Introduction: For whom the “Form” tolls …
I would not want the job that the IRS has. There are many “information reporting requirements” in the Internal Revenue Code. The IRS has the job (sometimes mandatory “shall” and sometimes permissive “may”) of having to create forms that reflect the intent of the Internal Revenue Code. The forms will necessarily reflect how the IRS interprets the text and intent of the Code. Once created, the “forms” become a practical substitute for the Code. If you look through your tax return you will “form” after “form” after “form”. The forms reflect how the various provisions of the Internal Revenue Code are “given meaning” (if the meaning can be determined).
The Form (in theory) follows the requirements of the Internal Revenue Code …
Every “form” is the result of one or more sections of the Internal Revenue Code. For example, Form 8833 is described as:
Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)
Taxpayers use this form to make the treaty-based return position disclosure required by Internal Revenue Code section 6114. Dual-resident taxpayers use this form to make the treaty-based return position disclosure required by Regulations section 301.7701(b)-7.
Form 8833 reflects how the IRS understands Internal Revenue Code sections 6114 and 7701(b) and how it attempts to give effect to those sections. Imagine having the job the job of creating forms for the Internal Revenue Code. In most cases the IRS has done an admirable job. In some cases, the IRS form may not accurately reflect the language and intent of the statute.
But, back to the Internal Revenue Code and the Form 8854 Balance Sheet …
This post is about some (but not all) aspects of IRS Form 8854. Form 8854 is familiar to most who relinquish U.S. citizenship or abandon their green card. In July 2014, the “American College of Trust and Estate Counsel” wrote the IRS an extensive submission describing many discrepancies between Internal Revenue Code S. 877A and IRS Form 8854. The focus of this post is less ambitious. It is restricted to a discussion of the relationship between Internal Revenue Code S. 6039G and the “balance sheet” found in Part V of IRS Form 8854.
Do the asset disclosures required in Part V of Form 8854, to the extent that they apply to “noncovered expatriates”, follow the requirements of Internal Revenue Code 6039G?
Back to the future: The evolution of “asset disclosures” and Form 8854 …
The evolution of Form 8854 may be seen here. A perusal of Form 8854 over the years reveals that:
Since 2009, every release of Form 8854 has required full asset disclosures for any person expatriating after June 16, 2008. This means that asset disclosure has been required by Form 8854 for both “covered expatriates” and for “noncovered expatriates”.
Prior to 2009, no release of Form 8854 required full asset disclosure for “noncovered” expatriates. This is significant because this means that those with assets of less than two million USD were NOT required to disclose their assets.
This is probably explained by the fact that prior to June 16, 2008, the value of assets was relevant ONLY to determine whether someone was a “covered expatriate”. After June 16, 2008 the value of “assets” was relevant to determine the actual expatriation tax.
Internal Revenue Code Sections: 6039G, 877A, 877(a)(2) and Form 8854 …
Form 8854 has been designed to do the work of the above three sections of the Internal Revenue Code. Let’s see how.
Form 8854 and Internal Revenue Code S. 6039G
26 U.S. Code § 6039G – Information on individuals losing United States citizenship
Includes in part:
(a) In general Notwithstanding any other provision of law, any individual to whom section 877(b) or 877A applies for any taxable year shall provide a statement for such taxable year which includes the information described in subsection (b).
(b) Information to be provided Information required under subsection (a) shall include—(1)the taxpayer’s TIN,
(2) the mailing address of such individual’s principal foreign residence,
(3) the foreign country in which such individual is residing,
(4 )the foreign country of which such individual is a citizen,
(5) information detailing the income, assets, and liabilities of such individual,
(6) the number of days during any portion of which that the individual was physically present in the United States during the taxable year, and
(7) such other information as the Secretary may prescribe.
The 6039G requirement applies to those who are “covered expatriates” under the rules of Internal Revenue Code 877A (and under 877(b)). (Those expatriating after June 16, 2008 are subject to the requirements of 877A.) This means that the requirement to report “(5) information detailing the income, assets, and liabilities of such individual,” applies ONLY to those who are “covered expatriates”. Therefore, the part of Form 8854 which requires “(5) information detailing the income, assets, and liabilities of such individual,” should apply ONLY to those who are “covered expatriates”.
