A Simple 4-Step Introduction to U.S. Expatriation (New 2027)

When a U.S. taxpayer is considered a U.S. citizen (USC) or a long-term lawful permanent resident (LTR) and decides to ultimately terminate their U.S. person tax status, they may be considered a covered expatriate — and may become subject to us exit tax. But where several attorneys and other inexperienced EAs and CPAs go wrong is by scaring taxpayers into believing that just because they are wealthy, they will have to pay an exit tax; that is absolutely false. The exit tax is not based on wealth; rather, it is based on potential unrealized income that accumulated while the taxpayer was a U.S. person. Let’s review the basic steps of determining whether a person is potentially subject to exit tax.

The Four Preliminary Steps to Exit Taxes

To determine whether a taxpayer will potentially have to pay exit tax, there are four (4) main steps the taxpayer must take first:

- - First, the taxpayer must determine whether they are a USC or LTR.
  - Next, the taxpayer must determine whether they meet one of the three covered expatriation tests.
  - Then, the taxpayer must determine whether they qualify for any exception to being deemed a covered expatriate.
  - And finally, if the taxpayer is a covered expatriate, does the calculation result in the taxpayer being subject to exit tax.

Is the Taxpayer a USC or LTR?

The first step that the taxpayer must take is to determine whether they are a U.S. citizen or long-term lawful permanent resident. If they are a U.S. citizen, unless an exception or exclusion applies, they will have to complete the next few steps. If they are a lawful permanent resident, it depends on whether the taxpayer was a permanent resident during eight of the past 15 years (aka ‘long-term’). It is important to note the following:

- - It does not have to be eight (8) full years, but
  - Time spent within the United States that the taxpayer was on a visa (or just not an LPR) is not applied toward the eight-year test.

Examples:

- - Taxpayer 1 came to the United States on a Green Card in July of 2020 and remained in the United States through February of 2027. The IRS may consider this sufficient to establish long term resident status.
  - Taxpayer 2 came to the United States on an H-1B visa and remained for 15 years on that visa before becoming a green card holder. After being a green card holder for five years, he decides he wants to terminate his green card status. Taxpayer 2 is not a long term resident because he was not a green card holder in eight of the past 15 years.

Is the Taxpayer a Covered Expatriate (3 Tests)

If the taxpayer is an LTR or USC, the taxpayer must next determine whether they are a covered expatriate. There are three (3) main tests to determine whether the taxpayer is a covered expatriate or not. The taxpayer must only meet one of the three tests, and not all of the three tests.

- - The first test is whether the taxpayer meets the net worth test, which means their net worth is $2 million or more.
  - Next, the taxpayer should determine whether they meet the net income average tax liability test. Unlike the net worth test, this test adjusts anually for inflation. It is also important to note that if the taxpayer is married filing jointly, the taxpayer must consider the full return and not just their portion of the return.
  - Finally, even if the taxpayer does not meet the net worth test or the net income average tax liability test, if the taxpayer is unable to certify under penalty of perjury that they are tax compliant for the past five years, they will also be considered a covered expatriate if they expatriate before getting into compliance. *Taxpayers should keep in mind that tax compliance does not necessarily mean the taxpayer submitted a ‘perfect’ tax return.

Does the Taxpayer Qualify for an Exception?

Even if the taxpayer qualifies as a covered expatriate, if they meet an exception to being a covered expatriate, then they will not be considered covered for exit tax purposes. The two main exceptions involve whether the taxpayer is a minor, and/or whether the taxpayer is a dual citizen (the dual citizen exception has additional requirements beyond merely being a dual citizen).

Does the Calculation Result in Exit Tax

Finally, presuming that the taxpayer is a covered expatriate, the next step is to determine whether they owe any exit tax. It is important to note that this is not a wealth tax but rather an exit tax.

Here are two simple examples to illustrate the difference:

- - Taxpayer 1 is a U.S. citizen that has $700 million in U.S. bank accounts. He does not own any assets other than this $700 million in bank accounts. Despite his large wealth, taxpayer 1 does not owe any exit tax.
  - Taxpayer 2 is a U.S. citizen that has $50,000 in cash in a bank account but has $5 million in stock with a $1 million basis in that stock. Here, taxpayer may have an exit tax based on the unrealized mark-to-market gain of the shares of stock that he owns, which are deemed sold the day before he expatriates.

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, 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?**

Hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting can be overwhelming for Taxpayers trying to sift through the false information and nonsense they find in online research. Only a handful of attorneys worldwide are Board-Certified Tax Specialists who specialize exclusively in offshore disclosure and international tax amnesty reporting.

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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

Contact our firm today for assistance.