Incidents of Trump administration border patrol agents pressuring re-entering green card holders into unknowingly abandoning their green card status are rampant. Customs and Border Protection (CBP) officers are confiscating green cards and placing re-entering individuals in holding rooms. While their motive for this heightened scrutiny of re-entering green card holders may be to weed out undesirables, one catastrophic consequence for certain green card holders is an unexpected series of tax events that could wipe out their lifetime wealth.
Once an individual is issued a green card subjecting them to worldwide US tax, such an individual needs to undertake certain affirmative actions in order to terminate that status. If you live outside the US without officially abandoning your green card or having it revoked, you are still a US taxpayer in the eyes of the IRS. In other words, after you receive your green card, you remain a US taxpayer until that green card status is cancelled either voluntarily or through administrative process.
What Is Happening at US Ports of Entry?
There is a troubling increase in the cases where green card holders are being detained, questioned, and even pressured to give up their green cards at US ports of entry. These cases often involve fear, confusion, and sometimes coercion, and can lead to devastating family consequences but also financial consequences, as discussed below.
Although there has been no formal policy change by the American government, Customs Border Patrol (“CBP”) officers have wide discretion to allow non-US citizens to enter the country. Under the current enforcement climate, non-citizens of all statuses including green card holders face heightened scrutiny and a narrowing of the exercise of prior discretion.
Now when entering a port of entry, green card holders are much more likely to be confronted by a CBP officer using their recently enhanced computer system. They are now likely to identify green card holders who may not have fulfilled their physical presence requirement in the US . We hear many stories of overwhelmed longtime green card holders who are pressured by CBP to sign a Form I-407 in order to proceed through US customs and remain in the US
As a green card holder, you have the legal right to return to the US unless an immigration judge decides otherwise. CBP cannot take away your status. Even if you do not read further beyond this sentence, please understand that if you’re encouraged to sign Form I-407 (Record of Abandonment of Lawful Permanent Residency Status), which would voluntarily abandon your residency, you can and should say: “I do not wish to abandon my permanent residency.” Do not sign anything until you fully understand the immigration and tax ramifications.
Request a hearing before an immigration judge. CBP officers cannot force you to sign a Form I-407 nor do they have the authority to revoke your green card unilaterally. Only an immigration judge can formally take away your residency. If CBP claims your green card is invalid, you have the legal right to request a hearing. In hindsight, your avoiding a financial calamity may be preferable, even if it results in your being refused entry into the US and returned to your original country of departure, than signing Form I-407.
Here is our warning: Signing a Form I-407 at the port of entry at the urging of a CBP officer to gain entry into the US may be a recipe for financial disaster as we will explain.
What Are the Implications of Holding a Green Card?
Holding a green card gives you lawful permanent residence status in the US, which means you can live and work in the US long-term, possibly for the rest of your life. However, holding a green card also makes you a US person for US tax purposes– responsible for reporting and paying US tax on your worldwide income.
At some point, you may begin to think about giving up your green card. For some, work or lifestyle choices may take them away from the US for many years. For others, they may no longer be willing to incur the serious costs to remain compliant with the voluminous US tax rules applicable to American taxpayers with overseas assets.However, there are real legal and tax implications under the US expatriation tax system. This includes the possibility of retroactively being assessed an exit tax and exposing your future US heirs to US inheritance tax on assets they inherit from you long after you are gone.
Who Is Considered a “Long-Term Resident” (LTR)?
Under IRC §877(e)(2), you are considered a “long-term resident” (LTR) if you have held a green card for at least 8 of the last 15 years. This definition is critical, because only LTRs may be subject to US exit tax and their heirs subjected to inheritance tax. This 8-year count is based on tax years, not calendar years. Each year counts, even if you held the card for as little as one day during the calendar year. Physical presence in the US is irrelevant – you’re considered a resident for US tax purposes for as long as you have green card status.
Tax Treaty Claims
If a tax treaty between the US and the country where you reside treats you as a non-resident for US tax purposes, and you can make a treaty claim of non-residency in the US for such year, and it will not count toward the eight-year threshold. This may enable a green card holder to avoid becoming an LTRin the year they give up their green card – and avoid being subject to the US exit tax and US inheritance tax.
To claim non-resident status in the US, the green card holder must file Form 8833 by attaching it to their Form 1040NR filed for the year. Unless a green card holder files the Form 8833, the IRS will count the year toward the “8 of 15" test for LTR status.
