Anatomy of the Form 8854

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The client-facing version is at The exit tax. Line numbers are from the 2024 Form 8854 (verify against the current form; the 2025 draft keeps the same structure). The companion page for the compliance clean-up is Form 2555, Step 11 until the delinquent-reporting footnote is written.

Step 0: The Expatriation Event

§877A(g)(2)–(5). Two kinds of people, one date each. The date fixes the valuation day (the day before), the split of the final year, and which year’s thresholds apply.

• Citizen. The expatriation date is the earliest of (§877A(g)(4)): the date of renunciation before a diplomatic or consular officer (8 U.S.C. §1481(a)(5)); the date of a signed statement of voluntary relinquishment furnished to State confirming an earlier expatriating act (§1481(a)(1)–(4)); the date State issues the Certificate of Loss of Nationality; or the date a court cancels a certificate of naturalization. For tax purposes the loss is not effective until State or a court gets a notice or the person gives State the signed statement (§7701(a)(50)); backdating to an earlier expatriating act is possible only through that statement, and the CLN date controls when the client did nothing but renounce. State reports every CLN to the IRS and the names are published quarterly under §6039G.
• Long-term resident (§877(e)(2)): a lawful permanent resident in at least 8 of the 15 tax years ending with the year of expatriation. Any part of a year with the card counts as a year, except a year in which the person was treated as a resident of a treaty country and did not waive treaty benefits (Reg. §301.7701(b)-7). Eight calendar years touched can be as little as six years and two days.
• LPR expatriation date (§877A(g)(3)(B); §7701(b)(6)): the date status is revoked or administratively or judicially determined abandoned — in practice the date USCIS or a consular officer accepts Form I-407 — or the date the person begins to be treated as a resident of a treaty country under a tie-breaker and does not waive the treaty benefit (Form 8833 filed as a nonresident). Expiration of the card is not abandonment. A client who moved home and let the card lapse remains a U.S. resident alien, filing Form 1040 on worldwide income, until the I-407 is filed; the missed years are plain unfiled returns, not nonresident years.
• Not an expatriation: a resident alien by substantial presence who leaves; an LPR with fewer than 8 of 15 years who abandons (no 8854, no exit tax, no §2801); a citizen who moves abroad and stops filing (still a citizen; see the 2555 page).

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Step 1: Covered or Not — the Three Tests

§877A(g)(1)(A) incorporates §877(a)(2). Fail any one and the person is a covered expatriate; the exit tax, the deferred-account rules and §2801 all follow from that status, nothing else.

• Tax liability test: average annual net income tax (after credits, including the foreign tax credit; Form 1040 line 24 less certain credits per the instructions) for the five tax years ending before the expatriation date greater than $211,000 for 2026 ($206,000 for 2025; $201,000 for 2024; indexed under §877(a)(2)(A)) (verify 2026 figure in Rev. Proc. 2025-32 §3.37). Joint filers use the joint liability as the individual’s number; the instructions do not split it.
• Net worth test: $2,000,000 or more on the expatriation date, worldwide, at fair market value, net of liabilities. Not indexed since 2004. Valued under the gift-tax principles of Notice 2009-85 §8: present value of pensions and deferred compensation; the actuarial value of a beneficial interest in a trust; the house, the business, the brokerage account; a spouse’s separate assets excluded, community property halved.
• Certification test: failure to certify under penalties of perjury, on Form 8854 Part II Section A line 7, compliance with all U.S. federal tax obligations for the five preceding years. “All” means returns filed, tax paid, and the information returns — FBAR, 8938, 3520, 5471, 8621. A false certification is perjury, not a filing error.
• Exceptions (§877A(g)(1)(B)): (i) a dual citizen at birth who remains a citizen of, and is taxed as a resident of, the other country, and was a U.S. resident for no more than 10 of the last 15 tax years (lines 4 and 5); (ii) a person under 18½ on the expatriation date who was a U.S. resident for no more than 10 tax years (line 6). Both exceptions require the line 7 certification; neither helps a non-filer.

