Probably the most misunderstood concept in the U.S. tax expatriation law provisions is Section 877(a)(2)(C) for several reasons.
1. People of modest means with modest to little income and little to no assets can fall into this category.
2. Most individuals think the mark-to-market tax upon expatriation is only applicable to rich, wealthy or otherwise individuals with high levels of income. See, Accidental Americans” – Rush to Renounce U.S. Citizenship to Avoid the Ugly U.S. Tax Web” International Tax Journal,CCH Wolters Kluwer, Nov./Dec. 2012, Vol. 38 Issue 6, p45
3. Lawful permanent residents (“LPRs”) can inadvertently fall into this category without doing anything, other than living principally in a country outside the U.S., which has a U.S. income tax treaty. See, Oops…Did I “Expatriate” and Never Know It: Lawful Permanent Residents Beware! International Tax Journal, CCH Wolters Kluwer, Jan.-Feb. 2014, Vol. 40 Issue 1, p9. At the end of this post is a list of the countries with U.S. income tax treaties.
4. Few individuals understand exactly what must be included and reported in IRS Form 8854 to be able to satisfy the certification requirement above. For more details, see What are the consequences of becoming a “covered expatriate” for failing to comply with Section 877(a)(2)(C)?
The relevant provisions of Section 877(a)(2)(C) are highlighted 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.
Failure to certify truthfully about compliance with U.S. tax law for 5 years, as set forth above in the statute, means the individual necessarily will be a “covered expatriate.” Does this mean that if a U.S. citizen who renounces citizenship or a LPR who abandons their green card, will necessarily be a “covered expatriate” if they fail to follow IRS Notice 2009-45 “Guidance for Expatriates Under Section 877A”?
What steps will the IRS take if someone intentionally does not comply with the certification requirement? Will they become a target of a criminal investigation, and under what circumstances? What could be the focal point of IRS Criminal Investigations of Former U.S. Citizens and Lawful Permanent Residents?
There are many pending and open questions not answered by current law, as the U.S. Treasury has yet to publish regulations under Section 877A, 877 or 2801.
APPENDIX – Countries with Income Tax Treaties with the United States
People’s Republic of China
the Czech Republic
Trinidad and Tobago