IRS Form 8854: Exit Tax, Covered Expatriates, and Filing Rules

IRS Form 8854 is the Initial and Annual Expatriation Statement — the form you file when you give up U.S. citizenship or end long-term lawful permanent resident status. It reports your worldwide assets and liabilities, determines whether the IRS classifies you as a “covered expatriate,” and, if it does, drives the calculation of the exit tax on your unrealized gains. For expatriations in 2026, you become a covered expatriate if your net worth is $2 million or more, your average annual net income tax over the prior five years exceeds $211,000, or you cannot certify full federal tax compliance for those five years.¹ Filing the form wrong, late, or not at all triggers a $10,000 penalty per year — whether or not any exit tax is owed.

Who Has to File

Two groups file Form 8854. The first is any U.S. citizen who formally gives up citizenship, whether by renouncing before a consular officer or by having citizenship revoked. The second is any long-term resident who ends lawful permanent resident status. A long-term resident is someone who held a green card in at least 8 of the 15 tax years ending with the year of expatriation.²

For green card holders, the expatriation event usually occurs when you file Form I-407 with U.S. Citizenship and Immigration Services to abandon your resident status.³ The Form 8854 obligation kicks in automatically once you take that step, regardless of your wealth or income. Even if you owe nothing in exit tax, you still have to file.

The Three Tests That Decide Whether You Owe Exit Tax

The core of Form 8854 is figuring out whether you are a covered expatriate. Three independent tests, and you need to pass all three. Failing any one of them puts you in that category and exposes you to the exit tax regime.

Net Worth Test

You fail this test if your net worth is $2 million or more on the day before your expatriation date. The $2 million figure is set by statute and does not adjust for inflation.² Net worth is the fair market value of everything you own worldwide — real estate, investments, retirement accounts, business interests, personal property — minus all your liabilities. Joint assets count at the value of your interest. A $3 million home owned equally with a spouse puts $1.5 million on your side of the ledger.

Average Annual Net Income Tax Test

Add up your net income tax for the five tax years ending before the expatriation year and divide by five. For expatriations in 2026, you fail this test if that average exceeds $211,000.¹ The threshold adjusts for inflation each year, so expatriating a year earlier or later can change the math. One unusually high-income year can pull a five-year average over the line even when the other years sit well below it.

Tax Compliance Certification

You must certify, under penalty of perjury, that you have met all U.S. federal tax obligations for the five tax years before expatriation.⁴ That covers income tax returns, gift tax returns, employment tax filings, and information returns. If you held foreign financial accounts with a combined value above $10,000 at any point, your FinCEN Form 114 (FBAR) filings must be current.⁵

A failed certification makes you a covered expatriate regardless of your net worth or income. Many people stumble here. They focus on the dollar thresholds and overlook a missed FBAR or an unfiled gift tax return from years back. Cleaning up delinquent filings before expatriating is cheaper than becoming covered by default.

Narrow Exceptions for Dual Citizens From Birth and Certain Minors

Two exceptions can spare you from covered expatriate status even if you fail the net worth or income test. Neither excuses you from filing Form 8854; they only block the exit tax from applying.

The first covers people who were dual citizens from birth. You qualify if you were born a citizen of both the United States and another country, you continue to be a citizen of and taxed as a resident of that other country, and you were a U.S. resident for no more than 10 of the 15 tax years ending with the expatriation year.⁶ Someone who acquired a second citizenship later in life does not qualify.

The second covers certain minors. You qualify if you became a U.S. citizen at birth, neither parent was a U.S. citizen at the time, you give up citizenship before turning 18½, and you were a U.S. resident for no more than 10 tax years before expatriation.⁶ Both exceptions still require you to meet the tax compliance certification.

How the Exit Tax Works If You Are Covered

For covered expatriates, the tax code treats every asset you own as if you sold it on the day before your expatriation date for its fair market value.⁷ The difference between each asset’s fair market value and your adjusted basis produces a gain or loss. You net all gains and losses across your worldwide portfolio, and the result goes on your final U.S. income tax return at the applicable capital gains rates.

The statute builds in a cushion. For 2026, the first $910,000 of net gain from the deemed sale is excluded.¹ A $1.5 million net gain means capital gains tax on $590,000. A net gain under $910,000 produces no exit tax on the deemed sale, though you still run the full calculation and report it. Documenting basis matters: every dollar of basis you can prove is a dollar of gain you do not pay tax on.

Retirement Accounts and Deferred Compensation

The deemed sale rule does not apply to deferred compensation. These items follow their own regime, which turns on whether the plan is “eligible” or “ineligible.”

Eligible deferred compensation covers 401(k)s, traditional and Roth IRAs, HSAs, and similar tax-deferred accounts. These are not taxed at expatriation. Instead, the plan administrator withholds 30% of each taxable distribution you later take.⁷ To keep this treatment, you must waive any treaty rights that would reduce that rate.

