March 11, 2012 - Phil Hodgen

The exit tax paperwork for people who have never filed

A reader sent me an email (hello G!) that raised a question that comes up fairly frequently. I gather this question applies to G’s children. It is worth a blog post.


You are a dual citizen. USA plus another country.

You have never filed a U.S. tax return, most probably because you haven’t lived in the United States. You may not have a Social Security Number issued to you.

You’ve decided to jettison the U.S. citizenship, for whatever reason. What tax hoops do you need to jump through?

My correspondent put the question as follows:

Can a U.S. dual citizen at birth, born abroad and never having lived in U.S., expatriate as a “covered citizen”, deal with the “exit tax” as long truthfully stating that they are not in compliance for the past 5 years? OR do they still have to fie income tax forms for the past 5 years even if they exit as a “covered expatriate” and pay the “exit tax” (which will be nil as this person has no financial assets)?

Do they have any other filing obligations other than filing out their last year 1040 and the expatriate form as a “covered expatriate”?

Exit Tax – Procedures

In order to properly log out of the U.S. tax system, you need to do two things. One is to get an “expatriation date.” This is the date on which you did something that caused you to exit the USA. For a citizen, this means terminating citizenship. Make an appointment at the Embassy. Do some paperwork.

Then you have to do some tax paperwork. The critical element is the “certification” requirement. You certify (on Form 8854) that you are all up-to-date with your U.S. tax obligations for the 5 years prior to the expatriation year. In other words, if you terminate your citizenship in 2012, you have to tell the IRS that all of your U.S. tax stuff is up to date for 2007-2011.

What if you can’t certify?

What if you can’t certify that everything is all up-to-date?

Simple answer. You will be a “covered expatriate” as far as the exit tax law is concerned.

You become a “covered expatriate” if you have $2,000,000 or more in net worth, you paid $151,000 or more in income tax over the prior five years–this is the 2012 number, or you fail to certify that you’re in good shape for the prior five years of tax obligations.

So what?

OK. You’re a covered expatriate. So what?

You’re subjected to all of the exit tax rules and you have to pay the tax no matter what your net worth happens to be. That means we pretend that you sold all of your assets on the day before you relinquished your citizenship. Other fun stuff happens with your pensions, trusts, and other stuff. All of this is designed to cause you to pay tax to the U.S. government.

OK. So you have no assets, no pensions, etc. So no harm can come to you — the sale of nothing yields zero capital gain, right?

Unnecessary open loops

It seems to me that your exposure is limited. You probably don’t want to re-enter the USA. But aside from that all you have is a giant open loop in your life. Paperwork can close that loop.

But why leave open loops in your life? Laws change. U.S. laws get weirder and weirder. What works now might not work in future.

Do the paperwork

Do the paperwork. File the last five years of tax returns. Terminate your citizenship. File the correct tax paperwork for the year you terminate your citizenship (Form 1040NR, Form 1040, and Form 8854).

You will NOT be a “covered expatriate” with all of the future tax baggage that status might create. (Congress and the appointed Defenders of Virtue at the Treasury Department have a habit of adding gunk to the system regularly.) You will be a regular, ordinary noncitizen of the United States.

Move about the planet as a free person.