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Step 2: Five Years Clean, Before Anything Else

This is the Tax Shop’s part of the job, and it comes before the consular appointment, not after. The client who is under both dollar thresholds is not covered if, and only if, line 7 can be signed. The sequence:

1. Pull wage and income transcripts and account transcripts for the six prior years; confirm which returns were filed and what was reported.
2. Inventory every foreign account, pension, insurance policy, mutual fund and trust interest for the same years. Test FBAR ($10,000 aggregate) and Form 8938 (abroad: $200,000/$300,000 single, double joint). Foreign funds are PFICs (Form 8621); many foreign pension and savings plans are foreign trusts (Form 3520/3520-A).
3. Missing returns or unreported foreign income → the Streamlined Foreign Offshore Procedures (three years of returns, six years of FBARs, Form 14653 non-willfulness certification, no penalty for a taxpayer abroad) (verify the procedure is still open and its terms). Missing FBARs only, with all income reported → the Delinquent FBAR Submission Procedure. Missing 5471/3520/8938 with income reported → file late with a reasonable-cause statement; the automatic penalties are assessed and contested.
4. Willfulness anywhere in the file → stop; this is counsel’s decision (voluntary disclosure practice, Form 14457), and the expatriation waits.
5. Only when the five years are filed and paid does the client decide on the dollar tests. Document the certification basis in the file: which years, which forms, filed when.

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Step 3: Part I, General Information

All filers, every year the form is required.

• Lines 1–3: post-expatriation mailing address and phone; principal foreign residence; country of tax residence if different. The IRS will write to line 1 about the deferral agreement and the annual filing.
• Line 4: initial statement (expatriated this year → Part II) or annual statement (expatriated before → Part III).
• Line 5: the expatriation date under §877A(g)(3), with a box for citizen, long-term resident, or long-term resident with dual residency in a treaty country (with the date treaty residence began). This is the Step 0 date; everything on the form is valued the day before it.
• Line 6a/b: every country of citizenship, including the U.S., and the date each was acquired. Line 7: citizenship by birth or naturalization. The dual-at-birth exception is tested from these.
• Line 8a–c: date LPR status began; date revoked or abandoned; date the card itself was relinquished. The 8-of-15 count runs from 8a; the expatriation date is 8b, not 8c.

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Step 4: Part II, Section A, Expatriation Information

• Line 1: U.S. income tax liability after foreign tax credits for each of the five tax years ending before the expatriation date, one box per year. The caution on the form is real: this is the liability figure for the test, not the balance due. Average the five; compare with the year’s threshold.
• Line 2: net worth on the expatriation date — the Section B line 25 figure. Line 3: whether there were significant changes in assets and liabilities in the prior five years; “yes” needs an attached explanation. This is the anti-dissipation question: gifts to family or a divorce settlement in the run-up will be asked about.
• Lines 4–5: the dual-citizen-at-birth exception. Line 6: the under-18½ exception.
• Line 7: the compliance certification, yes or no. “No” is honest and makes the client covered; “yes” when it is not true is perjury. Nobody signs this at our desk until Step 2 is finished.

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Step 5: Part II, Section B, the Balance Sheet

Every asset and liability as of the expatriation date, in U.S. dollars, column (a) fair market value and column (b) U.S. adjusted basis. Required of every initial filer, covered or not: the IRS uses it to test the $2 million line.

