If the U.S. Revokes My Citizenship, Do I Pay Exit Taxes?

With the current administration’s hard stance on immigration, the U.S. government is seeking to potentially denaturalize certain U.S. citizen taxpayers. One of the main reasons why taxpayers naturalize is because they have every intention of remaining U.S. citizens for the remainder of their lives and to pass that on to the next generations. A key benefit of becoming a U.S. citizen (as opposed to remaining a green card holder) is that it is much more difficult to be removed from the United States when a person is a citizen. But, if the United States government takes away a naturalized citizen’s citizenship status, can they become subject to the exit tax?

Who is Subject to Exit Taxes?

Individuals who are either U.S. citizens or long-term lawful permanent residents may become subject to the exit tax if they meet one of the covered expatriate tests and have income resulting in an exit tax. There is no distinction made between a born U.S. citizen and a naturalized U.S. citizen when it comes to exit taxes — they both fall into the general category of ‘U.S. citizen.’ While if a taxpayer proactively renounces their US citizenship, they squarely fall into the category of individuals who may become subject to exit taxes — what about taxpayers who are forced to denaturalize?

There is no Express Requirement for De-Naturalization to be Voluntary

Unfortunately, there is no express requirement that a taxpayer voluntarily renounce their citizenship as opposed to being forced to denaturalize. If a person were required to ‘voluntarily’ give up their US citizenship to be subject to an exit tax, you could foresee the potential issue when, for example, a very wealthy taxpayer who may become subject to high exit taxes could instead commit a crime sufficient to be denaturalized, and then avoid exit taxes. Even when denaturalization is involuntary, presumably, the IRS would still claim that taxpayers are required to pay the exit tax even if they are forced to naturalize. This is similar in concept to taxpayers who commit a crime and are still required to include the criminal income on their U.S. tax return.

Form 8854

Form 8854 is used as the initial and annual expatriation statement for taxpayers who expatriated and are either U.S. citizens or long-term lawful permanent residents. Focusing specifically on what is considered the date of relinquishment of US citizenship, the instructions provide the following examples of when a person’s citizenship is relinquished:

Date of relinquishment of U.S. citizenship.

You are considered to have relinquished your U.S. citizenship (and consequently, have an expatriation date) on the earliest of the following dates.

1. 1. The date you renounced 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).
  2. The date you furnished to the State Department a signed statement of your voluntary relinquishment of a U.S. nationality confirming the performance of an expatriating act (provided that the voluntary relinquishment was later confirmed by the issuance of a certificate of loss of nationality).
  3. The date the State Department issued a certificate of loss of nationality.
  4. The date a U.S. court canceled your certificate of naturalization.

While most of the time, taxpayers only become subject to exit tax when they voluntarily renounce and are considered a covered expatriate, it is essential to note that there is no express, steadfast rule requiring a taxpayer to voluntarily naturalize to be subject to exit taxes. In short, once naturalization is cancelled or revoked, the taxpayer is no longer a U.S. citizen, and if they are considered a covered expatriate, they may become subject to exit taxes.

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.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

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.

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

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.