources outside the USA, etc.

Part V – The Verdict: Comply or Renounce

Verdict: This is designed specifically to make renunciation of U.S. citizenship easier for Americans abroad. It is NOT designed to ease the tax compliance burden for those Americans abroad who wish to remain U.S. citizens.

In other words: this is a provision to incentivize renunciation!

John Richardson – Follow me on Twitter @Expatriationlaw

Appendix – Text Of The 2024 Green Book Proposals aimed at Americans renouncing U.S. citizensip

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

ADDRESS COMPLIANCE IN CONNECTION WITH TAX RESPONSIBILITIES OF EXPATRIATES

Current Law

An individual may become a U.S. citizen at birth either by being born in the United States (or in certain U.S. territories) or by having a parent who is a U.S. citizen. All U.S. citizens generally are subject to U.S. income taxation on their worldwide income, even if they reside abroad. U.S. citizens that reside abroad also may be subject to tax in their country of residence. Potential double taxation is generally relieved in two ways. First, U.S. citizens can credit foreign taxes paid against their U.S. taxes due, with certain limitations. Second, U.S. individuals may exclude from their U.S. taxable income a certain amount of income earned from working outside the United States. U.S. citizens living abroad are also eligible for the same exclusions from gross income and deductions as other U.S. taxpayers, and therefore may have taxable income that is low enough that no income tax is due.

The Internal Revenue Code (Code) imposes special rules on certain individuals who relinquish their U.S. citizenship or cease to be lawful permanent residents of the United States (expatriates). Expatriates who are “covered expatriates” generally are required to pay a mark-to-market exit tax on a deemed disposition of their worldwide assets as of the day before their expatriation date. An expatriate is a covered expatriate if they meet at least one of the following three tests: (a) has an average annual net income tax liability for the five taxable years preceding the year of expatriation that exceeds a specified amount that is adjusted for inflation (the tax liability test); (b) has a net worth of $2 million or more as of the expatriation date (the net worth test); or (c) fails to certify, under penalty of perjury, compliance with all U.S. Federal tax obligations for the five taxable years preceding the taxable year that includes the expatriation date (the certification test).

The definition of covered expatriate includes a special rule for an expatriate who became at birth a citizen of both the United States and another country and, as of the expatriation date, continues to be a citizen of, and taxed as a resident of, such other country. Such an expatriate will be treated as not meeting the tax liability or net worth tests if they have been a resident of the United States for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation occurs. However, such an expatriate remains subject to the certification test.

If a taxpayer renounces U.S. citizenship or abandons lawful permanent resident status, that taxpayer must file Form 8854, Initial and Annual Expatriation Statement, with the taxpayer’s U.S. tax return to make the certification described in the preceding paragraph and provide information to determine whether the individual is subject to the exit tax (and to compute such tax, if applicable).

General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals

Generally, the Internal Revenue Service (IRS) has three years from the date a return is filed to assess the tax. However, existing law extends the assessment statute of limitations in certain cases, such as when a taxpayer fails to furnish required information returns relating to various international transactions or assets. In these cases, the statute of limitations does not expire until three years after the information required to be reported is provided. Existing law does not include Form 8854 as one of the information returns that would trigger an extended statute of limitations.

Under the Foreign Account Tax Compliance Act (FATCA) provisions of the Code, a foreign financial institution is required to collect certain information about U.S. persons who hold an account with the institution, including the person’s U.S. taxpayer identification number (TIN). A foreign financial institution that fails to comply with these rules may be subject to U.S. withholding tax on certain U.S. source payments. Foreign financial institutions consequently routinely require an account holder who is a U.S. citizen to provide a TIN.

With some exceptions, an individual who is not a U.S. citizen is required to obtain a certificate from the IRS (generally referred to as a “sailing permit”) that the individual has complied with all of their income tax obligations before departing from the United States.

Reasons for Change

Form 8854 is critical to the IRS’s ability to identify expatriating taxpayers. If a person expatriates but fails to include the form with their tax return, it is difficult for the IRS to identify such a failure, and consequently the IRS may not be aware that the person has expatriated.

Although the IRS receives information on expatriating individuals from the Department of State or from the United States Citizenship and Immigration Service, the information is received after the expatriating act and does not include TINs, which means that it is more difficult and time- consuming for the IRS to match this information with taxpayer records. In the case of long-term permanent residents, many are not aware of the requirement to file Form 8854 when they surrender their green cards, and the IRS has no established methodology of identifying such cases. Because of these difficulties, the IRS may not discover that an individual has expatriated and failed to file Form 8854 until more than three years after the individual files their tax return for the year of expatriation. In these circumstances, unless the IRS proves fraud, the IRS may be barred from making any expatriation related tax assessments because the assessment statute of limitation on the taxpayer’s tax return may have already expired. These cases can involve substantial amounts of foregone exit tax and related taxes, and high net wealth taxpayers can exploit the tax system by simply failing to file Form 8854 with their tax return.