Ineligible deferred compensation — mainly nonqualified plans and certain foreign pension arrangements — is treated harshly. The entire present value of your accrued benefit is treated as received in a lump sum on the day before expatriation, and the full amount (less contributions already taxed) is included in income for your final tax year.⁴

Notifying Payers With Form W-8CE

Covered expatriates must deliver Form W-8CE to every payer of their deferred compensation, tax-deferred accounts, or nongrantor trust interests. The deadline is the earlier of 30 days after your expatriation date or the day before the first distribution on or after that date.⁸ Miss the window and eligible deferred compensation can flip into ineligible treatment, turning a 30% withholding regime into a lump-sum inclusion. Form W-8CE goes to payers, not to the IRS.

Non-Grantor Trust Interests

If you are a beneficiary of a non-grantor trust, you are treated as receiving the present value of your entire beneficial interest as a distribution on the day before expatriation, and that deemed distribution is immediately taxable. As an alternative, the trust can elect to be treated as having sold its assets and paid the resulting tax itself, or it can agree to withhold 30% on future distributions to you.⁸

Deferring the Exit Tax

Covered expatriates with a large bill do not necessarily have to pay all at once. The statute allows an election to defer the tax on a property-by-property basis, pushing payment on any specific asset forward until you actually sell it.⁷ The option is most useful when the deemed sale generates a large gain on illiquid property like real estate or a closely held business you plan to keep.

Deferral comes with conditions:

You must post a bond or letter of credit that the IRS accepts, securing the deferred tax plus interest.
You must permanently and irrevocably waive any treaty rights that would block the IRS from assessing or collecting the deferred tax.
The election is irrevocable once made and must be designated property by property. There is no blanket deferral.
Interest runs from the original filing due date, not from the date of eventual sale, so a long hold can produce substantial interest.

Deferral ends at the earliest of the actual sale, the date your posted security becomes inadequate (unless you fix it promptly), or your death.⁷ If you elect deferral, attach a copy of your tax deferral agreement request to the Form 8854 filed with your return.⁹

Where, When, and How to File

Form 8854 has a dual-filing requirement that catches many people off guard. You attach Form 8854 to your final U.S. income tax return, and you also send the original separately to the IRS at:⁹

Internal Revenue Service
3651 S IH35
MS 4301 AUSC
Austin, TX 78741

Your final income tax return, with Form 8854 attached, is due by the standard April 15 deadline of the year following expatriation. You can request a six-month extension by filing Form 4868.¹⁰ If no income tax return is required for the expatriation year, you still must send Form 8854 to the Austin address by the date a return would have been due, including extensions.⁹

Use certified mail or a trackable delivery service for every submission, and keep a complete signed copy with all supporting schedules and appraisals. The burden of proving timely filing falls on you.

Annual Filings After Expatriation

The form is called the Initial and Annual Expatriation Statement for a reason. Covered expatriates continue filing the annual portion (Parts I and III) each year if any of the following apply:⁹

You elected to defer tax on one or more properties. Annual filing continues until the full deferred tax and interest is paid, with any dispositions reported.
You hold eligible deferred compensation such as a 401(k) or IRA under the 30% withholding regime. You report distributions received, or certify that none were.
You are a beneficiary of a non-grantor trust. You report distributions, or certify none were received.

For years when you also file a U.S. income tax return, attach the annual Form 8854 to that return and send a copy marked “Copy” to the Austin address. For years without a return, send the annual Form 8854 directly to Austin by the date a return would have been due. The $10,000 penalty applies to each annual filing, not just the initial one.¹¹

Penalties and the Section 2801 Transfer Tax

The penalty for failing to file Form 8854, or filing it with missing or incorrect information, is $10,000 per year, unless you can show reasonable cause and the absence of willful neglect.¹¹ The penalty applies whether or not any exit tax is owed, and it attaches to both the initial filing and every required annual filing.

Covered expatriate status also reaches beyond your own tax bill. Under Section 2801, any U.S. citizen or resident who later receives a gift or inheritance from a covered expatriate owes a tax equal to the highest federal estate and gift tax rate — currently 40% — on the value of the transfer. The recipient pays, not the expatriate. An annual exclusion applies, and the tax is reduced by any gift or estate tax the covered expatriate paid to a foreign country on the same transfer.¹² If you plan to leave assets to family members who are U.S. persons, this provision is reason enough to do the planning before expatriation rather than after.

1
Internal Revenue Service. Revenue Procedure 2025-32
2
Internal Revenue Service. Expatriation Tax
3
U.S. Citizenship and Immigration Services. I-407, Record of Abandonment of Lawful Permanent Resident Status
4
Internal Revenue Service. Initial and Annual Expatriation Statement
5
Internal Revenue Service. Report of Foreign Bank and Financial Accounts FBAR
6
Office of the Law Revision Counsel. 26 U.S. Code 877 – Expatriation to Avoid Tax
7
Office of the Law Revision Counsel. 26 USC 877A – Tax Responsibilities of Expatriation
8
Internal Revenue Service. Form W-8CE
9
Internal Revenue Service. Instructions for Form 8854
10
Internal Revenue Service. Form 4868 – Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
11
Office of the Law Revision Counsel. 26 USC 6039G – Information on Individuals Losing United States Citizenship
12
Office of the Law Revision Counsel. 26 USC 2801 – Imposition of Tax