• Lines 1–5: cash and deposits; marketable U.S. stock; marketable foreign stock; nonmarketable U.S. stock; nonmarketable foreign stock, with line 5a separately stating foreign companies that would be CFCs if the person were still a U.S. person (not added into the total) and 5b their names, addresses and EINs. Form 5471 for the final year is still due.
• Lines 6–7: pensions and similar retirement arrangements, U.S. and foreign, and deferred compensation including stock options — at present value, not account balance, under Notice 2009-85 §8.D. A defined-benefit pension needs an actuarial figure; a 401(k) or IRA is its balance.
• Lines 8–10: partnership interests (attach a statement describing each partnership’s assets and liabilities by these same categories); assets held in trust where the person is treated as owner (§§671–679; attach a statement listing each trust); beneficial interests in other trusts, at actuarial value. Line 11–12: intangibles used in and outside the U.S. Lines 13–14: loans to U.S. and foreign persons. Lines 15–18: real property and business property, in and outside the U.S. Line 19: other assets (vehicles, art, crypto, life insurance cash value).
• Line 20: total assets (excluding 5a). Lines 21–24: installment obligations, mortgages, other liabilities, total. Line 25: net worth = line 20(a) − line 24, to Section A line 2.
• Basis in column (b) for an LPR: the §877A(h)(2) step-up to FMV on the residency-start date applies for the mark-to-market computation only, to property held on that date; it does not change basis for any other purpose, and it can be waived property-by-property (irrevocably) by marking the asset “(h)(2)” in Section C — useful where the pre-residency value was lower than cost.

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Step 6: Part II, Section C, the Deemed Sale

Skipped entirely if the person is not covered: average tax at or under the threshold, net worth under $2 million, and line 7 yes; or lines 4, 5 and 7 yes; or lines 6 and 7 yes. Otherwise this is the exit tax.

• Line 1a, eligible deferred compensation items (§877A(d)(3)): a plan whose payer is a U.S. person (or a foreign payer that elects to be treated as one), where the expatriate notifies the payer on Form W-8CE within 30 days of expatriation and irrevocably waives any treaty reduction of withholding. Result: not marked to market; every later payment is subject to 30% withholding (§877A(d)(1)), and the payer, not the expatriate, remits it. Checking “yes” here is the treaty waiver. A U.S. qualified pension, 401(k) or 403(b) normally lands here.
• Line 1b, ineligible deferred compensation: everything else (foreign pensions, a payer who will not comply) — present value of the accrued benefit is included in income on the day before expatriation (§877A(d)(2)), without early-distribution penalty, and basis is adjusted so it is not taxed again if the U.S. ever sees the payments.
• Line 1c, specified tax deferred accounts (§877A(e)(2)): IRAs (traditional and Roth), §529 and Coverdell accounts, HSAs and Archer MSAs. Treated as fully distributed on the day before expatriation; taxed as ordinary income on the final return; no §72(t) penalty; later actual distributions adjusted for the amount already taxed. A Roth IRA’s earnings are taxed here even if the five-year clock had run (verify the Roth treatment in the current instructions).
• Line 1d, nongrantor trusts (§877A(f)): not marked to market; the trustee withholds 30% from the taxable portion of each later distribution, and the expatriate gives Form W-8CE to the trustee. The box under 1d is the alternative election under §877A(f)(4)(B): treat the entire interest as received the day before expatriation, valued by an IRS letter ruling attached to the form. Rarely worth it.
• Line 2, the mark-to-market table (§877A(a)): every asset not covered by line 1, one row each — (a) description; (b) FMV on the day before expatriation; (c) cost or other basis, marked “(h)(2)” where the LPR step-up is waived; (d) gain or loss; (e) gain after allocation of the exclusion; (f) the form or schedule where the gain is reported (Schedule D / 8949, 4797, Schedule E); (g) tax deferred on that asset, if the Section D election is made. Line 3: totals of (d) and (e). Line 4: total deferred, to Section D line 5.
• The exclusion (§877A(a)(3)): $910,000 for 2026 ($890,000 for 2025), indexed, once per lifetime; a second expatriation gets only the unused remainder, adjusted. Allocate it to each gain asset in proportion to that asset’s built-in gain over total built-in gain of all gain assets (Notice 2009-85 §3.B); none to loss assets; the amount allocated to an asset cannot exceed that asset’s gain. Losses are recognized in full, and §1091 wash-sale rules do not apply to the deemed sale.
• Character follows the asset: capital gain, §1250 and §1245 recapture, collectibles at 28%. The gain is added to the dual-status Form 1040 as though the sale closed on the day before expatriation. Property acquired after the expatriation date is not in the table; property disposed of before it was really sold.

