15 Common Questions About Expatriation, Form 8854, and the Exit Tax—Answered by a CPA
Recently, I received this question:
I was born in France, and I have a French passport and driver’s license. In 2005, I received a Form I–551 (Permanent Resident Card or Alien Registration Card—AKA a green card) and became a Lawful Permanent Resident of the United States. I have renewed my green card twice by filing Form I–90 (Application to Replace Permanent Resident Card).
On November 30, 2022, I completed Form I–407 (Abandonment of Lawful Permanent Resident Status), to formally abandon my green card and lawful permanent resident status. The State Department accepted my surrendered Green Card. My exit was finalized in 2022.
It is my understanding that if:
- My average annual net income tax liability for the 5 taxable years ending before the expatriation date, i.e. (2017 – 2021) is less than $178,000 and/or
- My net worth is currently less than $2 million
…Then I’m not required to file Form 8854 (the Initial and Annual Expatriation Statement). Is that correct? And if so, does that mean I can simply expatriate and without having to worry about US taxes, penalties, and further sanctions?
This is a great question. Unfortunately, it isn’t that simple. Let’s discuss the purpose of Form 8854 and who is—and isn’t—required to file.
Here are 15 common questions about Form 8854 and exit taxes.
- What is the Purpose of Form 8854?
Form 8854 certifies to the IRS that an expatriating taxpayer has complied with U.S tax obligations for at least five years before their expatriation, such as filing all U.S. income tax returns and paying any tax owed.
Form 8854 also tells the IRS whether or not the taxpayer is a “covered expatriate.” Covered expatriates have to pay an exit tax. Non-covered expatriates do not.
- Who Is Required to File Form 8854?
Two categories of expatriate must file Form 8854:
- Any U.S. citizen who relinquishes U.S. citizenship
- Any Lawful Permanent Resident or Green Card Holder who terminated their long-term residency
If you surrender a green card or renounce your citizenship, the State Department will inform the IRS, and the IRS will know whether you have complied with the requirement to file Form 8854. If the IRS learns that you failed to file Form 8854, they will automatically categorize you as a “covered expatriate” and demand that you pay an exit tax, even if you are exempt.
- What’s a Long-Term Resident, or LTR?
Section 877(e)(2) defines an LTR as follows:
“You are an LTR if you were a Lawful Permanent Resident of the United States in at least 8 of the last 15 tax years ending with the year your status as an LTR ends.”
In the case of the question at the beginning of the article, the person asking had become an LPR in 2007, the year they received their green card. Because they expatriated in 2022, they had been an LPR for well over the minimum of 8 years, out of the 15 years , and thus qualify as an LTR. Therefore, we can already see that they are required to file Form 8854 regardless of any other factors.
- If I File Form 8854, Will I Be a Covered Expatriate?
- Their average annual net income tax liability for the five years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($178,000 for tax year 2022).
An individual who files a joint tax return must take into account the net income tax reflected on the joint return – you cannot prorate or divide the taxes even if you were divorced prior to expatriation or considered yourself a “non-earner” on the prior joint returns.
- Their Net worth is $2 million or more on the date of expatriation or termination of residency.
- They’ve failed to certify on Form 8854 compliance with all U.S. Federal tax obligations for the five years preceding the date of expatriation or termination of residency.
If you meet any of those conditions stated above, you will be considered a covered expatriate and subject to the exit tax.
Under section 877A(a)(1), “covered expatriates” are deemed to have sold all of their worldwide assets the day before the expatriation. They are thus subject to an income tax on the net unrealized gain they would have received if they had sold every asset for its fair market value on the day before expatriation. For tax year 2022, that net gain is then reduced by $767,000 (but not below zero – this exclusion amount is adjusted for inflation).
For example, let’s say you qualify as a covered expatriate and have an asset (let’s say Asset A), which you have owned for more than a year. Asset A is a business property. The day before your expatriation date, this asset had an FMV of $2,500,000 and a basis or cost of $1,000,000. You must calculate your exit tax based on the gains as calculated below.
Step 1: Determine the built-in gain or loss of Asset A by subtracting the basis from the FMV of the asset. (FMV of $2,500,000 – basis of $1,000,000 = $1,500,000 built-in gain)
Step 2: Allocate the exclusion amount to each of the gain properties by multiplying the exclusion amount. There is only one asset here, so the allocation is simple.
Exclusion for Asset A = (Gains for Asset A / Gains for All Assets)
Exclusion for Asset A = ($1,500,000 / $1,500,000) * $767,000 = $767,000
Step 3: Figure the final amount of deemed gain on each asset by subtracting the exclusion amount allocated to each asset
Asset A: $1,500,000 – $767,00 = $733,000
Because Asset A is deemed to have been sold for its fair market value on the day before expatriation, you would report and pay taxes on $733,000 of the net unrealized gain.
