Overview of the Expatriation Process, How to Expatriate

What is Expatriation, Am I Covered, Do I Owe U.S. Exit Taxes?

What is Expatriation?

For some individuals, when they want to permanently give up their U.S. status, there are certain protocols and procedures they must file with the IRS and USCIS. If the person is a legal permanent resident who qualifies as a long-term resident or a U.S. citizen, then they have to go through the formal process of giving up their U.S. person status. The process of formally relinquishing a green card or renouncing U.S. citizenship is referred to as expatriation — and the process has many steps to it, including making formal representations to the Internal Revenue Service, the Department of State, and/or United States Citizenship and Immigration Services.

How to Expatriate from the U.S.

Here are 5 steps on how to expatriate from the United States:

Planning for Expatriation (Step 1)

We cannot stress enough how important it is to make sure you properly ‘exit tax plan’ to expatriate before you actually expatriate. Once you complete the expatriating act, you cannot go back and unwind it — which is why preparation before expatriation is crucial. If you already qualify as a long-term resident — or you are a U.S. citizen – then it is crucial to evaluate your assets, income, and overall tax compliance in accordance with the covered expatriate rules. The ultimate goal is to avoid the covered expatriate status. If having covered expatriate status is unavoidable, then the next best strategy is to avoid the exit tax.

Do You already have Dual-Citizenship and Second Passport (Step 2)

When a person is a long-term resident, dual citizenship is not typically a major concern since the person is only a resident of the United States — and presumably already has citizenship in another country. When a person is a U.S. citizen, it is important they have citizenship in another country as well — in addition to an active passport — so they can use it to travel after the expatriation is complete. If a U.S. citizen seeks to renounce their citizenship without proving that they have citizenship in another country, they are referred to as “stateless” and may not be approved for expatriation.

The Expatriating Act (Step 3)

The expatriating act and the level of annoyance with completing the paperwork will vary depending on whether a person is a long-term resident or U.S. citizen.

Legal Permanent Residents

When a person is a legal permanent resident, they will usually just file a form I-407 as the expatriating act. Since 2019, foreign consulates will no longer accept walk-ins for a Form I-407 filing, but that may not be the case in all countries — depending on which country you are in (and how much of a smooth-talker you are).  Otherwise, the permanent resident mails the form I-407 to initiate the expatriation process.  Presuming that the I-407 is accepted and processed, the date of filing the form will be considered the expatriation date.

U.S. Citizen

On the other end of the spectrum, when a person is a U.S. citizen there is (understandably) a much more in-depth process to expatriation. Generally, the U.S. citizen will travel to a foreign consulate and submit Department of State forms 4079-4083. The U.S. citizen will also undergo an exit interview — and most consulates require that the U.S. citizen to return back to the consulate after the initial appearance for the second interview/meeting, either as a cooling-off period and/or an opportunity for the consulate officer to review the paperwork.  Different consulates handle this process “differently” depending on which foreign country the expatriation takes place. At the end of the process, once the expatriate has been approved for expatriation, the citizen will receive a stamped form DS-4083, which is referred to as a certificate of loss of nationality.

Form 8854 (Step 4)

Form 8854 is the expatriation statement.  It is a detailed summary of the expatriate’s assets and liabilities. We have a separate article detailing the ins and outs of IRS Form 8854. The Form 8854 is filed in addition to the final dual-status tax returns submitted by Taxpayer the year following their expatriation.

Preparing a Dual Status Tax Return (Step 5)

In the final year of the filing, the expatriate will file a dual-status return.

Example: Jeffrey expatriates on 8/1/2023.

Up until the expatriation date, Jeffrey will file a form 1040 (reporting worldwide income).  For the remainder of the year, Jeffrey files a form 1040NR as a non-resident, along with Form 8854.

Do You Need Offshore Disclosure with Expatriation?

When a person is either considered a U.S. citizen or a Long Term Lawful Permanent Resident (LTR), the formal process of either renouncing US citizenship or relinquishing a green card is referred to as expatriation. When a taxpayer expatriates from the United States there are various tax and immigration requirements that they must be aware of to ensure that the process goes smoothly. One of the biggest hurdles for some taxpayers is that they are not in IRS tax compliance for the five prior years at the time that they expatriate. As a result, this may lead to the taxpayer having to pay an exit tax when they may have avoided attacks if they had been tax-compliant at the time that they expatriated. Let’s look at four common issues involving offshore disclosure with expatriation.

Covered Expatriate Status

When a person is considered a covered expatriate, it means that they may be subject to the exit tax. When at all possible, taxpayers will try to avoid the covered expatriate status – and there are three (3) tests to determine covered expatriate status. If a taxpayer qualifies for either the net worth test, the net income average tax liability test, or the tax compliance test, they will be deemed a covered expatriate — unless an exception or exclusion applies. Thus, taxpayers who would only be considered to be covered expatriates because of the five-year tax compliance rule should be sure they are in tax compliance before they expatriate. This is because it can lead to an exit tax for items such as mark-to-market unrecognized gains; specified tax-deferred accounts, and ineligible deferred compensation (foreign pension). For taxpayers who have unreported foreign accounts, assets, investments, or income they will want to consider one of the offshore disclosure programs otherwise known as international tax amnesty.

Post-Expatriate Tax Audit

Some taxpayers are under the impression that once they expatriate, they are no longer subject to U.S. taxes. While they may not be subject to US taxes on their worldwide income, their prior-year tax returns that are still within the statutory time may be audited even after they expatriate, including their final year of tax filings. In other words, simply expatriating from the United States does not protect the taxpayer against the IRS auditing them for prior years. If a taxpayer is audited and the IRS determines that they did not properly expatriate because they did not actually meet the tax compliance rule it could lead to extensive fines and penalties after the fact.

U.S./Foreign Assets May be Subject to Levy/Lien

Even after a person expatriates from the United States, they can still be subject to examination and if the IRS determines that taxes or penalties are owed, then the IRS can lean or levy their bank accounts and other US-based assets, along with foreign assets in conjunction with cooperation clauses contained in tax treaties and FATCA agreements.

401K Withholding

 An additional potential tax pitfall is 401K and other eligible deferred compensation that is not subject to exit tax at the time of expatriation for non-covered expatriates. If the person is later determined to be a covered expatriate it will impact their 401K withholding because taxpayers who are determined to be covered expatriates are subject to a 30% withholding and even if the taxpayer is in a treaty country, they cannot take advantage of the treaty election if they are considered a covered expatriate.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms and do not qualify for an exception or exclusion to FBAR filing, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.