This article has been written specifically for U.S. CPAs and other U.S. tax preparers (I will use the term U.S CPAs to include any other form of U.S. tax preparer throughout this article). I am writing this article because too many of my clients have relinquished green cards lately and not known that they need to file a Form 8854. They all had U.S. CPAs who prepared their annual U.S. tax filings, but who did not inform them of this obligation.
First, I strongly advise all of my clients that Form 8854 should be prepared by both a U.S. CPA and a U.S. tax attorney because it has very specific legal questions that are not typically within the U.S. CPA’s purview. For your own risk management, it is best if you seek counsel for your client.
Second, not all green card holders are considered “long term residents” for purposes of Form 8854. Only long term residents are required to file Form 8854. Note 26 IRC §877(e)(1) clearly states that long term residents will be treated as U.S. citizens renouncing citizenship.
A taxpayer who is required to file Form 8854, must file this form when they file their income tax return for the year in which they relinquished their green card or renounced their U.S. citizenship. If the taxpayer applies for an extension to file their income tax return, they may file Form 8854 when they actually file their income tax return.
However, it appears that Form 8854 cannot be filed if it was either forgotten or not timely filed. If it was filed with after an extension that was applied for in a timely manner, the Form was timely filed. If a taxpayer does not file a Form 8854, or does not file this form on time, they will be considered ‘covered expatriates’ pursuant to the IRS’ position in Notice 2009-85 Sections 2A, 8C and Example 22.
There are a number of possible ways to choose to file the Form 8854 late, but they all carry significant risk of audit and of being rejected by the IRS. In addition, IRC 6039G (c)(2) clearly imposes a penalty of $10,000 for failure to file Form 8854. Note that the date of the relinquishment, if between December and January, can be helpful here, so be mindful of the date that the I-407 was delivered. I had a case where this saved the day!
IRC Section 6039G (d) clearly states that the IRS will be notified by the Department of State and any other agency dealing with the relinquishment of a green card, when a taxpayer’s status changed. This way the IRS will know that a Form 8854 was due. We do not yet see this happening regularly, but it is codified. In September, 2019, the IRS published new procedures for filing for U.S. citizens who have or will renounce their citizenship. However, it does not appear that these procedures are available to green card holders (long-term permanent residents) relinquishing their green cards.
Some practitioners downplay the severity of the consequences if a taxpayer is considered a ‘covered expatriate’. I implore you not to do so. Not only would the Exit tax apply, which I agree might not have significant effect for many of our clients, but IRC Section 2801 would also apply. If you are not familiar with the 2801 tax, please contact me and I will happily speak with you about its unprecedentedly broad application, its long term effects on families and its high rate with no exemption or credit.
In summary, I emphatically request that from all tax professionals to ask your clients annually whether they have relinquished their green card in the relevant tax year or at any point if they are new clients. If they have, urge them to obtain legal counsel to complete the Form 8854 with your office.
Disclaimer: None of this article is to be construed as legal advice. If you have encountered any issues discussed here, get the appropriate legal advice for you and for your client. To contact us, click here.