What People Get Wrong
When you are granted green card status, you are issued a Permanent Resident Card (“PRC”) that is valid for 10 years. A PRC can be renewed, so long as the individual is not found to have abandoned their green card status. Allowing your PRC to expire does not end your US green card status or US tax reporting and liability obligations. In a similar vein, if your passport expires, you are still a citizen of that country. The same concept applies for a PRC.
In short, living abroad for years does not change your US tax status and dying abroad does not change your status as a US taxpayer at death.
What Is Expatriation?
For green card holders, expatriation is the legal and tax process by which LTRs check out of the US immigration and tax systems.
Expatriation by an LTR requires a formal relinquishment of one’s green card status to United States Citizenship and Immigration Services (“USCIS”). It also requires the filing of Form 8854 along with the final Form 1040 / Form 1040NR. Form 8854 includes a detailed accounting of the expatriate’s worldwide assets and a certification under pains and penalty of perjury that the individual is in full compliance with all US tax filing obligations for the preceding five years. Failure to follow these separate tracks with the USCIS and the US Treasury Department will result in failure to cleanly break free from US tax residency.
Considerations of How to Give Up Your US Residency Status
1. File Form 1-407 with the USCIS
If you have a green card and you want to stop the requirement of filing US tax returns required under US tax law, then hand in the proper paperwork. Visit the nearest US consulate or mail in Form I-407 along with any valid PRC.This is the way for individuals to voluntarily officially abandon their green card status. The Form I-407 confirms your voluntary decision to give up lawful permanent residence in the US.
LTRs must also file Form 8854, and if they are Covered Expatriates (“CE”) (discussed below) pay an exit tax and subject their US heirs to US inheritance tax on all future receipt of gifts and bequests
Once you submit Form I-407, you’re considered a foreign national for US immigration purposes. In order to return to the US you may need a visa or ESTA depending on your citizenship. Giving up your green card is permanent. If you want to subsequently return to the US as anything more than a visitor, you must apply for a new non-immigrant visa or green card.
2. Have the Government Take Away Your Green Card
The US government can revoke your green card. Usually this happens if you spend too much time outside the US and then re-enter the US. The CBP officer will examine how much time you have been outside the US. They may conclude that you have spent too much time outside the US and have possibly abandoned your green card. In prior administrations, CBP offices often gave you one last chance to prove your intent to maintain your green card by remaining in the US for 6 or more months. However, the Trump administration has directed CBP to no longer give such leeway. They are now directed to either start the process of administrative revocation or press the green card holder to file a Form I-407 and voluntarily relinquish their green card status on the spot. Given that the latter requires less time and effort on the part of CBP, it results in this being the path that they strongly encourage.
3. Make a Treaty Election to Stop Being a US Taxpayer
For those residing in one of the 70 countries which have a tax treaty with the US, you can avoid being a US taxpayer for that tax year by electing to be a nonresident of the US for income tax purposes. This is accomplished by filing Form 1040NR, and then attaching Form 8833 to advise the IRS that you’re making a treaty claim to be taxed as a nonresident alien of the US While you have halted the “8 of 15" year LTR clock for the year of election, your immigration status as a green card holder would continue.
What are the Tax Implications for Green Card Holders Who Abandon Residency?
What If You’re Not an LTR?
If you are not an LTR, you only need to ensure you have filed the last three years of US tax returns. You do not need to file Form 8854 which only applies to LTRs (and all former US citizens).
What If You’re an LTR?
If you are an LTR then you also need to determine whether you are a CE. Only CEs are subject to US exit tax and only their US heirs are potentially subject to US inheritance tax.
If you are an LTR you will need to have filed five years of US tax returns to give up your green card . In addition, you must submit Form 8854 to the IRS along with your US tax return for the year of expatriation.
There are also significant negative tax ramifications if you decide to expatriate and you are classified as a CE.
To avoid stepping on the exit and inheritance tax financial landmines there are several possible strategies to consider:
1. Avoid becoming an LTR by not holding the green card status for more than eight years or stop the LTR clock before the eighth year by making a treaty election; if not possible, then
2. Avoid becoming a CE; if not possible, then
3. Minimize the negative tax consequences of exit and inheritance taxes.
Becoming a Covered Expatriate: The Tests and Exception
A CE is an LTR (or US citizen) that meets any one of the following three alternative criteria:
- High Net Worth – The taxpayer has a net worth of at least $2M on the date of expatriation; or
- High Federal Taxable Income – The taxpayer has an average annual net federal tax liability above $209,000 (2025, adjusts annually for inflation); or
- Non-Compliant on Preceding Five Years of US Tax Returns – The taxpayer fails to certify, under pains of penalty of perjury, that that taxpayer is fully US tax compliant for the preceding five years, or the taxpayer fails to provide evidence of such compliance (i.e., they fail to file and complete an accurate Form 8854).
