Surrender Green Card At The Border: Form I-407, U.S. Tax Expatriation

U.S. immigration law assumes that a person admitted to the United States as a lawful permanent resident (green card holder) will live there permanently. Remaining outside the United States for an extended period, may possibly result in a loss of LPR status. Long periods spent outside of America can result in problems upon re-entry at the U.S. border.

U.S. immigration officials examine returning green card holders to determine whether, for any reason, re-entry should be denied. Questions are often asked if the returning individual has had a long absence. This article examines some important tax tips for the LPR, especially for one contemplating surrendering the green card at the border after challenge by U.S. border officials.

LPR And U.S. Tax Obligations

The LPR has the privilege of living and working in the United States permanently and must pay U.S. income tax on worldwide income. If the individual loses LPR status he or she loses the right to live permanently in the U.S. and work there without a visa. These are U.S. immigration issues.

Even if the immigration rights have ended because the individual has lost the intention to live permanently in the U.S., it does not mean that the obligation to pay tax on worldwide income has terminated. The rules for immigration are different from the rules for U.S. taxation.

Once an individual has been granted the right to reside permanently in the U.S., and the residency starting date has commenced, taxation on worldwide income will continue until U.S. tax residency is severed according to specific and detailed tax rules. It is possible to have lost the right to live in the U.S. under the immigration laws, but still be subject to U.S. taxation under the tax laws. This issue has been addressed in court and the law is clear.

Form I-407 Abandoning LPR Status

The filing of Form I-407 Record of Abandonment of Lawful Permanent Resident Status, signifies that the individual has voluntarily abandoned LPR status. Sometimes, border immigration officers will ask individuals to sign Form I-407. This may happen if the officer believes the individual has abandoned U.S. residency due to a lengthy overseas stay.

Understandably this is a stressful situation, but the individual has the right to defend himself in removal proceedings before an immigration judge. This opportunity is waived when the individual voluntarily signs the Form I-407. No one can be forced to sign the form.  If the individual refuses to sign, a Notice to Appear before an immigration judge will be issued. The judge will make a determination whether LPR status has been lost.

WARNING For LTRs! 

Under U.S. tax rules, LPRs who have held the green card for 8 tax years out of the past 15 tax years are “long term residents”.  LPRs should carefully consider this when examining whether to retain the card.

When a LTR surrenders the green card (whether or not at the border) this is an “expatriation” for tax purposes. The LTR is treated the same as a U.S. citizen who gives up citizenship. Very significant U.S. tax consequences result if the individual is a “covered expatriate”, who is presumed to have given up U.S. status for a tax avoidance motive.

Covered Expatriate Status For The LTR

The LTR will be treated as a CE if any of the following apply:

• The individual’s average annual net income tax for the 5 years ending before the date of termination of residency is more than an inflation adjusted amount ($201,000 for 2024).  This number represents the average of U.S. income tax paid by the LTR, and not his average income.
• The individual’s net worth is $2 million or more on the date of residency termination.
• The individual fails to certify on IRS Form 8854 that he has complied with all U.S. tax obligations for the 5 preceding years.

The tax certification requirement often presents problems for the LTR. Many who have been living overseas and whose green card may have expired some time ago, are unaware of their continuing U.S. tax obligations. They often mistakenly believe that because the green card has expired for immigration purposes, they are no longer responsible for U.S. taxes. Unfortunately, this is not the case.

Covered Expatriate Tax Consequences

CEs are subject to an exit tax.  Generally, worldwide assets are deemed sold at fair market value on the day before the expatriation. This phantom or pretend gain is subject to tax, usually at capital gains rates. A 3.8% net investment income tax often applies on top.

There are additional tax burdens that apply to the CE’s deferred compensation plans and specified tax deferred accounts, such as IRAs or HSAs. For example, the CE pays ordinary income tax on the deemed distribution of any specified tax deferred accounts.  In addition to the taxes that are imposed directly on the CE, a U.S. recipient of a future gift or bequest from the CE must pay a special transfer tax upon receiving that gift or inheritance, currently at a 40% tax rate on its value.

No Time For Tax Planning At The Border

There is an important lesson for the LTR at the border who may be urged to sign the Form I-407. If the LTR might be a CE, he should not sign the form. This will cause an immediate expatriation for tax purposes.

All individuals have a right to refuse to sign and to have a judicial determination rendered about their residency status. Opting for such a determination gives the individual time to obtain competent U.S. tax advice. Prior to the appearance before the immigration judge who will render a decision on LPR status, an experienced tax professional can assist with planning and compliance issues. Proper tax planning can help mitigate or even completely avoid the burdens associated with CE status.

Most importantly, and in conclusion, LTRs must have a clear understanding of their rights and the critical tax issues at stake. This will allow the LTR the opportunity to make an informed decision without undue pressure from immigration authorities at the point of entry.

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