I.R.C. § 877(c)(2)(B) Provides an exception for Certain Minors, and Dual Citizens even if they met the Average Annual Net Income Tax Liability and/or the Net Worth threshold. These are:
- Persons who had dual citizenship at birth and have had no “substantial contacts” with the U.S.
- Minors expatriating before age 18½ who were born in the U.S. to noncitizen parents and have had no “substantial contacts” with the U.S.
For Dual Citizens described above, they are considered to have had “no substantial contact” with the U.S if they (a)were never a resident of the United States, (b)has never held a United States passport, and (c) were present in the United States for 30 days or less in each year of the ten year period before the expatriation occurred.
For Certain Minors described above, they are considered to have had “no substantial contact” with the U.S if they were present in the United States for 30 days or less in each year of the ten year period before the expatriation occurred.
Caution: These exceptions would only let you avoid the exit tax. You would still have to complete Form 8854 when expatriating.
To determine which property would be subject to the exit tax, the IRS looks to see whether the value of the property would be included in a decedent’s gross estate for federal estate tax purposes AS if the covered expatriate died on the day before their expatriation date. That would mean “all property, real or personal, tangible or intangible, wherever situated.”
Generally, that includes:
- Marketable and Nonmarketable stock and securities issued by U.S. and Foreign Companies
- Interests in Domestic and Foreign Partnerships
- Intangibles used within and Outside United States
- Loans to American and foreign persons
- Real and Personal property located within and Outside United States
- Business property located within and Outside United States
- Installments note receivables and other receivables (Foreign and Domestic)
- Other Assets located within and outside the US
Note: This list is not all-inclusive.
According to Section 877A(g)(3), your expatriation date will be whichever of these occurs first:
- The date you renounce your U.S. citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a Certificate of Loss of Nationality)
- The date you gave the State Department a signed statement of your voluntary relinquishment of a U.S. nationality (again, provided that the voluntary relinquishment was later confirmed by the issuance of a Certificate of Loss of Nationality).
- The date the State Department issues you a Certificate of Loss of Nationality
- The date a U.S. court canceled your Certificate of Naturalization
Dual Residents from Treaty Countries
- If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date on which you commenced to be treated as a resident of that country under the treaty, did not waive the benefits of the treaty, and gave notice to the Secretary of such treatment. See Regulations section 301.7701(b)-7 for information on other filing requirements
Long Term Residents
- The date you voluntarily abandoned your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U.S. consular or immigration officer.
- The date you became subject to a final administrative order that you abandoned your lawful permanent resident status (or, if such order has been appealed, the date of a final judicial order issued in connection with such administrative order).
- The date you became subject to a final administrative or judicial order for your removal from the United States under the Immigration and Nationality Act.
The person who sent in the question at the start of this article ceased to be an LTR of the United States on November 30, 2022 —the date that he completed Form I–407 and surrendered their green card to a U.S. consular or immigration officer, AND received a Certificate of Loss of Nationality.
Note: In order to avoid being subject to U.S. worldwide taxation after expatriating, you must go through one of the proper procedures outlined by the State Department. Simply throwing away a green card/U.S Passport or leaving the U.S. for long periods of time will not change your status from an LPR or citizen to a Non-Resident.
The IRS instructions here should be your most important source of guidance. This type of paperwork can be complicated, so you may be wondering how to fill out Form 8854. Here’s a brief overview:
Part I is where you’ll provide basic information about yourself, such as your mailing address, principal place of residence, country of residence, and whether you’re filing an initial form or providing annual statements because of an earlier expatriation.
Part I also asks questions about your date of expatriation and your citizenship or residency status. Citizens will need to declare how they obtained their citizenship, and LTRs will need to provide information on when they first became lawful permanent residents in the U.S.
Part II, Sections A & B
These sections are where you’ll give the IRS the information, they need to determine whether you’re a covered expatriate or a non-covered expatriate, and whether or not you’re exempt from the exit tax.
Part II, Section C
You only have to fill out Section C if you are a covered expatriate. If you’re non-covered, you can skip it. That means you shouldn’t complete Section C if:
- Your average net income tax liability for the 5 tax years immediately before expatriation was under $178,000 (see line 1 in Section A), and/or
- Your Net Worth was under $2 million and you checked “Yes” on line 6 in Section A; or
- In Section A, you checked “Yes” on lines 3, 4, and 6; or
- In Section A, you checked “Yes” on lines 5 and 6
Part II, Section C (1a–d)
If you are a covered expatriate, this section requests information on:
- Eligible deferred compensation items
- Ineligible deferred compensation items
- Specified tax-deferred accounts
- Interest in a non-grantor trust
Depending on the type of item or account you own at the time of expatriation, you will be required to …
- Include the distribution of your entire interest , or present value of the accounts on the day before your expatriation date – this generally applies to Ineligible deferred compensation items, and Specified tax deferred accounts. [this applies to item (ii) and (iii)] , or
- waive any right to claim any reduction in withholding under an applicable treaty between the United States and a foreign country when distributions are made , taxable distributions that you receive in the future will be subject to 30% withholding – this generally applies to Eligible deferred compensation items,and Interests in nongrantor trusts
Part II, Section C, Line 2
This line is used to calculate gain or loss on the deemed sale of all properties you own on your date of expatriation. Do not include any assets already listed in Part II, Section C (1a–d)
Part II, Section D
If you expatriated in 2022, and you chose to enter into a tax deferral agreement with the IRS for assets subject to the exit tax, use lines 2 through 5 of Section D to figure the amount of tax you can defer.