Computing the Exit Tax
Deemed Disposition of Capital Assets and Special Expatriation Allowance
IRC §877A applies an exit tax on CEs based on their net unrealized gain with respect to their worldwide property. The CE is deemed to have sold all of their property as of the day before expatriation.
This exit tax on a “deemed disposition” is also known as the “mark-to-market” exit tax regime. To the extent that realized gain from the “deemed disposition” exceeds a special expatriation allowance amount of $890,000 (2025), there will be exit tax owed. If the net gain is long-term, the excess is taxed at 23.8%.
Deemed Distribution of Tax-Deferred Account Assets
In addition to capital assets, it also important to consider the impact of the exit Tax on the retirement plan assets owned by the CE.
If a CE owns certain specified tax-deferred accounts known as “ineligible deferred compensation,” and which includes IRAs, the CE pays ordinary income tax on the “deemed distribution.” Early distribution penalties will not apply on a “deemed distribution” of these accounts. However, if the CE decides to take an actual distribution of the accounts to mitigate double tax in the country of residence, the general early distribution penalty rules would apply.
These “deemed distribution” rules also apply to foreign pensions and similar arrangements. However, to the extent the foreign pension covered non-US source employment income before the taxpayer had become a US tax resident, that portion of the foreign pension can be excluded from the “deemed distribution.”
Defined benefit pension plans, whether domestic or foreign, are also subject to the exit tax. The taxpayer is required to determine the actuarial equivalent present value of the future stream of benefit payments.
Deferred Compensation Plans
Other retirement plans, including IRC §401(k) accounts and §403(b) government plans, are “eligible deferred compensation” plans and are subject to different rules because they are considered deferred compensation. Eligible deferred compensation plans such as a 401(k) plan account, provide the CE with the choice of how and when to pay the exit tax on such accounts.
Planning strategies include:
- Taking an actual lump sum distribution before expatriating (which might be subject to early withdrawal penalties before age 59 ½);
- Paying the ordinary income tax upon expatriation due to a deemed distribution of the entire account balance (no penalty); and
- Electing to defer the tax on the 401(k) account balance so there is no exit tax on expatriation. However, the CE must submit to the US plan administrator a Form W-8CE within 30 days of expatriation to be eligible for this “pay tax as you go” approach. Under this approach, the CE agrees to have the US plan custodian pay 30% withholding tax on all future distributions and waive all potential tax treaty relief that might otherwise lower the withholding tax by non-residents on distributions.
The CE is given this third option for certain “eligible deferred compensation” plans because all of these plans have a US plan administrator, which provides the IRS with assurance that the 30% withholding tax will be collected and paid over to the IRS. In addition, the CE must file a Form 8854 every year in which they have withholding tax paid over to the IRS.
The special $890,000 capital gain exemption or allowance is not available for these deemed distributions from deferred compensation and specified tax-deferred accounts because these accounts are not classified as capital assets.
For this reason, for many LTRs with considerable deferred compensation and other tax-deferred account assets, the exit tax is especially onerous and very difficult to avoid through planning. Often the optimal approach is to accelerate a withdrawal prior to expatriation, in an effort to obtain a foreign tax credit for US taxes paid on the withdrawal in the country of residence.
Scope of Worldwide Property for Net Worth Test and Exit Tax
The IRS has made it clear through various notices that it will apply very broad rules interpreting the scope of the CE’s property. Federal estate tax ruleswill be used to define the scope of property including interests in property and powers over trusts that would have been included in the taxpayer’s gross estate had the taxpayer died the day before expatriating.
Taxpayers should also assume that since this is the IRS’s last major opportunity to impose tax on departing taxpayers,the IRS will carefully scrutinize not only all of the taxpayer’s wealth as of the date of expatriation but also wealth dispositions reported on Form 8854, which must include all “significant changes” in assets and liabilities over the five-year period prior to expatriation.
While the IRS has not defined “significant changes,” it is well-accepted by tax professionals that it includes surrender of legal powers of appointment over trusts or property and other transfers for no consideration or sales for consideration. The IRS is given one last opportunity to examine the taxpayer’s balance sheet over this five-year period before expatriation to make sure that sales were at arm’s length at reasonable valuations and that gifts were in fact completed and accurately reported.
