The Jobs Creation Act of 2004, signed into law on October 22, 2004, substantially altered the expatriation tax rules (Code section 877) applicable to US citizens and long-term permanent residents who commit an expatriating act after June 3, 2004. Inter alia, the subjective tax-avoidance test is replaced by an objective standard; the ruling request procedure to rebut the presumption of a tax-avoidance motive is eliminated; a new physical presence test results in certain individuals being taxed as US residents for the year the test is met; and reporting requirements for both the initial expatriation and the next 10 years are enhanced.

The expatriation regime applies to certain US citizens who renounce their citizenship and to long-term residents (individuals who were lawful US permanent residents in at least 8 of the preceding 15 years) who surrender their green card, if they are found to have a tax-avoidance motive for doing so. Some US income, estate, and gift tax consequences from which expats are normally exempt, may, if applicable, follow such individuals during the 10 years after expatriation.

The determination of the tax-avoidance motive was previously more subjective. Individuals with a net worth or income tax liability above certain thresholds were presumed to have such a purpose, although some such persons could request an IRS ruling to the contrary. Individuals who did not meet the thresholds could in certain circumstances be deemed to have a tax-avoidance motive. The new test is entirely objective. A tax-avoidance motive is deemed to exist only if (1) the individual’s average annual net US income tax during the five prior years is greater than $127,000 (indexed for inflation); (2) his net worth as of the expatriation date is at least $2 million; or (3) he fails to certify under penalty of perjury that he has complied with the US tax laws for the previous five years, regardless of his motivation. Narrow exceptions to the average tax liability and net worth tests exist for certain expatriating citizens (not long-term residents) who became dual citizens of the United States and another country at birth, and for certain minors; however, such individuals are still subject to the requirement for certification of tax compliance.

An expatriating act, formerly defined with reference to US immigration law and deemed to occur on the happening of specifically enumerated acts (such as renunciation of US nationality before a US diplomatic or consular officer) now requires formal notice. A citizen or long-term resident continues to be taxed as such until he gives notice of an expatriating act or termination of residency (with the requisite intent to relinquish citizenship or residency) to the secretary of state or the Department of Homeland Security and provides a tax statement to the IRS under Code section 6039G. Formal notice must be given by all citizens and long-term residents who expatriate, not just those who are deemed to have a tax-avoidance motive.

A new rule treats an individual as a US citizen or tax resident, taxable on worldwide income, if he is physically present in the United States for more than 30 days in any of the 10 calendar years after expatriation. Up to 30 days’ presence while the individual is working for an employer is excepted; the employee must not be related to the employer and must be actually performing services for his employer on those days. Furthermore, the individual must have certain ties to another country or have minimal prior US physical presence.

An expatriating individual must provide certain information to the IRS, including his TIN; the mailing address of his principal foreign residence; the foreign country of which he is a citizen; details of his income, assets, and liabilities; and the number of days he was present in the United States during the taxable year (Code section 6039G). Previously, a statement was filed only at the time of expatriation on form 8854 (Expatriation Initial Information Statement); to have a valid expatriation for tax purposes, expatriating citizens and long-term residents must now also file a section 6039G information statement annually during the subsequent 10 years, even if no US federal income tax is due. Failure to file can result in a $10,000 penalty, unless the failure is due to reasonable cause and not wilful neglect.

The considerable changes in reporting requirements necessitate substantial revisions to form 8854 to provide for new and additional information and updated filing procedures. For instance, current form 8854 instructs former long-term residents to file the form as an attachment to their dual-status income tax return for the year of expatriation; but now an individual is not considered expatriated for tax purposes until the information required by section 6039G is filed with the IRS. Thus, a longterm resident who intends to expatriate in January 2005 but follows the current filing instructions is not expatriated for tax purposes until his 2005 income tax return is filed in 2006. The form’s current instructions require only individuals who meet the net worth threshold for taxmotivated expatriation to disclose information about their assets and liabilities; now, however, all citizens and long-term residents must disclose such information.

Procedures for providing official notice of expatriation to the secretary of state or Department of Homeland Security in order to effect expatriation for tax purposes must be clarified. For example, does the provision of form I-407 (Abandonment of Lawful Permanent Resident Status) to the Department of Homeland Security or consular officials constitute such formal notice for long-term residents? What is the analogous procedure for expatriating US citizens? The IRS is giving priority to the required changes—it is currently revising its forms (including form 8854) and filing procedures—and is expected to publish amended forms soon.