Sailing Permit& the IRS: Certain U.S. persons may be required to file for an IRS sailing permit at the time they give up residence in the U.S.
This tax requirement is separate from expatriation and exit tax documents such as Form 8854 and Form I-407. For some U.S. residents, the IRS requires that they apply for a Sailing Permit before leaving the U.S.
A sailing permit may be required by either legal permanent residents or resident aliens who will no longer (currently) meet the Substantial Presence Test.
*Not all residents are required to file the sailing permit forms.
Certificate of Compliance IRS Sailing Permit
The idea behind the sailing permit is that the IRS wants to know when a Legal Permanent Resident or resident alien who meets substantial presence has relinquished their U.S. Person status. This prevents the IRS from wasting time and resources pursuing tax compliance for filers who are no longer required to file 1040 tax returns with the IRS.
While form I-407 (for Legal Permanent Residents) is filed with the USCIS (U.S. Citizenship and Immigration Services), and the DS-4079 to DS-4083 package (for renouncing citizenship) is filed with the DS (Department of State), the IRS has its own set of forms as well.
For IRS purposes, the key sailing permit forms are:
IRS Form 1040-C
IRS Form 2063
Declaration of Termination of Residency
“As provided by the IRS:
“Before leaving the United States, all aliens (except those listed below under Aliens Not Required To Obtain Sailing or Departure Permits) must obtain a certificate of compliance.
This document, also popularly known as the sailing permit or departure permit, must be secured from the IRS before leaving the U.S.
You will receive a sailing or departure permit after filing a Form 1040C, U.S. Departing Alien Income Tax Return or Form 2063, U.S. Departing Alien Income Tax Statement and Annual Certificate of Compliance.”
IRS Form 1040-C
The 1040-C form is completed and submitted by resident aliens (Legal Permanent or Substantial Presence resident) when they intend to leave the United States as a resident.
The form is not filed in lieu of the form 1040, but rather is submitted in addition to the 1040.
As provided by the IRS:
“Form 1040-C is used by aliens who intend to leave the United States or any of its possessions to:
Report income received or expected to be received for the entire tax year, and •
Pay the expected tax liability on that income, if they are required to do so.
Form 1040-C must be filed before an alien leaves the United States or any of its possessions.”
We have prepared a detailed summary of Form 1040-C (not to be confused with the Form 1040, Schedule C used to report capital gains).
Exceptions to Filing form 1040-C
There are several exceptions to filing the IRS Form 1040-C. They include:
“1. You are a representative of a foreign government who holds a diplomatic passport, a member of the representative’s household, a servant who accompanies the representative, an employee of an international organization or foreign government whose pay for official services is exempt from U.S. taxes and who has no other U.S. source income, or a member of the employee’s household who has no income from U.S. sources.
2. You are a student, industrial trainee, or exchange visitor, or the spouse or child of such an individual. To qualify for this exception, you must have an F-1, F-2, H-3, H-4, J-1, J-2, or Q visa. Additionally, you must not have received any income from sources in the United States other than:
a. Allowances covering expenses incident to your study or training in the United States (including expenses for travel, maintenance, and tuition);
b. The value of any services or accommodations furnished incident to such study or training;
c. Income from employment authorized under U.S. immigration laws; or
d. Interest on deposits, but only if that interest is not effectively connected with a U.S. trade or business.
3. You are a student, or the spouse or child of a student, with an M-1 or M-2 visa. To qualify, you must not have received any income from sources in the United States other than:
a. Income from employment authorized under U.S. immigration laws, or
b. Interest on deposits, but only if that interest is not effectively connected with a U.S. trade or business.
4. Any of the following applies.
You are on a pleasure trip and have a B-2 visa.
You are on a business trip, have a B-1 visa or a combined B-1/B-2 visa, and do not stay in the United States or any of its possessions for more than 90 days during the tax year.
You are passing through the United States or any of its possessions, including travel on a C-1 visa or under a contract, such as a bond agreement, between a transportation line and the U.S. Attorney General.
You are admitted on a border-crossing identification card.
You do not need to carry passports, visas, or border-crossing identification cards because you are
(i) visiting for pleasure or
(ii) visiting for business and do not stay in the United States or any of its possessions for more than 90 days during the tax year.
You are a resident of Canada or Mexico who commutes frequently to the United States to work and your wages are subject to income tax withholding.
You are a military trainee admitted for instruction under the Department of Defense and you will leave the United States on official military travel orders.
