Giving up U.S. citizenship or a green card can trigger an immediate income tax bill, and the IRS may be able to collect it indefinitely, no matter where you live. The rules can also reach your friends and family. This post explains why tax planning generally comes before the paperwork, who the expatriation rules can affect, what the U.S. Department of State forms are, and how hard the tax may be to collect once you live abroad. Consulting an experienced attorney before taking any of these steps is essential.
Table of contents:
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Why does tax planning usually come before giving up U.S. citizenship or a green card?
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What is the general income tax rule when someone expatriates?
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Can the IRS collect the expatriation tax from someone living outside the United States?
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Can someone become a covered expatriate even with no assets?
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Can your friends and family be taxed because of your expatriation?
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What forms are filed to renounce U.S. citizenship?
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If you live abroad with no U.S. assets, can the IRS still collect?
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Why is planning important before renouncing citizenship or abandoning a green card?
Why does tax planning usually come before giving up U.S. citizenship or a green card?
U.S. international tax law is complex. Without planning, people can create very adverse tax consequences for themselves and for their friends and family, often without understanding the full implications of the law. This is especially true for tax expatriation, which is when a U.S. citizen (USC) renounces citizenship or a long-term lawful permanent resident (LPR), meaning a green card holder, abandons that status. Several features of the law make planning ahead important.
What is the general income tax rule when someone expatriates?
The general rule is that an immediate income tax is payable under the “mark to market” taxation rules on unrealized gains. Mark to market means that unrealized gains, the increase in value of assets that have not actually been sold, are treated as if the assets were sold and are taxed right away. This can produce an income tax bill at the time of expatriation, even though nothing has actually been sold.
Can the IRS collect the expatriation tax from someone living outside the United States?
Yes. Once a tax is recognized under U.S. tax law, the only way to discharge the liability with the U.S. federal government is to pay the tax owing. The IRS generally can collect an income tax owing against a taxpayer who lives outside the U.S. indefinitely. The normal 10 year collection statute does not apply while the individual is outside the United States for a continuous period of at least six months, under IRC Section 6503(c). In effect, the IRS can “forever” pursue collection of the expatriation tax against U.S. citizens and lawful permanent residents living outside the U.S.
Can someone become a covered expatriate even with no assets?
Yes. It is easy to fall into the general rule of expatriation, even for a taxpayer who would not otherwise be subject to income taxation. A person who falls into these rules is called a “covered expatriate.” Because covered expatriate status can attach even to someone with no assets, it is sometimes described as a “Forever Taint.”
Can your friends and family be taxed because of your expatriation?
Yes. The friends and family of a covered expatriate, meaning a former U.S. citizen or long-term lawful permanent resident who fell into these rules, can be subject to U.S. taxation during their lifetimes, even if they also live outside the United States. This consequence comes from Section 2801, sometimes called the “Hidden Tax” of expatriation and another part of its “Forever Taint.”
What forms are filed to renounce U.S. citizenship?
Renouncing U.S. citizenship involves going to the U.S. Department of State and taking the oath of renunciation. Two forms are completed and filed at that time:
- Form DS-4080, Oath of Renunciation of the Nationality of the United States.
- Form DS-4081, Statement of Understanding Concerning the Consequences and Ramifications of Relinquishment or Renunciation of U.S. Citizenship.
The reason planning generally comes first is that these are the steps that formally complete the renunciation, after the tax consequences are already in motion.
If you live abroad with no U.S. assets, can the IRS still collect?
It may be difficult. If the individual lives outside the U.S., does not travel to and from the U.S., and has no assets in the U.S., it may be practically very difficult for the IRS to collect on the tax judgment owing. Even so, there are legal means and steps the IRS can take in an attempt to collect U.S. taxes on assets held overseas.
Why is planning important before renouncing citizenship or abandoning a green card?
Ideally, a former U.S. citizen or long-term lawful permanent resident will want to avoid these potential tax and collection issues by engaging in thoughtful and strategic planning before renouncing U.S. citizenship or abandoning lawful permanent residency. Because expatriation can trigger an immediate tax, long-term collection exposure, and tax consequences for family members, the planning generally comes before the renunciation paperwork. Consulting an experienced attorney before taking any of these steps is essential.
