Form 8854

Who Must File Form 8854 and When?

Form 8854 must be filed by two main groups:

• U.S. citizens renouncing their citizenship.
• Long-term residents who plan to relinquish their green card status.

You are considered a long-term resident for expatriation tax green card purposes if you have held a green card for at least eight of the last 15 tax years before the year of expatriation. The form must be attached to your final U.S. income tax return (Form 1040 , or 1040-NR) for the year that includes your expatriation date and filed by the tax return’s due date, including extensions. If you expatriated in a prior year and deferred payment of tax, reported eligible deferred compensation, or are a beneficiary of a nongrantor trust, you must file an annual Form 8854 for each subsequent year until your obligations are satisfied.

Failing to file Form 8854 can result in a $10,000 annual penalty unless due to reasonable cause, and may also lead to continued U.S. tax obligations and loss of eligibility for an IRS refund.

Covered Expatriate Rules and the U.S. Exit Tax

A central concept in the US expatriation tax regime is the “covered expatriate.” You are classified as a covered expatriate if you expatriate after June 16, 2008, and meet any of the following criteria:

• Your average annual net income tax liability for the five years ending before expatriation exceeds $206,000 (for 2025; $201,000 for 2024, indexed for inflation).
• Your net worth is $2 million or more on the date of expatriation.
• You cannot certify, under penalties of perjury on Form 8854, that you have complied with all U.S. federal tax obligations for the five years preceding expatriation.

If you are a covered expatriate, you are subject to the U.S. exit tax, which is a mark-to-market tax on the net unrealized gain of your worldwide assets as if you had sold them the day before expatriation. For 2025, the first $890,000 of gain is excluded from tax (indexed annually). Certain exceptions apply for dual citizens and minors, but only if they meet specific residency and compliance requirements.

Key Information Reported on Form 8854

Form 8854 requires detailed disclosures, including:

• Personal identification and expatriation details (dates, citizenships, residency status).
• Five-year tax compliance certification.
• Calculation of average annual net income tax liability for the five years before expatriation.
• Net worth calculation, including a balance sheet listing all worldwide assets and liabilities at fair market value.
• Disclosure of significant changes in assets or liabilities in the five years before expatriation.
• Identification of deferred compensation items, specified tax-deferred accounts, and interests in nongrantor trusts.
• Calculation of the mark-to-market gain and allocation of the exclusion amount.
• Election to defer payment of the exit tax (if applicable), including details of security provided and a waiver of treaty rights.
• Annual reporting for those with deferred tax, eligible deferred compensation, or nongrantor trust interests,

Common Form 8854 Filing Mistakes and Penalties to Avoid

Several common mistakes can lead to IRS penalties or ongoing tax obligations:

• Failing to file Form 8854 at all, which means you are still considered a U.S. taxpayer.
• Incomplete or inaccurate reporting of worldwide assets and liabilities.
• Not certifying five years of U.S. tax compliance, which automatically makes you a covered expatriate.
• Misreporting the expatriation date or misunderstanding the definition of long-term resident.
• Not attaching Form 8854 to your final tax return or not sending a copy to the IRS as required.
• Failing to file annual Form 8854 in subsequent years if you have deferred tax, eligible deferred compensation, or a nongrantor trust interest.

FAQ

What is the purpose of IRS Form 8854 in the U.S. expatriation tax process?

IRS Form 8854 serves as the official notification to the IRS that you have relinquished U.S. citizenship or long-term residency. It determines whether you are a covered expatriate, calculates any exit tax due, and certifies your compliance with U.S. tax obligations for the five years before expatriation.

Who is considered a “long-term resident” or “covered expatriate” for Form 8854 purposes?

A long-term resident is someone who held a green card for at least eight of the last 15 years before expatriation. A covered expatriate is anyone with average annual net income tax liability above $206,000, a net worth of $2 million or more, or who cannot certify five years of U.S. tax compliance on Form 8854.

When is Form 8854 due, and do I file it with my final Form 1040 or separately?

Form 8854 must be attached to your final U.S. income tax return (Form 1040 or 1040-NR) for the year that includes your expatriation date and filed by the tax return’s due date, including extensions. A copy should also be sent to the IRS address listed in the instructions form 8854.

How does Form 8854 calculate the U.S. exit tax on my worldwide assets?

Form 8854 requires you to list all worldwide assets at fair market value and calculate the net unrealized gain as if sold the day before expatriation. The first $890,000 of gain (for 2025) is excluded. The form then determines the exit tax owed, with special rules for deferred compensation, retirement accounts, and trusts.

What happens if I do not file Form 8854 or cannot certify five years of U.S. tax compliance?

If you do not file Form 8854 or cannot certify five years of tax compliance, you are automatically classified as a covered expatriate. This subjects you to the exit tax and ongoing U.S. tax filing obligations, and you may face a $10,000 IRS penalty for each year the form is not filed.

How BT Can Help

For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Molly Johnson, partner in charge of Bennett Thrasher’s International Tax practice , or call us at 770.396.2200.