Lower-income individuals who have spent most of their lives abroad may find complying with these rules difficult when attempting to expatriate. A dual citizen who has spent most of their life outside the United States will be considered a covered expatriate despite having relatively low income and assets if the individual does not certify to the IRS compliance with all U.S. Federal tax obligations for the five preceding taxable years. Some dual citizens who have spent most of their lives outside the United States may not have previously filed a U.S. tax return or obtained a TIN. Foreign financial institutions in some countries have threatened to close bank accounts of U.S. citizens who do not provide a TIN. U.S. citizens who are citizens and residents of foreign countries and have limited contacts with the United States may wish to expatriate, but in order to avoid being considered covered expatriates such individuals need to be able to certify that they are compliant with all U.S. Federal tax obligations for the five preceding taxable years. For taxpayers with modest incomes who have not been filing U.S. tax returns but have been filing tax returns and paying tax in their countries of residence, the cost and practical difficulties of certifying compliance with their U.S. Federal tax obligations may impede their ability to satisfy the requirements for expatriation. For example, it may be difficult to find a U.S. tax advisor to prepare a U.S. tax return in the taxpayer’s country of residence, and the cost of doing so may be significant for a lower-income taxpayer. If the taxpayer would not owe any U.S. tax, the benefit to the IRS of the filing of such tax returns is limited.

The requirement for an alien to obtain a sailing permit is no longer necessary as the IRS has other tools to help ensure tax compliance, including withholding tax requirements applicable to payments to nonresident aliens that have been implemented since the sailing permit requirement was originally enacted.

Proposal

First, the proposal would provide that, in the case where a taxpayer is required to provide Form 8854 to the IRS with their tax return, the time for assessment of tax will not expire until three years after the date on which Form 8854 is filed with the IRS. This will create parity with the current statute of limitation rules for tax returns when other information returns relating to various international transactions or assets are required to be filed with the return. The proposal will reduce abuse and noncompliance with respect to high net wealth expatriates.

Second, the proposal will grant the Secretary and her delegates authority to provide relief from the rules for covered expatriates for a narrow class of lower-income dual citizens with limited U.S. ties. This relief would apply only to taxpayers that have a tax home outside the United States and satisfy other conditions that ensure that their contacts with the United States are limited, and whose income and assets are below a specified threshold. Evidence of limited contacts with the United States may include a demonstration that the taxpayer’s primary residence has been outside the United States for an extended period. Evidence of the taxpayer’s income and assets may include a foreign tax return, information about the value of property owned by the taxpayer and the taxpayer’s sources of income, or information demonstrating that a certain amount of income earned from working outside the United States is excludable from U.S. tax. No inference would be intended that the evidence acceptable to the Secretary under this provision constitutes the filing of a U.S. tax return.

The requirement for an alien to obtain a sailing permit would be repealed. The proposal would be effective for taxable years beginning after December 31, 2023.

3 thoughts on “Biden 2024 Green Book: Message To Accidental Americans – Either comply or renounce!

  1. shalombresticker

    Hi,
    Regarding what you wrote, “It appears that relief can be granted for certain individuals with a net worth that exceeds 2 million USD.”
    It says, “This relief would apply only to taxpayers that have a tax home outside the United States and satisfy other conditions that ensure that their contacts with the United States are limited, and whose income and assets are below a specified threshold.”
    So I would guess that there will probably will not be relief for those who are “covered” because their assets are $2M+.

    __________________________________________________

    Reply: You may be right. But, it appears to me that the regulatory authority would be broad enough to allow for a higher threshold.

    Reply
  2. Margo S.

    My understanding is that the normal statute of limitations for these things (IRS investigation of a tax return) is 3 years. Doesn’t the IRS currently have 3 years to investigate a Form 8854?

    __________________________________________________

    Response: The IRS currently has three years to audit a return. In the case of the failure to include certain information returns that would have been required as part of that return, the IRS has three years to audit from the date that the information return was actually filed. The proposal is to add the Form 8854 to the group of information returns, whose omission would extend the audit period for three years from the date of the actual filing the Form 8854 (regardless of when the tax return was originally filed).

    Reply
  3. Pingback: FATCA, Foreign Information Returns And The IRS Statute Of Limitations For Americans Abroad | PREP Podcaster

Leave a Reply