Note with respect to all hypotheticals: Please note that actual returns will have to be completed which will provide a more accurate and nuanced figure of the total tax, the simplification of facts and figures in the following hypotheticals are intended merely for purposes of general illustration and not reliance.

Hypothetical 1 (Aggregate Total Income Tax Liability Below Threshold)

John was born in the U.S. while his non-U.S. parents were attending university for post-graduate studies. Shortly after he was born, the family returned to Country E. John is a citizen of Country E and lives and works in Country E.

John renounced his citizenship on October 1, 2019 and received a Certificate of Loss of Nationality. John has never filed a U.S. income tax return and never applied for or received a Social Security Number. He wants to use these procedures to come into compliance with his U.S. tax obligations. He must report his worldwide income on Form 1040 for 2019 and the preceding five tax years (and may claim all available deductions and credits, including foreign tax credits, to the extent permitted) to determine the total tax. In each year, John had various sources of income, including small amounts of income from foreign mutual funds that are passive foreign investment companies. For tax years 2014 through 2019, John submits the following tax returns required under these procedures:

2019 Form 1040NR (with Form 1040 attached as an information return reporting worldwide income through October 1, 2019), with a total tax of $1,000.00 USD

2018 Form 1040, line 15, total tax $4,800.00

2017 Form 1040, line 63, total tax $4,800.00

2016 Form 1040, line 63, total tax $4,800.00

2015 Form 1040, line 63, total tax $4,800.00

2014 Form 1040, line 63, total tax $4,800.00

John uses his best efforts in computing his total tax for each year. John computed the income from his foreign mutual funds and reported them as ordinary income on the “other income” line of his Forms 1040. He should have also used Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, to make additional computations, but he failed to include that form with his return. John adds the “total tax” amounts for all his six tax returns submitted under the procedures; the amount is $25,000. John’s total tax liabilities are within the limit for these procedures. John is eligible to use these procedures.

Hypothetical 2 (Aggregate Total Income Tax Liability Above Threshold)

Assume all the facts in Hypothetical 1, except John’s aggregate total tax liability for tax years 2014 through 2019 is slightly over $25,000. John is not eligible to use these procedures because his aggregate total tax liability for tax years 2014 through 2019 exceeds the threshold for these procedures. If he makes a submission under these procedures, the IRS will process the returns using normal processing procedures. John will be liable for all taxes, penalties, and interest associated with his submissions. Under general IRS procedures, John may request relief for penalties under the First Time Abate Policy for tax year 2014 and request abatement of penalties based on reasonable cause for the remaining liabilities. If he qualifies, John may file an Offer in Compromise.

Hypothetical 3 (Net Worth Below Threshold)

Jane was born in the United States. Her parents, citizens of another country, were in the United States on a temporary work assignment with a multinational company when she was born. While on that temporary work assignment, Jane’s parents purchased a house in the United States. Jane and her family returned to their country shortly after she was born. Although they left the United States, Jane’s parents kept the house in the United States and rented it to tenants. Jane lives and works outside the United States. When her parents died, Jane inherited the rental house (with a fair market value of $300,000).

Jane wants to renounce her citizenship and use these procedures to come into compliance with her tax obligations. Jane has never filed a U.S. income tax return and never applied for or received a Social Security Number. Jane must report her worldwide income on her U.S. income tax returns, including any income from the U.S. rental home. Jane renounces her citizenship on December 31, 2019. Then, Jane submits the tax returns required under this procedure for tax years 2014 through 2019 (including a Form 8854).

Assuming the aggregate total tax amount for tax years 2014 through 2019 is less than $25,000 and Jane’s net worth is below $2,000,000, Jane may use these procedures.

Hypothetical 4 (Net Worth Above Threshold)

Assume all the facts in Hypothetical 3 except the value of the U.S. rental home is $3 million, and Jane’s total net worth exceeds $2,000,000. Jane does not qualify for these procedures because her net worth exceeds $2,000,000. (The exceptions to “covered expatriate” status, as provided in IRC 877(c)(2), are not applicable to these procedures.)

Hypothetical 5 (No “filing history as a U.S. citizen or resident”)

Assume all the facts in Hypothetical 3 except in tax year 2012 Jane filed a Form 1040NR reporting rental income and related expenses for the U.S. rental home. She had no other U.S. sourced income. Jane’s 2012 filing was based on the good faith assumption that she was not a U.S. citizen. Jane may use these procedures.

Hypothetical 6 (Foreign Tax Credit; 35% Tax Rate in Treaty Country)

Jane is a dual citizen of the United States and Country T and is a resident of Country T. The United States has a tax treaty with Country T. Jane has a net worth under $2,000,000 and has an average income tax liability for the past five years under the threshold of IRC 877(a)(2)(A). (For 2014 through 2018 this is $168,000 of average annual net income tax). Jane’s only income over the past 5 years has been $200,000 of wage income that she earned from performing services in Country T for a Country T employer. For the last 5 years Jane has been filing tax returns in Country T as a Country T resident reporting all her wage income. Jane was subject to an income tax rate of 35% in Country T in each year. Assume the U.S. income tax rate for 2014-2019 is 25%. Assume further that Jane does not qualify to make an election under IRC 911.