The problem for any CE is that any mischaracterizations or inaccuracies in the Form 8854 or during the preceding five-year pre-expatriation period could result in the IRS determining that the taxpayer had failed to meet the “full compliance test.” Failure to meet the “full compliance test” could trigger CE status regardless of the taxpayer’s net worth or average income tax liability.
Non-Filers and Voluntary Disclosure
The problem for many LTRs who have lived overseas is that they have not filed US tax returns for years. This failure often results from not being aware that when their PRC expired, their green card status and US tax liability continued. For taxpayers who knowingly and purposely failed to satisfy their prior US tax filing obligations, they may have no choice but to pay the back taxes, interest, and penalties, despite the cost, because it is preferable to a possible criminal tax fraud indictment. For these taxpayers, their only financial choice might be the IRS-sanctioned Offshore Voluntary Disclosure Program (OVDP).
Beyond the OVDP program, taxpayers have two choices. The IRS has also sanctioned the Streamlined Procedures Program (one for US residents requiring a 5% penalty payment upon submission and the other for non-residents with a somewhat lower reporting threshold allowing the filing of delinquent or omitted tax returns). The key eligibility requirement for the Streamlined Procedures Program is that the taxpayer’s prior conduct may have been mistaken or inadvertent but it cannot be wilfull. Accordingly, for most individuals whose conduct was non-wilfull, the decision boils down to making a voluntary Streamlined submission in which you must disclose all the facts—the good, the bad and the ugly—or making a “Quiet Disclosure.”
A Quiet Disclosure occurs when a taxpayer amends prior year tax returns and submits such amended returns without going through an approved IRS disclosure program such as the Streamlined program. The IRS frowns on Quiet Disclosures. A Quiet Disclosure accomplishes nothing in terms of reduced penalties or exoneration from criminal prosecution that are typically provided by an approved IRS compliance program. The IRS is currently using AI to establish the pattern of behavior of non-filers, overcoming a prior lack of substantial resources to review every return in search of potential violations. No doubt the cost of preparing an amended return is less expensive than the costs and time required to participate in one of the formal IRS disclosure programs. For the taxpayer with substantial unreported assets or under-reported income, cryptocurrency, or undisclosed accounts, the preferred approach is often to make a voluntary remediation under the Streamlined program.
For LTRs who are non-compliant with their US tax obligations for the preceding five years before expatriation, often the best approach prior to abandoning their green card is to voluntarily enter the Streamlined program. By bringing themselves into full US tax compliance with their last five years of tax returns and six years of FBARs, the LTR who may have become a CE should then be able to subsequently sign a Form 8854 certifying to full US tax compliance during the five-year pre-expatriation period. If they do not trigger the net worth or federal tax average test, the LTR can then avoid being designated as a CE and the associated negative tax consequences.
US Inheritance Tax for US Heirs of Covered Expatriates
In 2008 when updating the US exit tax rules, Congress added a new stealth tax code provision in IRC §2801. This is a federal inheritance tax that is imposed on US heirs who receive gifts or bequests from a CE. Unlike the one time exit tax which is imposed on the CE, the inheritance tax is imposed on the US recipients of most future gifts and bequests received from a CE.
Most pernicious is the fact that the US inheritance tax is not limited to the LTR’s net worth on his or her expatriation date. Rather, it includes all after-departure net worth, whether self-created or inherited, that is used to make gifts or bequests of more than $19,000 annually to US heirs and persons.US recipients beyond this small exemption are subject to IRC §2801 inheritance tax on their receipt of the gift or bequest.
Many LTRs considering expatriating from the US overlook three especially punitive aspects of the inheritance tax:
- No Lifetime Exemption for Recipients. The IRC §2801 inheritance tax is imposed without the US recipient person being able to apply their own lifetime federal gift and estate tax exemption amount on the gift or bequest received from the CE.
- Taxable Amount Not Limited to Net Worth on Expatriation Date. The amount of assets that are subject to US inheritancetax may be far more than the LTR’s personal net worth as of the expatriation date. The tax could include significant after-acquired or after-inherited assets of the LTR.
- Includes Unrealized Appreciation. The inheritance tax may be imposed even though there was no unrealized appreciation in worldwide assets of the CE as of their expatriation date.
For example, suppose that Adam is a LTR who owns a $2.5M money market account on the date of his expatriation. Adam has a child born in the US. Adam expatriates by filing Form I-407 with the US CIS but he never files a Form 8854. Adam is a CE as of his expatriation date even though no exit tax was due because he had no appreciated worldwide assets or it was below the exemption amount. Later, when back in the U.K. Adam inherits $50M and self-creates another $50M from a new start-up in Europe. To the extent any portion of Adam’s $100M+ in assets following his expatriation date is gifted or bequeathed to his child, the child will be forced to report their receipt of such property to the IRS on Form 708 (yet to be released). His child would owe US inheritance tax on the value of such gifts or bequests in excess of the current tiny $19,000 annual exclusion amount.
