Form 8854 Explained

Form 8854 is the IRS form that makes your expatriation official. It sets your expatriation date, certifies that you complied with US tax law for the five years before you left, and determines whether you are a covered expatriate. You attach it to a final dual-status return, and failing to file it carries a $10,000 penalty.
Think of Form 8854 as the document that closes your tax account with the United States. Renouncing at the consulate ends your citizenship; Form 8854 ends your status with the IRS. Both must happen for a clean exit.
What Form 8854 does
- Establishes the date you expatriated.
- Certifies that you met all federal tax obligations for the prior five years. This certification is the third covered-expatriate test.
- Reports your assets and net worth so covered status can be determined.
- Computes the mark-to-market exit tax if you are covered.
The dual-status final-year return
The year you expatriate is split. For the part of the year you were a citizen or resident you file Form 1040, reporting worldwide income. For the part after expatriation you file Form 1040-NR, reporting only US-source income. Form 8854 is attached to this final filing.
Deadlines
Form 8854 is due with your income tax return for the expatriation year, including extensions, and a copy goes to the IRS address in the instructions. Covered expatriates who elect to defer tax on the deemed sale also have annual filing obligations afterward.
The $10,000 penalty and the bigger risk
Failure to file Form 8854 when required triggers a $10,000 penalty. The larger danger is the certification: if you cannot truthfully certify five clean years, you become a covered expatriate by default, which can pull your worldwide gains into the exit tax even if your wealth is modest. This is why getting compliant before you expatriate matters so much.
Once you understand Form 8854, see the full renunciation process and, if you may be covered, how Section 2801 affects gifts you later make to US persons. Covered expatriates should also read how 401(k)s and IRAs are treated, since they fall outside the gain exclusion.
Source: IRS Instructions for Form 8854. See sources.