Consequences of not Telling the IRS You Expatriated

  • author Mark Nestmann
  • calendar September 20, 2010

I've written widely in this blog about the subject of expatriation.  From a U.S. perspective, that's the act of giving up your U.S. citizenship and passport, and setting up legal residence outside the United States.

This blog entry is a little technical, so if you're not familiar with the expatriation, or why you might wish to consider it, click here

Under the "old" expatriation law that applied from 2004-2008, you had to file IRS Form 8854 (Expatriation Information Statement) in order for your expatriation to be effective from a tax perspective.  In other words, without filing Form 8854, Uncle Sam still considered you to still be living on the plantation, as it were.  You were subject to both tax on your worldwide income and all the reporting obligations that come with being a U.S. citizen or permanent resident.

Under the "new" law that took effect June 17, 2008, expatriation for tax purposes occurs at the time a former U.S. citizen or long-term resident performs an "expatriating act" as defined in the amendments to the Tax Code that came into effect on that date.

For this purpose, expatriation occurs on the earliest of any of the following dates:

•    The date you renounce U.S. nationality before a U.S. diplomatic or consular officer.

•    The date you furnish to the Department of State a signed statement of voluntary relinquishment of U.S. nationality confirming the performance of an act of expatriation.  (This must be done in a personal appearance before a consular officer.  You can't just send the State Department a letter telling them you've expatriated).

•    The date the Department of State issues you a certificate of loss of nationality.

•    The date a U.S. court cancels your certificate of naturalization.

There is no requirement that you complete Form 8854 for your expatriation to become effective.  That may make it tempting not to file the form, which requires that you list every asset you own to calculate your net worth and any unrealized gains in your investment portfolio.  This could be especially true if you're a "covered expatriates" (e.g., have a net worth over $2 million or meet other conditions defined in the expatriation amendments).

However, there are still consequences if you don't file the form.

First, there's a $10,000 penalty for failing to file it.

Second, you automatically become a "covered expatriate."  That triggers either the termination or punitive taxation of future distribution from any U.S. retirement or pension plan.  It also means that if you make any future gifts or bequests to any U.S. recipient that exceed $13,000 annually, the recipient must pay a tax on the excess amount at the highest estate rate then applying.  Finally, if you have unrealized gains that exceed $627,000 (2010 threshold, adjusted annually for inflation), you'll need to pay tax on those gains as if you sold them on the day before expatriation.

And don't think the IRS won't know you've expatriated without Form 8854.  State Department regulations require the IRS to be informed when a certificate of loss of nationality is issued.  So if you have serious tax problems, expatriate without dealing with them, and then fail to file Form 8854, the IRS won't necessarily go away.

In a worst-case scenario the IRS could even refer your case to the Justice Department, which could issue a criminal indictment.  It could then notify Interpol of the indictment.  Interpol would in turn issued a "red notice," requesting assistance worldwide for your arrest and extradition to the United States.  The same sequence of events (less extradition) could occur if you travel to the United States.

Just a word to the wise!

Copyright © 2010 by Mark Nestmann

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