The Form 8854 balance sheet is found in Part V of the current version of Form 8854.
Notice that the instructions at the top of Part V specifically say:
Form 8854 (2015)
Balance Sheet and Income Statement
List in U.S. dollars the fair market value (column (a)) and the U.S. adjusted basis (column (b)) of your assets and liabilities as of the following date.
• Part II filers – the end of the tax year for which you are filing the form
• Part IV filers – your expatriation date.
Part IV filers do not complete column (d).
The above directive is described as applying to ALL people expatriating in the current year. The directive is NOT restricted to “covered expatriates”! Yet the asset disclosure requirements in 6039G apply ONLY to “covered expatriates”.
The Part V balance sheet requires the disclosure of very significant information about the complete scope of an “expatriate’s assets”. The balance sheet requires:
- the identification of all assets
- in the case of property sufficient information to determine any deemed capital gains
- in the case of “Foreign Pensions” the present value on the date of expatriation
- significant information about “specified tax deferred accounts”
- significant information about “granter trusts”
- valuation of controlled foreign corporations
- more …
It is the most intrusive “asset inquisition” known to man.
Form 8854 appears to require this asset disclosure:
- whether the “expatriate” is a “covered expatriate” (and is therefore subject to the S. 877A Exit Tax) or whether the person is NOT a “covered expatriate” (and is therefore NOT subject to the S. 877A Exit Tax); and
- whether income and assets is even relevant to a determination of whether someone is a “covered expatriate”.
How Form 8854 elicits information about the assets of “noncovered expatriates” …
Form 8854 has been designed to elicit information about the assets of ALL “noncovered expatriates”. There are two categories of “noncovered expatriates”.
Category 1 – The value of their assets IS relevant, but that value is below two million USD.
Category 2 – The value of their assets is NOT relevant because they benefit from either the “dual citizen exemption” or the “renounce before the age of 181/2 exemption.
For example, for “expatriates” who meet the “dual citizen” exemption to the Exit Tax, asset disclosures are NOT relevant. It is ONLY the “compliance requirement in Internal Revenue Code 877(a)(2)(C) that must be met. Yet, as noted by the “American College of Trust and Estate Counsel“, Form 8854 requires full asset disclosure.
Required Financial Disclosure – Form 8854, Part IV, Section A [Expatriation Information], Lines 1 & 2.
Section 877A(g)(1)(B)(i) provides that certain dual-citizens will not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) if the individual:
(1) became at birth a citizen of the United States and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and
(2) has been a resident of the United States for not more than 10 taxable years during the 15-taxable year period ending with the taxable year during which the expatriation date occurs.
Similarly, section 877A(g)(1)(B) provides that an individual who relinquishes his or her U.S. citizenship before attaining age 18½ if he or she has been a U.S. resident will not be treated as meeting the requirements of subparagraph (A) or (B) of section 877(a)(2) for less than 10 taxable years. Such an individual will not be subject to the expatriation tax even if his or her (i) average five-year net income tax liability exceeds the threshold amount or (ii) net worth was $2,000,000 or more on the date of expatriation. The individual, however, is still treated as a covered expatriate unless he or she certifies that he or she has complied with all federal tax obligations for the five tax years preceding the date of expatriation as required pursuant to subparagraph (C) of section 877(a)(2). Form 8854, which is used to make this certification, should not require disclosure of net worth or five-year average income tax liability because neither is relevant to his or her eligibility for the exception.
So, what does all of this mean?
Internal Revenue Code 6039G applies only to “covered expatriates”. Therefore the extensive and intrusive asset disclosures in the Part V “Balance Sheet” should NOT apply to those who are NOT “covered expatriates”.
Yet, Part V of Form 8854 appears right after Part IV of Form 8854. Part IV is where one makes the “certification of tax compliance” which is a necessary condition to avoid “covered expatriate” status.
My advice – just suck it up and complete the Part V balance sheet …
Complete the balance sheet and “exit” the U.S. tax system cleanly, finally and irrevocably. There are times when the “Form” does not follow the requirements of the Internal Revenue Code. Think of it as an example of a breach of the unstated principle of: