Personal residence exclusion under exit tax rules

American citizens who give up their American citizenship (expatriates) are classified into covered expatriates and non-covered expatriates. A covered expatriate is subject to a “mark to market” rule, where the US pretends that the covered expatriate sold all his property on the day before expatriation and imposes a tax on the gain from the pretend sale.

Normally, you get a personal residence exclusion of $250,000 when you sell your principal residence. The question is: Do you get the exclusion for the pretend sale under mark to market?

Summary

If you actually sell your principal residence, you get a $250,000 exclusion from the gain. It’s not clear whether you get the exclusion when you calculate the gain for exit tax purposes. If it is feasible to sell the residence, consider doing so in preparation for expatriation.

FBAR and Tax Crime Statutes of Limitations – Suspended When Overseas?

What is a Statute of Limitations (SOL), Generally?
The tax laws contain what is known as a statute of limitations. The statute prescribes the length of time permitted to the IRS to enforce the tax rules. If the length of time runs out for a particular tax year, then the IRS is forever barred from claiming that you owe more tax in that year. It is important to understand how the various statutes of limitations work, because in certain cases, the statute of limitations will be longer than others or it will not start to run at all.  There are often different SOL time periods for civil versus criminal actions. You can learn more about the various tax related SOL in my earlier blog posting here. 
How does the SOL Work for FBAR Purposes?
The Internal Revenue Manual at IRM Section 4.26.17.5.5.4 provides a good summary of bullet points on the topic. These are elaborated upon, below:
The Title 26 statutes of limitations do not apply to FBAR cases. Title 26 refers to a particular Title in the United States Code; Title 26 contains the Internal Revenue Code.
The statute of limitations on assessment of civil FBAR penalties is 6 years from the date of the violation. Typically, the date of the violation is the date when an accurate and complete FBAR being due, is not received by the Treasury (i.e., June 30 due date. This refers to June 30th of the year following the calendar year for which the foreign financial account should be reported.). It is very important to note that unlike the case of tax returns, the FBAR SOL “clock” does start to “tick” (the SOL time period begins and continues to run) even if the taxpayer has not filed the FBAR (FinCen Form 114).  Therefore, a US person with an FBAR filing duty, might just get lucky and win the audit lottery simply by waiting for the 6-year SOL to run on the old, unfiled FBARs.  By filing prospectively, such a taxpayer can become FBAR compliant merely by the passage of time.  The question arises whether the SOL is tolled or suspended if the taxpayer is outside of the US?  More on this below.

Relinquish your U.S. citizenship or their green card, but have not filed FBARs.

It is possible to expatriate, not file FBARs, and certify to the IRS that you have complied with your tax obligations. It is not necessarily a good idea, however.

Summary

An expatriate must certify whether he has complied with all tax obligations under Title 26 of the United States Code. FBAR filings are required under Title 31. Therefore, the expatriate does not need to certify whether he is up to date with FBAR filings.

Three ways to be a covered expatriate

When you relinquish your U.S. citizenship, you will be a “covered expatriate” if:

• Your net worth exceeds $2,000,000;
• Your average net Federal income tax liability for the prior 5 years exceeded $160,000 (for expatriations in 2015); or
• You do not certify under penalty of perjury that your prior 5 years of tax obligations are up to date.

For this blog post, we will focus on the third test: The certification requirement.

Use Form W-8BEN to eliminate US tax

When a US person (like, say, a 401(k) plan administrator) pays taxable income to someone outside the United States, 30% must be subtracted from the payment and given to the IRS. This is the withholding tax required by IRC §1441(a).

Paying 30% tax to the United States on a 401(k) distribution when the income tax treaty between the United States and Switzerland says that the USA cannot tax the distribution? Sounds like a bad idea. Here is how you prevent this from happening.

Fill in Form W-8BEN and give it to the 401(k) plan administrator. In particular, use Part II of Form W-8BEN to use the CH-income tax treaty to force the result of zero tax withholding in the United States.

• On Line 9, you certify that you are a resident of New Zealand.
• On Line 10, you claim the benefit of Article 18.1(a) to create a rate of withholding of 0% on your 401(k) distribution.
• The explanation is that the treaty gives exclusive power to tax the 401(k) distribution to the country of residence. Nothing more remarkable than that will be required to complete Part II.

Other countries' treaties

The US has income tax treaties with many countries. Treaties like CH's (the country of residence gets to tax cross-border pension distributions) are common but far from universal. The treaties may provide for different treatments for different types of distributions. For example, the US-UK income tax treaty gives the source country the exclusive right to tax lump sum distributions. US-UK Income Tax Treaty, art. 17.2 (2001, as amended).

Conclusion

If you are receiving cross-border retirement account distributions, look for an income tax treaty between your home country and the United States. It may well give you a better tax result than the default tax rules of the United States and your home country. The pension benefits are most commonly found in article 18, but because each country negotiates its version, and the treaties were adopted at different times, you might find pension benefits clauses in other articles.

Covered gift and bequest from covered expatriate

In the article, 'The New Rules of Offshore Accounts', that last paragraph states that if a person receives a gift/bequest from certain wealthy people who have renounced U.S. ties could have to pay tax on it at a 40% rate.

What form is filed to calculate this tax liability?

The chances of having your tax return audited by the IRS.

The Chances of Being Audited

2014 audit statistics show changes

Every year the IRS publishes the statistics of the number of tax returns they are examining. Provided here are the last three years of published information and a look back to 2008 to see any trends:

Percent of Individual Tax Returns Audited
Fiscal Year	2014	2013	2012	2008
All Individual Tax Returns	0.86%	0.96%	1.03%	1.00 %
No Income (AGI)	5.26%	6.04%	2.67%	2.15%
Income under $25,000	.93%	1.00%	1.05%	.90%
$25,000 - 50,000	.54%	.62%	.70%	.72%
$50,000 - 75,000	.53%	.60%	.64%	.69%
$75,000 - 100,000	.52%	.58%	.64%	.69%
$100,000 - 200,000	.65%	.77%	.85%	.98%
$200,000 - 500,000	1.75%	2.06%	1.96%	1.92%
$500,000 - $1 million	3.62%	3.79%	3.57%	2.98%
$1 million - $5 million	6.21%	9.02%	8.90%	4.02%
$5 million - 10 million	10.53%	15.98%	17.94%	6.47%
$10 million and over	16.22%	24.16%	27.37%	9.77%
Note: These audit rates are stated as a percent of total tax returns in each Adjusted Gross Income (AGI) class as claimed on individual tax returns. In general the examinations are for tax returns filed in the previous calendar year. Observations: Overall, you have less than a 1 out of 100 chance of being selected for an audit. The .86% audit rate is down .10% versus 2013. Audit rates are down for all income levels versus 2013 due to resource constraints per the IRS. The IRS claims this translates into the potential loss of $2 billion in tax revenue. However, the audit rates for those with incomes over $500,000 is still up dramatically when compared to 2008. The IRS is continuing its focus on returns with no AGI or negative income. This group's 5.26% audit rate is significantly over the 2.15% audit rate in 2008.