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Step 7: Section D, Deferral, and the Final Return

• The deferral election (§877A(b)): asset by asset, irrevocable, available only with a tax deferral agreement with the IRS (Notice 2009-85 §3.D: adequate security — a bond or letter of credit — and a U.S. agent). Line 1 is the election and a waiver of any treaty bar on assessment or collection. Line 2: total tax on the final-year 1040 line 24 with the deemed sale; line 3: the same without §877A(a) amounts (attach the computation); line 4: the difference, the tax eligible for deferral; line 5: the amount actually deferred from Section C column (g), entered in brackets beside Form 1040 line 24 and labeled “EXP.” Deferred tax is due when the asset is sold, or the earlier of the return due date for the year of death or the day the security is no longer adequate; interest runs from the original due date at the underpayment rate. Not available for line 1a–1d items.
• The dual-status year: a Form 1040 for January 1 through the day before the expatriation date, with Form 8854 attached, carries the deemed-sale gain, the line 1b and 1c inclusions, and ordinary income to that date; a Form 1040-NR covers the expatriation date through December 31 for U.S.-source and effectively connected income. The instructions treat the 1040-NR as the return with the 1040 and 8854 attached as a statement when the person is a nonresident at year end (verify the current assembly order in the 8854 and 1040-NR instructions). “Dual-Status Return” across the top. No joint return, no standard deduction on the NR portion.
• Where it goes: the signed original 8854 attached to the return; a copy marked “Copy” mailed separately to the IRS at the Philadelphia address in the instructions (verify address). Due with the return, April 15 (June 15 abroad, Form 4868 to October 15). Penalty for failure to file a complete and correct 8854: $10,000 (§6039G(c)), and under §7701(n) the person is treated as a U.S. citizen or resident until it is filed (verify whether §7701(n) still applies to post-2008 expatriations; the 8854 instructions say the penalty, not the continued-status rule, is the consequence for current expatriates).

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Step 8: Part III, the Annual Statement

• Required every later year by a covered expatriate who (1) elected deferral, (2) has eligible deferred compensation, or (3) is a beneficiary of a nongrantor trust — and only then; a non-covered expatriate, or a covered one with none of the three, files once.
• Line 1: each deferred asset with the mark-to-market gain and tax deferred on the original form, and the date of disposition in the current year if any; the deferred tax on a disposed asset is paid with that year’s return (Form 1040-NR). Line 2: distributions of eligible deferred compensation received, and tax withheld at source. Line 3: distributions from the nongrantor trust and withholding.
• Filed with the 1040-NR if one is due, otherwise alone to Philadelphia, by the 1040-NR due date. The $10,000 penalty applies per year missed.

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Step 9: §2801 and Form 708

• The tax: a U.S. citizen or resident who receives a covered gift or covered bequest from a covered expatriate owes tax at the highest §2001 or §2502 rate (40%) on the value received in the calendar year in excess of the §2503(b) annual exclusion ($19,000 for 2026). The recipient is liable, not the donor. Covered status is determined once, at expatriation; it does not expire and does not depend on later net worth. A domestic trust that receives a covered gift pays the tax itself; a foreign trust’s U.S. beneficiaries pay as distributions are made.
• Not covered: transfers reported on a timely U.S. gift or estate return of the expatriate (Form 709 or 706) — so a covered expatriate with U.S.-situs property who files a 706-NA shelters that part; transfers to a U.S. spouse that would have qualified for the marital deduction; charitable transfers; transfers by a covered expatriate who later becomes a U.S. person again.
• Form 708: final regulations under §2801 (T.D. 10027, January 14, 2025) apply to gifts and bequests received on or after January 1, 2025; the form and instructions were released January 2026. Due the 15th day of the 18th month after the close of the calendar year of receipt: June 15, 2027 for 2025 receipts, with a six-month extension on Form 7004 that does not extend payment. Not required if the year’s total covered gifts and bequests are under the annual exclusion. The burden of determining that the donor was a covered expatriate falls on the recipient; a protective Form 708 is allowed. Separate from, and in addition to, the Form 3520 report of a large foreign gift.
• The planning point: gifts made before the expatriation date are the expatriate’s own gifts under §2501, against a $15,000,000 lifetime exemption, reported on Form 709 and outside §2801. The same gift a day after expatriation costs the U.S. children 40%. Pre-expatriation gifts also reduce net worth for the $2 million test, but a large one draws Section A line 3. This is the sequencing that counsel designs.