Jane is planning to relinquish her U.S. citizenship in 2019 by taking an oath of renunciation. After relinquishing citizenship, she wants to use these procedures to come into compliance with her U.S. tax obligations. Jane has never filed a U.S. income tax return and never applied for or received a Social Security Number. Jane renounces her U.S. citizenship on December 31, 2019. Then, Jane submits the tax returns required under these procedures for tax years 2014 through 2019 (including a Form 8854). Jane must report her worldwide income on her U.S. income tax returns, including the $200,000 of wage income. She submits the returns without a Social Security Number.

Assume that Country T would have the primary right to tax Jane’s wage income and the United States would have a secondary right to tax the income based on her citizenship, after providing a credit for the income tax paid to Country T. Because Jane’s Country T tax liability is higher than her U.S. tax liability, and because Jane is not limited in the amount of the Country T tax she may claim as a credit, Jane would not owe any additional U.S. tax. Thus, Jane would have an aggregate U.S. tax liability for 2014 through 2019 under $25,000. Jane is eligible to use these procedures.

Hypothetical 7 (Foreign Tax Credit; 20% Tax Rate in Treaty Country)

Assume the same facts as in Hypothetical 6, except that Jane paid income taxes in Country T at a tax rate of 20%. Assume the U.S. income tax rate for 2014-2019 is 25%.

As in Hypothetical 6, under the U.S.-Country T tax treaty, Country T would have the primary right to tax Jane’s wage income and the United States would have a secondary right to tax the income based on her citizenship, after providing a credit for the income tax paid to Country T. Because Jane’s Country T tax liability is lower than Jane’s U.S. tax liability, and even though Jane is not limited in the amount of the Country T tax she may claim as a credit, Jane still owes additional residual tax to the United States. Jane paid the equivalent of $40,000 of tax in Country T in each year. After applying the U.S. foreign tax credit, Jane still owes $10,000 of additional tax in the United States in each year. Considering six years from 2014-2019, Jane owes an aggregate of $60,000 of tax to the United States, which would be greater than $25,000. Jane is not eligible to use these procedures.

Hypothetical 8 (Foreign Earned Income Exclusion; 25% Rate in Tax Country)

Assume the same facts in Hypothetical 6, except here is no applicable treaty, Jane may be eligible to make an election under IRC 911, and Jane was subject to a 25% income tax rate in Country T. Assume the U.S. income tax rate for 2014-2019 is 25%.

Because Jane is a U.S. citizen residing in a foreign country and working in that foreign country, Jane may be entitled to claim the foreign earned income exclusion (FEIE) under IRC 911, which would reduce Jane’s U.S. taxable income. Although Jane can claim a foreign tax credit (FTC), assume Jane chooses to first use the FEIE. Jane would be eligible for a FEIE amount (indexed annually for inflation) in each year as follows:

2014 – $ 99,200 ($200,000 - $99,200 = $100,800 income not excluded under IRC 911)

2015 – $100,800 ($200,000 - $100,800 = $99,200 income not excluded under IRC 911)

2016 – $101,300 ($200,000 - $101,300 = $98,700 income not excluded under IRC 911)

2017 – $102,100 ($200,000 - $102,100 = $97,900 income not excluded under IRC 911)

2018 – $103,900 ($200,000 - $103,900 = $96,100 income not excluded under IRC 911)

2019 – $105,900 ($200,000 - $105,900 = $94,100 income not excluded under IRC 911)

If Jane meets the requirements under IRC 911, Jane can claim the FEIE on IRS Form 2555/2555-EZ and exclude a portion of her earned income in each year. To the extent that the FEIE does not cover all the income earned, Jane can claim a foreign tax credit with respect to the excess foreign source income (but cannot credit foreign taxes against amounts excluded under FEIE). Due to the FEIE and foreign tax credits, Jane would not owe any U.S. tax. Thus, Jane would have an aggregate U.S. income tax liability for 2014 through 2019 under the $25,000 aggregate income tax threshold. Jane is eligible to use these procedures. See Foreign Earned Income Exclusion and Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

Hypothetical 9 (Foreign Earned Income Exclusion; 17% Rate in Tax Country)

Assume the same facts in Hypothetical 8, except Jane was subject to a 17% income tax rate in Country T. Assume the U.S. income tax rate for 2014-2019 is 25%. Provided that Jane meets the requirements under IRC 911, Jane can claim the FEIE on IRS Form 2555/2555-EZ and exclude a portion of her earned income in each relevant year. To the extent that the FEIE does not cover all the income earned, Jane can claim a foreign tax credit with respect to the excess foreign source income (but cannot credit foreign taxes against amounts excluded under FEIE). Because the amount of Country T tax that Jane can credit is less than her U.S. tax liability, Jane would owe U.S. income tax in each year. For example, for 2014, $100,800 of the $200,000 of income is not excluded under IRC 911 multiplied by a 25% U.S. tax rate equals $25,200 of U.S. tax. The amount of Country T tax allocated to the non-excluded amount is $17,136. $25,200 of U.S. tax less foreign tax credits of $17,136 provides a difference of $8,064 of U.S. tax owed in 2014. Thus, Jane would have an aggregate U.S. income tax liability for 2014-2019 of $46,944 which is greater than $25,000. Jane is not eligible to use these procedures. See Foreign Earned Income Exclusion and Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.