What Is IRS Form 8854? A Guide for Expats
To renounce your US citizenship, you must file a variety of forms. One of the most important is IRS Form 8854. Until you’ve filed this form, you will still be considered a citizen by the Internal Revenue Service.
But what is Form 8854—and how do you complete it? Here’s what you need to know.
Key Takeaways
- US citizens must file Form 8854 to certify tax compliance after relinquishing their citizenship.
- Certain long-term residents must also file Form 8854 to terminate their residency.
- Form 8854 is used to determine whether a US person will have to pay the exit tax when renouncing their citizenship or terminating their residency.
What Is Form 8854?
Form 8854 is an IRS tax form used to show that you have settled your US taxes once and for all. Until you’ve done this, the US government will consider you a citizen for income tax purposes and expect you to continue filing US taxes.
Form 8854 also determines whether you are a covered or non-covered expat. If you are a covered expat, you will be required to file an exit tax in order to finalize your renunciation.
Who has to File IRS Form 8854?
US citizens who are renouncing their citizenship must file Form 8854. Certain long-term residents must also file this form when terminating their US residency. Specifically, US residents who have held a Green Card for at least eight out of the past 15 years must file Form 8854 if they wish to be considered non-residents.
What Is the Penalty for Failing to File Form 8854?
The penalties for failing to file Form 8854 when required can be steep. First, there is the noncompliance penalty—up to $10,000. (However, this penalty only applies to covered expats.)
Beyond this, because you will be considered a US citizen until you have filed Form 8854, you will continue to be subject to US taxes. That means that you will also have to pay any unpaid taxes you incurred before filing, along with any associated interest or penalties.
Whether you are a covered or noncovered expat, it is always best to file this form as required.
What Is a Covered Expatriate?
The question of whether you are a covered or noncovered expat will have a major impact on the costs of renouncing your citizenship. In fact, it can be the primary factor that determines whether renouncing your citizenship makes financial sense at all.
So what’s the difference between a covered expat and a non-covered expat? In short, a covered expat must pay an exit tax to renounce their citizenship or terminate their residency. A non-covered expat, on the other hand, can renounce their citizenship or terminate their residency without needing to pay an exit tax.
Who Is Considered a Covered Expatriate?
The IRS will consider you a covered expatriate if any of the following standards apply:
- Net Worth Test:
- Your personal net worth exceeds $2 million at the time of expatriation.
- Tax Liability Test:
- Your average annual income tax liability for the past five years exceeds a certain threshold.
- For the 2024 tax year, this threshold is $190,000 (adjusted annually for inflation).
- If you meet either of these conditions, you may be subject to the exit tax, which applies to covered expatriates who renounce US citizenship or long-term residency.
- You have failed to file or pay your taxes as required during any of the last five years
If you meet any of the above qualifications, you are a covered expat, and you will be required to pay an exit tax. Otherwise, you are a non-covered expat, and the exit tax does not apply to you. Either way, you will still have to file Form 8854 to determine your status, whether covered or non-covered.
There are rare exceptions when you may not be considered a covered expat even if you meet the usual standards. Namely, if you became a dual citizen at birth or if you expatriated from the US before the age of 18 ½, you may be able to avoid the exit tax even if it would otherwise apply. These exceptions can be complex, however. Consult an expat tax professional to learn more.
How Is the Exit Tax Calculated?
The exit tax is based on a “deemed sale” of your worldwide assets on the day before expatriation. This means the IRS treats your assets as if they were sold at fair market value, even if you haven’t actually sold them.
Exemption for 2024
- For 2024, the first $821,000 of gains (adjusted annually for inflation) is exempt from the exit tax.
- Only gains exceeding this threshold will be subject to the exit tax.
If you qualify as a covered expatriate, you may need to calculate capital gains tax on your deemed sale, minus the exemption amount.
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How to File Form 8854
Form 8854 is incredibly complicated to complete. We do not recommend completing it yourself, as even a minor mistake or miscalculation could have wide-ranging tax implications.
For example, to avoid being considered a covered expat, you must certify on Form 8854 that you have been entirely tax-compliant for the previous five years. This is a significant claim, and you could face severe penalties if you are wrong about this.
For the sake of security and peace of mind, consult a qualified tax professional like Greenback Expat Tax Services to ensure that you complete Form 8854 accurately.
What If I’m Behind on My Expat Taxes?
One of the most common reasons expats qualify as covered expats is that they aren’t up to date on their taxes when they renounce their citizenship. Many Americans are unaware that they must file a US tax return even after moving overseas.
If you are behind on your expat taxes, don’t panic. The IRS provides an amnesty program for expats in your position. It’s called the Streamlined Filing Compliance Procedures.
Requirements for Using the Streamlined Filing Compliance Procedures
To qualify for the Streamlined Filing Compliance Procedures, you must:
- Self-Certify Your Non-Willfulness
- You must confirm that your failure to file was accidental and not intentional tax evasion.
- File Up to Three Years of Delinquent Tax Returns
- Submit the most recent three years of missing income tax returns.
- Pay any delinquent taxes and interest owed based on these returns.
- File Six Years of Foreign Bank Account Reports (FBARs)
- If required, you must file FBARs for the past six years to report foreign financial accounts.
Compliance and Expatriation Considerations
Once you complete these steps, the IRS will consider you in basic compliance with US tax law.
However, if you plan to expatriate and wish to avoid covered expatriate status, you must certify that you have been tax-compliant for the past five years. If your non-compliance goes beyond the three-year window covered by the Streamlined Filing program, additional steps may be required to meet the five-year compliance rule for expatriation.
If you have been delinquent in your expat taxes for any amount of time, don’t wait to use this program! If the IRS contacts you about your delinquency before you start the process yourself, you may lose the privilege of claiming amnesty.
Still Have Questions about IRS Form 8854 and Your Expat Taxes?
We hope this post has helped you understand what Form 8854 means to you as a US expat.
Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.
