After 32 years of IRS work — and more than $100 million in resolved tax debt — I've seen just about every version of the problem you're dealing with. I'm Darrin Mish, a tax attorney in Tampa. Here's what you should know.
The Decision That Cannot Be Walked Back
Every year, more U.S. citizens formally renounce their citizenship at U.S. embassies and consulates abroad. The reasons are usually some combination of tax complexity, banking restrictions under FATCA, foreign career or political considerations, and the cost of maintaining dual compliance.
Renunciation is a permanent legal step. It also triggers a separate U.S. tax process called expatriation. The two are not the same. You can renounce citizenship and still face years of unresolved U.S. tax obligations. Understanding both pieces before you decide is essential.
How Renunciation Actually Works
Citizenship is renounced by appearing in person at a U.S. embassy or consulate abroad, signing an oath of renunciation (Form DS-4080), and paying the State Department fee (currently $2,350). The State Department issues a Certificate of Loss of Nationality after processing.
Renunciation cannot be done from inside the United States. It cannot be done by mail. It requires personal appearance and intent. The State Department screens for whether the renunciation is voluntary and informed.
The legal effect: U.S. citizenship terminates as of the date of the renunciation oath. After that date, the former citizen is treated as a non-resident alien for U.S. immigration and most legal purposes.
The Tax Expatriation Process
Separately from immigration renunciation, the U.S. tax code has its own expatriation regime under IRC Sections 877 and 877A. Expatriation for tax purposes occurs when a U.S. citizen renounces citizenship or when a long-term resident (someone who held a green card for at least 8 of the last 15 years) terminates U.S. residency.
The tax expatriation rules apply to “covered expatriates,” defined as expatriates who meet any of three tests:
Average annual net income tax liability for the prior five years exceeds the inflation-adjusted threshold (approximately $206,000 for 2025).
Net worth on the date of expatriation is $2 million or more.
The expatriate fails to certify on Form 8854 that they have complied with all federal tax obligations for the prior five years.
Any one of these makes the individual a covered expatriate. Most affluent renouncers fall into the net worth category.
The Exit Tax
Covered expatriates are subject to the “exit tax” under IRC Section 877A. The exit tax treats the covered expatriate as having sold all of their worldwide assets at fair market value on the day before expatriation. The deemed sale generates a hypothetical gain (or loss) that is taxed under U.S. rules.
The exit tax has a built-in exclusion. For 2025, the first approximately $890,000 of gain is excluded from the exit tax (indexed annually). Gain above the exclusion is taxed at the rate that would apply if the assets had actually been sold – capital gains rates for capital assets, ordinary rates for ordinary income items.
The exit tax is essentially a wealth tax imposed on departure. For a covered expatriate with significant unrealized appreciation in stock, real estate, or business interests, the bill can be substantial.
Deferred Compensation and Retirement Accounts
The exit tax treats deferred compensation and certain retirement accounts differently from other assets.
Eligible deferred compensation items (most qualified U.S. retirement plans, certain non-qualified deferred compensation) are subject to a 30 percent withholding tax on future payments rather than the mark-to-market exit tax. The expatriate signs Form W-8CE waiving treaty benefits.
Specified tax-deferred accounts (IRAs, certain non-qualified plans) are treated as fully distributed on the day before expatriation, with the entire account balance included in income for that year. This is often the largest piece of the exit tax for middle-affluent expatriates.
Interests in non-grantor trusts are also handled separately, generally with 30 percent withholding on future distributions.
The Form 8854 Filing
Form 8854, “Initial and Annual Expatriation Statement,” is the required filing for any expatriate, whether covered or not. The form establishes the date of expatriation, certifies compliance with prior tax obligations, lists assets and their fair market values, and calculates any exit tax.
Form 8854 is due with the final U.S. tax return covering the year of expatriation. Failure to file Form 8854 timely automatically makes the expatriate a covered expatriate, regardless of net worth or income.
The form requires substantial documentation. Asset valuations, basis records, prior year tax liabilities, foreign retirement accounts, trust interests. Preparation often takes months.
Five Years of Compliance Before You Can Renounce Cleanly
The third covered-expatriate test – failure to certify five years of compliance – catches many would-be renouncers. The certification requires sworn confirmation that all federal tax obligations for the five years preceding expatriation have been met.
This means timely filed returns, timely filed FBARs, timely filed information returns (Forms 5471, 3520, 8938, 8621, and so on), and paid balances. Any gap in any year of the five-year lookback makes the certification false – and certification failure converts the expatriate to covered status automatically.
For expats who have been filing inconsistently, the practical effect is that the renunciation cannot be done cleanly until five clean years of compliance are on the books. This often means filing back returns through the Streamlined Foreign Offshore Procedures and waiting out the five-year clock before renouncing.
The Inheritance Side
Covered expatriates trigger a separate gift and bequest tax for U.S. recipients. Under IRC Section 2801, U.S. citizens and residents who receive gifts or bequests from covered expatriates pay tax on those amounts at the highest applicable U.S. estate or gift tax rate (currently 40 percent).
The tax applies to the U.S. recipient, not the covered expatriate. The recipient files Form 708 and remits the tax. This is the lifetime “tail” of covered expatriate status – U.S. heirs continue to face the surcharge on gifts and bequests for years after the renunciation.
What Renunciation Does Not End
Renunciation ends future U.S. tax obligations on worldwide income (subject to the exit tax). It does not end past obligations.
Unpaid prior-year taxes remain owed. The IRS can pursue collection. The IRS can still file levies on U.S.-source income, U.S.-located assets, and through treaty partners on foreign assets in some cases.
Open audits, criminal exposure, and civil penalty assessments survive renunciation. The former citizen remains liable in personal capacity for amounts owed.
Three Steps If You Are Considering Renunciation
First, fix the back compliance. Five years of clean returns is the gate to a clean certification. If you have gaps, the Streamlined Foreign Offshore Procedures clean up the past before the five-year clock starts.
Second, get a covered-expatriate analysis. Net worth, income, and asset basis determine the exit tax. Sometimes pre-renunciation planning (asset transfers, basis step-ups, gifts to non-U.S. persons) reduces the exit tax substantially.
Third, plan for the heirs. Section 2801 affects U.S. recipients for decades. Estate planning around expatriation often includes structures that minimize this surcharge.
Renounce Deliberately, Not Impulsively
After 32 years of helping clients through cross-border decisions, the renouncers who come out cleanly are the ones who planned for at least two years before the appointment at the embassy. Contact the Law Offices of Darrin T. Mish, P.A. at (813) 229-7100. We assess covered expatriate status, model the exit tax, and structure the path so the renunciation does what you want it to do.