Before completing lines 2 through 5 of Section D, you must fill out two hypothetical individual income tax returns using Form 1040 or 1040-SR.
- The first return includes all income, including the exit tax gain and loss
- The second return includes all income except the exit tax gain and loss
Attach both hypothetical returns to this 8854.
You only have to complete Part III if you:
- Deferred the payment of tax on any property on a Form 8854 filed in a previous year,
- Reported an eligible deferred compensation item on a Form 8854 filed in a previous year, or
- Reported interest in a non-grantor trust on a Form 8854 filed in a previous year.
- On 2022 Form 1040, the unrealized capital gain or loss is reported on Line 7
- On Form 1040-NR, the unrealized capital gain or loss is reported on Line 7
Depending on the type of asset (personal or business), you will also be required to attach Schedule D or Form 4797.
NOTE: Notice 2009-85 requires covered expatriate to file a dual status return for the year of expatriation, unless the expatriation date is Jan 1, the expatriate will file a form 1040NR (covering period taxpayer became a non-resident Alien), and attach form 1040 as a schedule, or as an information return ( covering periods taxpayer was a U.S person for income tax purposes)
If you elect for a tax deferral, you’ll have to submit a bond or letter of credit for some form of collateral that is deemed acceptable by the IRS.
You are required to attach Form 8854 to your income tax return (Form 1040, U.S. Individual Income Tax Return or Form 1040-NR, U.S. Nonresident Alien Income Tax Return) for the year of expatriation.
The income tax return must be filed by the due date (including extensions).
You are also required to send a copy of the Form 8854, marked “Copy,” to the IRS Austin Campus in Texas.
If you don’t have to file a tax return, then just send one Form 8854 to the IRS Austin Campus.
According to the IRS, if you:
- Fail to file Form 8854 for any tax year, or
- Do not include all the information required by the form, or
- The form includes incorrect information
…You may owe a penalty of $10,000 for that year, unless it is shown that such failure is due to reasonable cause and not willful neglect.
Yes, The IRS has announced procedures for certain Expatriates who have relinquished U.S. citizenship or terminated long-term residency, and who wish to come into compliance with their U.S. income tax and reporting obligations and avoid being taxed as a covered expatriate.
The criteria for relief under these procedures are very limited in scope, so it is recommended that you read all the information for these procedures including the FAQs to determine eligibility. Click here for more info.
As a former citizen or former U.S. resident , you will be considered as a Foreign Person or a Non-Resident Alien beginning with the very first day you effectively renounced your citizenship or terminated your long-term residency.
- If you own a US single member LLC , it will now default to a “foreign owned U.S disregarded entity“.
Foreign owned disregarded entities are required to file a Proforma 1120, and Form 5472. Foreign Owned Single Member LLCs must file Form 5472 if it had a reportable transaction with a foreign or domestic related party – read more here
- Your C-Corporation will also default to a “foreign owned U.S corporation” and will be required to attach form 5472 to the corporation’s annual tax return , i.e. 1120 – only if the corporation has a reportable or related party transactions as defined under section 6038.
A reporting corporation must file Form 5472 if it had a reportable transaction with a foreign or domestic related party.
A U.S Corporation is a reporting corporation if a Foreign shareholder owns at least 25% of its stocks, either by value or by vote.
Penalty for late or non-filing of 5472 starts at $25,000, and if the failure continues following 90 days after the notice of failure is sent, the amount of the additional penalty to be assessed is $25,000 for each 30-day period, during which the failure continues -non-filing penalty can be unlimited, unless there is reasonable cause(See Treas. Reg. § 1.6038A-4(b)-(d)). .
Get Help from an Experienced CPA or Tax Attorney.
Renouncing your U.S. citizenship or surrendering your green card are major steps to take, and there are a lot of Tax complications involved. The consequences are long-lasting. If you want some help with Form 8854, or if you just have some more questions, you’d like to ask me, please get in touch for a consultation.
I’ll be happy to help.
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***Disclaimer: This communication is not intended as tax advice, and no tax accountant -client relationship results**