Failing to Report Assets and Pay Expatriation Tax Can Lead to Penalties

 Posted on October 26, 2021 in Taxation Law

Over the past decade, the rates of expatriation, in which a U.S. citizen renounces their citizenship or a long-term resident of the United States ends their legal residence status, have increased significantly for a variety of reasons. Because U.S. citizens and residents are required to pay taxes on all income they earn, including income earned in foreign countries, expatriation may seem like a good option to alleviate a person’s tax burden. However, expatriation has tax consequences, and upon renunciation of U.S. citizenship or termination of residency status, a person may be required to pay taxes based on the assets they own. Failure to do so can result in significant tax penalties. Fortunately, an experienced attorney can help expatriates understand the tax laws that apply to them and ensure they are taking the correct steps to avoid penalties.

Recent Case Demonstrates the Consequences of Misreporting Income and Assets

In a recent case prosecuted by the Justice Department, the founder of a Russian bank pled guilty to committing tax fraud when he expatriated from the UnitedStates. After the bank became a publicly traded company that was worth billions of dollars, the founder renounced his citizenship. When doing so, he falsely reported that his net worth was only $300,000, and on his tax return for that year, he falsely reported an income of around $200,000. In actuality, the court found his net worth was over $1.1 billion.

The man’s false reporting led to an underpayment of taxes by more than $248 million. After he was arrested and charged with tax fraud, he pled guilty to the charges. Under a plea deal, he agreed to pay over $506 million, which included the taxes owed, statutory interest, civil tax penalties, and a fine of $250,000.

The Importance of Filing Form 8854 Correctly

While the matter described above is an extreme case, those who do not follow the correct procedures when expatriating may also face penalties. All expatriating U.S. citizens or long-term residents are required to file Form 8854, where they will report the total value of the assets they own. An expatriation tax will apply if a person has a net worth of at least $2 million or if their average annual net income tax liability for the past 5 years is above a certain amount ($171,000 in 2020). To determine the amount of the exit tax, all assets owned by a person will be treated as if they have been sold, and the capital gains tax will be applied to the net gains from this “sale.”

Contact Our San Jose, CA Tax Attorney

If you are planning to expatriate from the United States, John D. Teter Law Offices can make sure you meet all requirements when filing Form 8854. We will advise you on the best ways to minimize your tax liabilities and ensure that you can protect yourself from accusations of tax fraud. Contact our San Jose tax lawyer at 408-866-1810 to arrange a confidential consultation and get legal help with tax-related matters.

Sources:

https://www.justice.gov/opa/pr/founder-russian-bank-pleads-guilty-tax-fraud

https://www.irs.gov/individuals/international-taxpayers/expatriation-tax

https://www.irs.gov/instructions/i8854