What are the consequences of becoming a “covered expatriate” for failing to comply with Section 877(a)(2)(C)?
Many lay persons are stumped as they try to understand the tax consequences of Sections 877 and 877A. The language in the drafting of the statutes is not so clear. Be careful to understate the meaning and how the IRS interprets the law.
One of the greatest risks for anyone who wants to self-diagnose their path towards becoming a former U.S. citizen, is Section 877(a)(2)(C). To be blunt, anyone who renounces their citizenship at the Embassy or Consulate will find that process relatively easy. However, no one at the U.S. Department of State will provide tax advice or try to interpret the meaning of Section 877(a)(2)(C). Indeed, the Foreign Affairs Manual used to read to the person taking the oath, simply provides the standard overview language of “special tax consequences” arising form the renunciation.
Even the most economically modest individual, with little assets or income, can fall into this trap for the unwary – Section 877(a)(2)(C). The statute is spelled out below –
- This section shall apply to any individual if—
- (A) the average annual net income tax . . . is greater than $124,000,
- (B) the net worth of the individual as of such date is $2,000,000 or more, 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.