However, exception 4 does not apply if the Area Director believes you had taxable income during the current tax year through your departure date or the preceding tax year and your leaving the United States would hinder collecting the tax
Form 2063 is a short form that does not require much from the Taxpayer.
It is a tax form that requests the IRS to issue a certification which confirms that all U.S. income tax obligations have been satisfied for certain tax filers, including:
a resident alien whose taxable period has not been terminated, or
a departing nonresident alien having no taxable income from U.S. sources.”
How to Qualify for Form 2063?
The IRS provides taxpayers the option to file the (shorter) Form 2063 in lieu of the more complicated 1040-C.
Form 2063 is preferred over the 1040-C, because the 2063 form is much simpler to prepare.
Taxpayers can qualify to file Form 2063 in lieu of Form 1040-C in the following circumstances:
“[Y]ou have filed all U.S. income tax returns you were required to file, you paid any tax due, and either of the following applies.
You have no taxable income for the year of departure and for the preceding year (if the time for filing the earlier year’s return has not passed); or
You are a resident alien with taxable income for the preceding year or for the year of departure, but the Area Director has decided that your leaving will not hinder collecting the tax.
Form 2063 asks the following questions:
Name (please print or type)
Social security number or ITIN, if any
U.S. address (number, street, apt. no. or rural route, city, state, and ZIP code)
Foreign address (street address, city or town, state or province, country, and ZIP or foreign postal code)
While in the U.S., check if you were: An employee Self-employed 6 Of what country are you a citizen or subject?
Passport or alien registration card number
Date of departure (MM/DD/YYYY)
Original date of your entry into the U.S. (MM/DD/YYYY)
Date on which you last arrived in the U.S. (MM/DD/YYYY)
Are you a resident alien of the U.S.? Yes No If “No,” enter the country of which you are a resident
Did you receive or do you expect to receive any income subject to U.S. income tax for the tax year shown on line 4 on the front of this form?
Did you receive any income subject to U.S. income tax during the prior tax year?
Are you liable for filing tax returns or paying taxes to the United States for any prior year not shown above?
Do I File 1040-C or 2063?
The Form 2063 is the preferred form for Taxpayers, since it is easier to complete and does not require a tax calculation.
It is submitted to the IRS to show payment was made (if any was required).
Conversely, the Form 1040-C is for residents who do not qualify for Form 2063.
As provided by the IRS:
“Ordinarily, all income received or reasonably expected to be received during the tax year up to and including the date of departure must be reported on Form 1040-C and the tax on it must be paid.
When you pay any tax shown as due on the Form 1040-C, and you file all returns and pay all tax due for previous years, you will receive a sailing or departure permit.
However, the IRS may permit you to furnish a bond guaranteeing payment instead of paying the taxes for certain years. The sailing or departure permit issued under the conditions in this paragraph is only for the specific departure for which it is issued.”
Declaration of Termination of Residency
Another required submission (although not technically a form), is a statement used to determined Residency Termination. It is required to be attached to the filers income tax return for the year residence in the U.S. terminated.
As provided by the IRS:
“You must file a statement with the IRS to establish your residency termination date. You must sign and date this statement and include a declaration made under penalties of perjury.
The statement must be attached to your income tax return. If you are not required to file an income tax return, send the statement to the Department of the Treasury, Internal Revenue Service, Austin, Texas 73301-0215, on or before the due date for filing your income tax return.
The statement must contain the following information (as applicable):
Your name, address, U.S. taxpayer identification number (if any), and U.S. visa type and number (if any).
Your passport number and the name of the country that issued your passport.
The tax year for which the statement applies.
The last day you were present in the United States during the year.
Enough facts to establish that you maintained your tax home in and had a closer connection to a foreign country following your last day of presence in the United States during the year (or, if applicable, following the abandonment or rescission of your status as a lawful permanent resident during the year).
The date that your status as a lawful permanent resident was abandoned or rescinded.
Enough facts (including copies of relevant documents) to establish that your status as a lawful permanent resident has been abandoned or rescinded.
If you can exclude days under the de minimis presence rule (refer to Publication 519, U.S. Tax Guide for Aliens), state the dates you are excluding and include enough facts to establish that you maintained your tax home in, and had a closer connection to, a foreign country during the period you are excluding.
Note: If you do not file the required statement, you cannot claim a closer connection to a foreign country or countries. This does not apply if you can show by clear and convincing evidence that you took reasonable actions to become aware of the requirements for filing the statement and significant steps to comply with those requirements.”
Article was written by: Golding & Golding, International Tax Lawyers, Sean M. Golding