Internal Revenue Code Secs. 877A and 2801, related to individuals who relinquish U.S. citizenship or long-term permanent residence (green cards), have largely remained unchanged since taking effect in 2008. In the intervening years, various factors have influenced the application of these rules and motivations for expatriating, with implications for individuals who have already expatriated and those who may do so in the future.

While many countries have exit tax regimes that can apply to individuals who terminate tax residence, the U.S. is fairly unique in that its tax expatriation consequences apply only to those whose U.S. citizenship or lawful permanent residence status is terminated. Others who terminate tax residence are, for the most part, “free to go.” 

Background 
U.S. federal tax expatriation provisions apply to certain individuals who terminate U.S. citizenship and ‘long-term’ lawful permanent resident status. For further information on expatriation, see our White Paper: Leaving the United States – U.S. Tax Planning for U.S. Citizens and Tax Residents Temporarily or Permanently Leaving the U.S.

Planning opportunities to limit exposure to expatriation consequences has been the subject of many articles and continue to apply. See, for example, Expatriation Planning for U.S. Citizens and Green Card Holders: Opportunities and Considerations. This article focuses on what has changed or may change in terms of U.S. expatriation, even though Secs. 877A and 2801 themselves have not.

What Has Changed

Section 2801 Transfer Tax Regulations

The Sec. 2801 tax is imposed on each U.S. citizen or resident receiving a covered gift or covered bequest. Regulations under Sec. 2801, related to the transfer tax on gifts and bequests to U.S. citizens and residents from covered expatriates, were not released until January 2025. Prior to issuance, enforcement of the tax was delayed until procedures and regulations were to be issued. Taxpayers subject to such tax based on gifts made before 2025 were met with a welcome surprise under the final regulations, effectively confirming that the tax was forgiven for transfers made before 2025. The regulations provided several other clarifications regarding how the tax would be imposed after years of uncertainty. For example, in addition to indicating that tax would be due beginning January 1, 2025, the final regulations indicate that Form 708, United States Return of Tax for Gifts and Bequests Received from Covered Expatriates, will be used to facilitate reporting and calculation of the tax. These regulations were issued just before the change from the Biden to the Trump administration took place, with many questioning if enforcement of the tax will ultimately occur. Form 708 has not yet been released. As a result of the regulations, taxpayers do nonetheless have more insight into how the tax may apply and should consider revised planning opportunities. 

Notice 2009-85 Ruled Not Binding

Notice 2009-85 was released in 2009 to provide guidance for individuals possibly subject to tax under Sec. 877A. Regulations have not been issued under Sec. 877A, with most looking to Notice 2009-85 for guidance. Many are less concerned with guidance under Notice 2009-85 in recent years, particularly since the court in Aroeste v. United States, No. 3:22 cv 00682 (S.D. Cal. 2023) (Aroeste), agreed that Notice 2009-85 is not binding authority as it fails to comply with the Administrative Procedures Act (APA). This ruling has resulted in both further flexibility and uncertainty.

Notice 2009-85 did not address Sec. 2801, other than to indicate that separate guidance would be issued and would provide a reasonable period of time for initial reporting and tax payments. Final regulations under Sec. 2801, discussed above, represent such guidance.

Green Card Holders and Treaties

Section 877A(g)(1)(A) has remained clear that a green card holder is not treated as a lawful permanent resident for any year if treated as a resident of a foreign country under a U.S. tax treaty and does not waive the benefits of such treaty applicable to residents of such country. Further, those who are long-term residents can trigger an expatriation via claiming foreign residence under a treaty in a manner similar to those who formally relinquish their green cards or U.S. citizenship. This construct has not changed, but the court in Aroeste discussed certain issues related to expatriation in a manner not previously stated in authoritative guidance. For example, the court indicated that failure to timely file Form 8833, Treaty-Based Return Position Disclosure Under Sec. 6114 or 7701(b), or Form 1040NR, U.S. Nonresident Alien Income Tax Return, does not prevent the ability to claim foreign residence under treaty.