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Step 10: After the Exit

• Income tax: the former citizen or LPR is a nonresident alien. FDAP income (U.S. dividends, interest other than portfolio interest, rents without the §871(d) election, pensions and annuities) at 30% or the treaty rate, by withholding; effectively connected income and the §871(d) net election on U.S. real estate on Form 1040-NR; FIRPTA withholding on a later sale of the Denver rental (§1445, 15%). The §877(b) alternative ten-year regime does not apply to post-June 16, 2008 expatriates.
• Estate tax: a nonresident alien’s estate is taxed on U.S.-situs property (U.S. real estate, tangible property here, U.S. corporate stock) with a $60,000 exemption (§2102(b)) unless a treaty says otherwise; the $15 million basic exclusion is gone. The Denver rental in the example is in the U.S. estate at 40% above $60,000.
• Social Security: benefits continue; nonresident-alien withholding of 30% on 85% of each payment (§871(a)(3)) absent a treaty; payments suspended for residents of a short list of countries.
• FBAR / 8938: end with the final year of U.S.-person status.
• Immigration: the Reed Amendment (8 U.S.C. §1182(a)(10)(E)) makes a former citizen who renounced to avoid tax inadmissible; rarely enforced, never waived in writing. A former LPR who wants to return starts over with a visa.
• Colorado: no exit tax; domicile, not citizenship, decides residency. A client still domiciled in Colorado on the expatriation date reports the deemed-sale gain on a full-year DR 0104 (Colorado starts from federal taxable income); a nonresident thereafter files DR 0104PN only for Colorado-source income, including the rental. Break domicile first, in the earlier year, and the deemed sale is out of Colorado’s reach.

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Step 11: Relief Procedures for Certain Former Citizens

IRS procedures from September 2019 for the “accidental American”: a person who relinquished citizenship after March 18, 2010, has no filing history (or filed only as a nonresident), has a net worth under $2 million, has an aggregate tax liability of $25,000 or less for the year of expatriation and the five prior years, and whose non-compliance was non-willful. They file the six years of returns with the 8854 under the procedures, owe no tax or penalty, and are treated as not covered despite the certification problem. Usually the child of a client, born in Denver, raised in Lima, who learned about FBARs from a bank form. The relief does not extend to LPRs and does not help anyone who ever filed a resident return (verify the procedures are still open and the dollar limits).

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Step 12: What We Do and What Goes to Counsel

• Ours: recognize the event (especially the lapsed green card); count the 8 of 15 years; run the three tests on the back of an envelope; get the five years filed through the right procedure; prepare the Section B balance sheet and the line 1 five-year liability figures from the file; prepare the final dual-status return and the 8854 for a non-covered expatriate if the client insists on us doing it; keep the Part III calendar.
• Counsel’s (Tyler Murray or an international tax attorney): any client who is covered or within reach of covered; valuation of pensions, trusts and closely held businesses; the pre-expatriation gift program and the Form 709; the deferral agreement and security; the W-8CE notices and the treaty waiver decision; a willful file; the immigration side; the estate plan for U.S.-situs assets and the U.S. children. The time to make the introduction is a year before the consular appointment.
• Never: sign a line 7 certification we have not verified; let a client renounce before the five years are filed; treat an expired green card as an expatriation.

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Questions at the desk

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Written for the Tax Shop desk from the EA Journal’s “It’s Taxing to Say Goodbye” (Nov./Dec. 2015) brought current to 2026, the 2024 Form 8854, Notice 2009-85 and the 2025 §2801 regulations. Items marked (verify) are to be confirmed against primary sources before they are relied on. Private reference, not client advice; the exit tax itself is referred to counsel.