Failure to File IRS Form 8854 after Surrendering a Green Card or after Expatriation
I was sharing with my colleague that we have had 5 inquiries this week on a single topic. US exposed persons who gave up US passports or Green Cards but failed to file Form 8854 -
Initial and Annual Expatriation Statement - https://www.irs.gov/forms-pubs/about-form-8854
1. Is it the end of the world?
2. Does it mean they continue to be subject to US taxes?
On their US source income? Yes
On worldwide income? Usually- No
3. Would they be subject to penalties? Potentially yes
I'll first provide some technical background.
The tax consequences associated with expatriating changed significantly with the enactment of the Heroes Earnings Assistance and Relief Tax Act of 2008 (P.L. 110-245, 6/17/08; the "HEART legislation"). U.S. citizens seeking to terminate their citizenship and long-term residents seeking to return their green card (collectively, "expats") are no longer subject to an alternate U.S. income tax regime for ten years following the date of expatriation. Instead, section 301 of the HEART legislation added two new sections to the Code: a new income tax provision, Section 877A, that subjects certain expats to an exit tax; and a new transfer tax provision, Section 2801, pursuant to which the U.S. recipients of gifts and bequests from certain expats could be subjected to gift or estate tax. In addition, other Code provisions were revised to be consistent with the new approach.
To Whom does the Expat Relief Apply
The Expat Relief is designed to address two distinct but interrelated issues:
(i) a taxpayer’s noncompliance with U.S. income tax return filing requirements
as well as
(ii) a taxpayer’s failure to file Form 8854.
While the failure to file tax returns leaves the statute of limitation open indefinitely in which the IRS could assess and collect the tax. The interesting aspect of the Expat Relief is that in some ways it is more limited than the existing options that are available through the Streamlined Foreign Offshore Procedures and Section 877A.