If Adam does not timely file the Form 8854, it is possible for the IRS to collect the inheritance tax in the future from his US child. It is the US child who bears the onerous burden to prove that Adam was not a CE when he or she received the gift or bequest from Adam or his estate.
Pre-Expatriation Planning
While many non-financial decisions are involved with green card holders expatriating, we will address only the financial considerations.
Hopefully, we have made clear that the financial burdens associated with an LTR expatriating hinge largely on whether the individual can avoid being classified as a CE. For most of our clients, they are unable to avoid being classified as a CE.
We previously noted the basic strategies we recommend to our departing green card holders.
1. Avoid becoming an LTR. Leave the US by abandoning the green card or making a treaty election before the eighth year;
2. Avoid CE status. By restructuring your financial affairs to bring yourself below the $2M net worth limit and/or finding ways to bring average federal net income tax liability below the threshold. Finally, voluntarily fix any noncompliance in tax returns for the five prior years (six years for FBARs) preferably through the Streamlined program.
If CE status is unavoidable, then the there are strategies that should be considered before expatriating. This might involve arranging assets to minimize the capital gain that will be subject to the “mark-to-market” tax? Cash is king when it comes to avoiding the “mark-to-market” tax regime.
To the extent the LTR has already left the US and has established a new home or returned to an existing home in their country of origin, such an LTR may no longer be a US domiciliary. Subject to the local inheritance tax laws in the current jurisdiction, it may be possible to make large gifts of intangibles (including stock in US companies) or foreign property of any kind to a US trust for family members without any US gift tax concerns or reporting obligations. There is no obligation for a former US domiciliary to notify the US government of a change in domicile Remember domicile is a subjective determination unlike the bright-line mechanical tests for US income tax residence.
If the LTR is currently living in the US and therefore a US domiciliary, it may be possible to maximize their lifetime exemption amount by transferring roughly up to $14M in illiquid appreciated hard to value assets in trust for US persons. There is no exit tax on the trust assets when the settlor is later classified as a CE. There is no US inheritance tax on the subsequent distribution of trust assets to US persons provided that when the trust was settled (funded), the settlor had not yet been classified as a CE.
It is also important to remember that all types of gifting discussed above must be made in tax years prior to the tax year of expatriation. Current-year gifts will be included in the net worth and exit tax calculations of the taxpayer.
We strongly encourage clients to make an honest and practical determination of the accuracy of all their prior tax returns for the past five years and FBARs for the past six years. There are voluminous and burdensome international tax returns and forms that must be filed annually by American taxpayers. Bring yourself into US tax compliance (likely through the Streamlined program) before you abandon your green card. Avoid surprises when your accountant goes to prepare the Form 8854.
For many of our high net worth LTRs, there may be no viable way to avoid CE status which will apply for life. In this situation, a critical financial consideration may be the tax regime of the new country of residence. A former LTR may derive little future tax relief from expatriation to a high tax country in Europe (other than possibly simplifying their annual accounting and tax reporting), but must incur a significant exit tax to achieve such outcome.
Premium on Careful Planning in Advance
There is a definite premium placed on careful and thoughtful planning well in advance of filing the formal Form I-407 with the USCIS and the filing of the Form 8854 and final Form 1040/ 1040NR. Ensuring completely accurate tax filings for the last five years, managing your worldwide estate assets and the deemed dispositions of property and deemed distributions of IRAs and foreign pensions requires long-term strategic planning well before any applications or final tax returns are submitted.
Expatriation by LTRs is a formal procedure with complex highly technical rules which requires many practical and legal considerations. Expatriation is a process that takes considerable time, especially if strategic steps will be taken in tax years before the formal application and filing of Form 8854.
By recognizing the dangers of appearing in front of a CBP officer at a US port of entry (including pre-clearance airports), anyone who has ever held a green card can avoid not only an unpleasant immigration confrontation at a port of entry but more importantly also avoiding stepping on financial landmines if asked to sign a Form I-407 under duress. Green card holders living abroad or those in the US who are considering giving up this status can take control of the situation by seeking and following proper advice. Failure to plan is planning to fail.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Melvin Warshaw is the principal of Melvin A. Warshaw, Esq., in Wellesley, Massachsuetts.
David Lesperance, J.D., is the principal of Lesperance & Associates in Gibraltar.
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