Expatriating and IRS Form 8854

Expatriation: All About IRS Form 8854

Under the “old” expatriation law that applied from 2004-2008, you had to file IRS Form 8854 (Expatriation Information Statement) in order for your expatriation to be effective from a tax perspective. Without filing this form, the US government would still consider you a US citizen or permanent resident, even if you had expatriated. This meant you would still be subject to:

• Paying taxes on your worldwide income.
• Complying with all the reporting obligations that come with being a US citizen or permanent resident.

The “new” law took effect on June 17, 2008. Under it, expatriation for tax purposes happens when a former US citizen or long-term resident does an “expatriating act.” This act is defined in the amendments to the Tax Code that came into effect on that date.

There is no requirement that you complete Form 8854 for your expatriation to become effective. That may make it tempting not to file the form, which requires that you list every asset you own to calculate your net worth and any unrealized gains in your investment portfolio. This could be especially true if you’re a “covered expatriate.” For example, if you have a net worth over $2 million or meet other conditions in the expatriation amendments.

There Are Consequences If You Don’t Fill Out Form 8854

First, there’s a $10,000 penalty for failing to file it. But we only know of a few instances where it’s been imposed.

Second, you automatically become a “covered expatriate.” That triggers either the termination or punitive taxation of future distributions from any US retirement or pension plan. It also means that if you make any future gifts or bequests to any US recipient that exceed $18,000 annually, the recipient must pay a tax on the excess amount at the highest estate rate then applying. That rate is currently 40%. Finally, if you have unrealized gains over $866,000 (the 2024 threshold, adjusted annually for inflation), you’ll need to pay tax on those gains. You’ll pay tax as if you sold them the day before expatriation.

And don’t think the IRS won’t know you’ve expatriated without Form 8854. State Department regulations require the IRS to be informed when it issues a certificate of loss of nationality – the paperwork confirming you’re no longer a US citizen. So if you have serious tax problems, expatriate without dealing with them, and then fail to file Form 8854, the IRS won’t necessarily go away.

IRS Form 8854 Instructions

Part II, Section A, No. 6 of Form 8854 requires you to certify that you have complied with all tax obligations for the five years prior to your year of expatriation.

You don’t want to answer this question “No.” If you do, it’s an invitation to the IRS to subject you to an audit for the previous five years. And you automatically become a covered expatriate, even if you wouldn’t qualify otherwise.

But what exactly does “tax compliance” mean? The instructions to Form 8854 state:

Check the “Yes” box if you have complied with your tax obligations for the 5 tax years ending before the date on which you expatriated, including but not limited to, your obligations to file income tax, employment tax, gift tax, and information returns, if applicable, and your obligation to pay all relevant tax liabilities, interest, and penalties. You will be subject to tax under section 877A if you have not complied with these obligations, regardless of whether your average annual income tax liability or net worth exceeds the applicable threshold amounts.

The phrase, “including but not limited to” causes more than a few expatriates consternation. To find out what it really means, we must delve more deeply into the labyrinth of the Tax Code, specifically section 877A. This is one of the sections that deal with expatriation.

Section 877A defines a “covered expatriate” as:

… an expatriate who meets the requirements of subparagraph (A), (B), or (C) of section 877(a)(2).

Section 877A is not the same as Section 877(a), although they are obviously related. Section 877(a)( 2) defines a covered expatriate (without actually using the term), in part, as someone who:

… fails to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.

Note the use of the phrase “this title.” The Tax Code is Title 26 of the US Code. So, as long as you’ve satisfied all the requirements of Title 26, you can honestly check “Yes” on Form 8854.

This is significant, because the requirement to file Form 114 – the foreign bank account reporting report, or FBAR – is in Title 31. This means that even if you’re delinquent filing this form, you can still expatriate and comply with the terms of Form 8854.

On the other hand, if your non-US investments are significant enough that you meet the filing thresholds for Form 8938, you must file that form with your tax returns. That’s because Form 8938 is a Title 26 form. But if you file Form 8938 without also filing the FBAR, that’s likely to create a red flag.

We’re not recommending that you not file Form 114. We are pointing out the technical requirements of the law.

There are good reasons to take care of all of your reporting obligations before you expatriate, including FBARs. The most significant advantage of doing so is that if the IRS later discovers you didn’t file the forms, it can’t come after you. The last thing you want is needing to deal with the IRS after you expatriate.

The FBAR civil penalty risk expires six years after the date it was supposed to be filed. It can pursue criminal penalties, which are much rarer, for only five years. But if you’re living outside the United States (as you must if you expatriate), the IRS can ask a court to suspend the statute of limitations.

Need Help?

We can assist in every phase of giving up your US citizenship or long-term residence. This includes helping you get a second passport before giving up US citizenship.

And if you’re not ready to expatriate, we can help you take advantage of tax breaks in the Tax Code that apply to US citizens and permanent residents living overseas.

Schedule a free no-obligation consultation with a Nestmann Associate to see if expatriation is right for you.