Motivations for Expatriation

Expatriation has often been motivated by the desire to limit worldwide tax liabilities and foreign information filing requirements that typically come with U.S. citizenship or green card status but are avoided by most nonresident aliens. For more insight, see our article: Troubled Waters: International Reporting Obligations for U.S. Individual Taxpayers With Offshore Connections. The burden of such forms continues to motivate many taxpayers to expatriate, even if their citizenship or green card status has not resulted in excess tax.

Double tax has occurred for many due to Sec. 27 not permitting a foreign tax credit against the net investment income tax (NIIT) of Sec. 1411, with both IRS and prior case law indicating that treaties could not be used as an independent basis to claim the credit. Case law has evolved in this regard, however, whereby many are now comfortable claiming foreign tax credits against the NIIT by reason of treaty, reducing exposure to double taxation that motivated certain U.S. persons to expatriate (nonresident aliens are not subject to the NIIT). See Bruyea v. U.S., No. 23-766T (Fed. Cl. 2024). Filing amended returns to request refunds may be prudent.

Some are hopeful that the U.S. will change to residence-based taxation, as has been rumored by the Trump administration, believing that expatriation would be unnecessary for Americans and green card holders residing outside the U.S. Taxpayers should consider the potential that exit-tax rules could be revised to ensure those changing to nonresident status will remain subject to exit-tax rules even without termination of U.S. citizenship or green card status.

For a variety of external reasons, some taxpayers have become weary of retaining U.S. citizenship, residing in the U.S., and/or investing in the U.S. In recent months, there has been a significant uptick in those actively considering or taking action to expatriate for these reasons.

For U.S. citizens, the need to obtain a second citizenship before terminating U.S. citizenship (if dual citizenship was not already held) can be a roadblock to expatriation. Immigration will generally not approve relinquishment for a U.S. citizen to expatriate without a second citizenship. More countries with taxpayer-friendly regimes also provide an expedited path to citizenship, often without a requirement to reside in the country. These opportunities, combined with other motivating factors, increase the practical viability of expatriation for U.S. citizens. The Trump administration has suggested the U.S. may offer a similar golden visa to encourage foreigners to consider the U.S. a tax-friendly alternative. 

Constitutional Challenge to Section 877A Possible

Taxpayers who have or are considering expatriating are increasingly considering whether Sec. 877A is constitutional and the chance that a court may conclude it is not. The rationale for this position is that Sec. 877A does not require the realization of income, which is inherently required under the Sixteenth Amendment for income taxes. This issue was brought to light in Moore v. U.S., No. 22-800 (U.S. 2024) (Moore), though the U.S. Supreme Court was able to decide Moore without needing to opine on whether an income tax required realization under the Constitution. Practitioners and taxpayers alike recognize the potential that Sec. 877A may be considered unconstitutional, with some filing protective claims for refund in instances where tax was previously paid. 

Exceptions to “Covered Expatriate” Status Expanding

Since its inception in 2008, Sec. 877A has included limited exceptions to covered expatriate status for narrow categories of taxpayers who were either born with dual citizenship or who relinquish citizenship prior to age 18 ½. Such individuals were nonetheless required to certify tax compliance for the five prior tax years to qualify for such exceptions. In 2010, IRS provided additional relief procedures for U.S. citizens with a net worth of less than $2 million and an aggregate tax liability of $25,000 or less for the year of expatriation and the five prior taxable years. Such individuals could satisfy the compliance certification process via an alternative, simplified means provided the failure to meet general requirements was due to non-willful conduct.

The currently pending Taxpayer Assistance and Service Act, released earlier this year in discussion draft form, is aimed at simplifying procedures and taxpayer rights. Sec. 206 of the bill, Reduced Burden for Lower-Income, Dual Citizen Expatriates; Clarification of Limitations Period, would waive certification requirements of Sec. 877(a)(2)(C) for certain individuals. The provision focuses on certain individuals seeking expatriation where the five-year compliance requirement may be disproportionately burdensome, effectively preventing them from choosing to expatriate.

The Takeaway
Taxpayers who have considered expatriation from the U.S. may do so for different reasons and with different consequences. While Secs. 877A and 2801 have not changed since 2008, new guidance and external factors may have some taxpayers reconsidering expatriating and its implications. It is important to consult with professional advisors who are knowledgeable in the evolving landscape surrounding expatriation.