U.S. Expatriations &

Voluntary Disclosure

Agenda

• U.S. Expatriations– Individuals that qualify;– Tax consequences of expatriation; – Reporting; and– Protective planning.

• U.S. Voluntary Disclosure– New streamlined process;– Other options (ie. OVDP, traditional voluntary disclosure, etc.); and– Situational Analysis – Group Discussion.

U.S. Expatriation

Who is a U.S. Expatriate?

• A U.S. citizen who formally renounces (most common way)– Done before a diplomatic or consular officer of the US in a foreign state.– Generally two appointments are required for a “cooling off period”.

• A long-term resident who ceases to be taxed as a U.S. resident– Green card must be held for at least 8 of the last 15 years (and taxed as a U.S.

Resident during).– Ends with the year the status is either legally relinquished or a treaty based tie-

breaking to another country.

• “Covered expatriate” (CE) is a class within the term expatriate– Not all expatriates of the U.S. will incur U.S. expatriation tax.

Date of Expatriation

• For tax purposes, citizenship is lost on the earliest of the date:– Taxpayer renounces;– Taxpayer furnishes the US Department of State a signed statement of voluntary

relinquishment (specific acts required under this provision);– The U.S. Department of State issues a certificate of loss of nationality (CLN); or– A court of the US court cancels a naturalized citizen’s certificate of

naturalization.

• For green card holder, the expatriation date is the earliest of the

date:• Individual legally relinquishes green card;• Individual legally loses privilege of residing permanently in the US; or• A treaty based tie breaking to another country of tax residence.

Are You “Covered”?

• A CE is a person who meets any of the three tests:

1. Taxpayer’s net worth exceeds US$2M on the date of expatriation;

2. Taxpayer’s annual US income tax for the 5 years preceeding the

year of expatriation exceeds US$151K (inflation adjusted); or

3. Taxpayer fails to certify full compliance with US tax obligations for

each of the prior 5 years ending prior to year of expatriation.

Note – At this time, tax motivation is irrelevant to the test!

Scope Limitations to CE Test

Scope Limitations – Exempt From Tests # 1 and # 2 if:

1. Born a dual citizen, is a citizen and resident of that country on

expatriation date, and no substantial contacts including resident of

US for 10 or fewer years in the 15 years prior to and including year

of expatriation; or

2. Expatriates before age 18½, and has been a resident of the United

States for no more than 10 tax years prior to the date of

relinquishment.

Tax Consequences of Expatriation

• CE is treated as having sold all of her assets for their fair market values

on the day before the date of expatriation (“mark-to-market”, or “MTM”).

• Valuation is based on estate tax principals (not gift).

• The first $651K of MTM gain is exempt from tax, except for:– Deferred compensation;– Specified tax-deferred accounts; and– Interests in non-grantor trusts.

• Deferral of exit tax payment available.

• Certain post expatriation gratuitous transfers subject to “transfer tax”.

Reporting Requirements

• Expatriation reporting via Form 8854:– All expatriates report (even if no tax implications).– A part of the tax compliance process of expatriation.

• Any “significant changes in taxpayers assets and liability” during

recent period before, up to filing of form, needs disclosed.– Suspected that “economic substance” and STEP considerations will be made.

• Generally a dual status return is filed in the year of expatriation.

Planning Considerations

• Gift Planning:– Consider giving assets to other persons (especially to a non-US spouse).– U.S. situs assets worth considering.– Pay attention to unified credit limits - 2012 a good year – US$5.12M.– Needs to be “completed” timely.

• Accelerate tax before expatriation.– Recognize gain and prevent double taxation.– Items such as deferred compensation items and RRSPs may not have a

mechanism.

U.S. Voluntary Disclosure Process

Pick Your Poison

• 2012 Offshore Voluntary Disclosure Program (OVDP)

• Send to processing center

• New Filing Compliance Procedures for Non-Resident U.S. Taxpayer

• Other methods????

2012 OVDP

• Eight year compliance period

• Penalty computation required – either 5% or 27.5%– How certain are we the taxpayer will qualify for 5%? Read FAQ closely.

• Many extra documents to be filed

• Little or no negotiation involved

• Opt out considerations

Send to Processing Center

• No U.S. tax owing (even US$1 will make taxpayer ineligible)– We better be sure of this!

• Only information forms missing (including FBAR)– Does not include elections (ie. Form 8891)!

• Assume up to six years worth of amendments should be

considered– IRS does not specify how many years!

New Filing Procedures• Eligibility requirements

– Resided outside of the U.S. since January 1, 2009 and who have not filed a U.S. tax return during the

same period.– Amended returns, submitted through this process, will be treated as high risk (exception for late Form

8891 relief).

• A streamlined process for non-resident U.S. taxpayers with delinquent returns with low risk factor

(including tax owed less than US$1,500/year)– What is low risk? Appears to be IRS discretion.– 3 years of income tax returns and 6 years of FBARs.– If low risk, no penalties.

• What about the high risk?– IRS request you consider 2012 OVDP or other options per website (what is other?) first.

– Subject to a more thorough review and possibly a full examination otherwise.– Could be similar to opting out of 2012 OVDP on higher risk files?– Consider reasonable cause before going in?

Other Options?

• Send to Criminal Investigations (ie. “noisy disclosure”)

ANY OTHER IDEAS?

SITUATIONAL ANALYSIS DISCUSSION

Contact Information

David Turchen, CA, CPA(PA)

MNP LLP

300, 32988 South Fraser Way

Abbotsford, BC V2S 2A8

Email: david.turchen@mnp.ca

Phone: 604-870-7431