In recent months, several seemingly unrelated developments in U.S. law and policy have begun to converge in a way that should capture the attention of tax professionals, immigration lawyers, and globally mobile individuals. On one front, the Department of Justice continues to press denaturalization cases against U.S. citizens who obtained their status by fraud or misrepresentation. On another, the Internal Revenue Code stands ready with its expatriation tax regime—potentially ensnaring not only those who voluntarily renounce their citizenship but also those whose citizenship is stripped away. In mid-August, the U.S. Citizenship and Immigration Services, an agency within the Department of Homeland Security, issued a memorandum broadening its framework for evaluating “good moral character” in naturalization cases, promising a more holistic review that looks at both positive contributions and negative conduct.
At first glance, these may appear to be discrete issues; but they suggest a deepening intersection between tax compliance, moral character, and citizenship status. This intersection carries profound consequences for both naturalized citizens and applicants.
Denaturalization And The Exit Tax: A Chilling Convergence
Most U.S. international tax professionals are aware that the expatriation tax regime, including the U.S. exit tax, can apply when a citizen or long-term resident voluntarily expatriates. Under § 877A of the Internal Revenue Code, those deemed “covered expatriates are treated as though they sold all their worldwide assets the day before expatriation. Unrealized gains are marked-to-market, and a hefty tax bill may follow. Additionally, U.S. persons receiving gifts or inheritances from a covered expatriate must pay a transfer tax (currently 40%) on the fair market value of the gift or bequest.
As I explored in a recent Forbes article, however, denaturalization raises a thorny question: if one loses citizenship involuntarily, does the exit tax still apply? The answer, alarmingly, is yes. The Code does not distinguish between voluntary and involuntary expatriation. A denaturalized individual who meets the covered expatriate definition will find him or herself subject to the same mark-to-market rules as someone who walked into a consulate to renounce.
This creates a paradoxical scenario. The very individuals who may have been denaturalized for fraud in their immigration process (for example, failing to disclose a crime or misstating a material fact) can be swept into an exit tax regime intended to deter tax-motivated renunciations. A punitive immigration remedy thus triggers a punitive tax result, compounding the consequences of denaturalization in ways that many would not anticipate.
Tax Fraud -The Pathway To Denaturalization
While the classic grounds for denaturalization include concealment of criminal histories or material lies in the naturalization process, there are growing indications that serious tax fraud may be viewed as evidence that naturalization was procured illegally or fraudulently.
As I emphasized in another Forbes article, the government’s case law on this point is limited but appears to now be evolving. Misrepresentations regarding one’s past conduct, including fraudulent conduct in financial affairs, may be seen as undermining the requisite “good moral character” for naturalization.
This dynamic places U.S. tax compliance squarely in the crosshairs of both the Department of Justice and the Department of Homeland Security. The failure to file or report properly on one’s tax returns may have traditionally been seen as a civil or administrative matter but has now developed further carrying potential consequences for one’s citizenship status.
A New Dimension: USCIS Recasts “Good Moral Character”
The August 2025 USCIS policy directive redefines how immigration officials should assess “good moral character” for naturalization purposes. Previously, the analysis relied heavily on a checklist of statutory bars: certain crimes, false testimony, or failure to support dependents would automatically disqualify an applicant. The new policy retains those prohibitions but also emphasizes that the “totality of the circumstances” must be weighed.
What will this new directive mean in practice? According to the memorandum, officers have not only authority, but an “explicit directive to weigh all relevant evidence, both adverse and favorable, before granting or denying naturalization.” An individual’s positive contributions such as steady employment, volunteer work, military service, long-term residence, and yes, tax compliance being expressly mentioned, can now be marshaled to offset negative incidents. Consistent with the totality of circumstances approach, the memorandum states that USCIS will look for evidence of genuine rehabilitation for individuals who have transgressions. This will include full payment of overdue taxes.
This new framework provides the immigration official with greater flexibility and discretion. While this can be very positive, the directive brings the possibility of too much subjectivity, inconsistency, and, in some cases, the possibility of bias. From a tax perspective, for example, there is danger that individuals with imperfect compliance histories may be judged inconsistently. One USCIS officer may view remedial action (e.g., entering a voluntary disclosure program) as a strong positive factor. Another may view the same history somewhat negatively, as evidence of dishonesty and unreliability. This area has not yet developed and until it does and we have clarifying guidance, it will remain a source of anxiety for applicants and their advisors.
Tax Compliance And “Good Moral Character”
The precise role of tax compliance is not spelled out in the memorandum, but its significance cannot be understated. Annual tax filings and information returns are not like isolated traffic offenses or lapses in judgment. Tax compliance is continuous and measurable and can be symbolic of civic responsibility when it is involved in the naturalization process.
Indeed, USCIS has long treated failure to file taxes or falsely claiming U.S. citizenship on tax forms as red flags for moral character. Under the new holistic model, however, consistent and transparent tax compliance could function as a powerful positive factor. It may help rehabilitate applicants with transgressions in other areas. Conversely, tax noncompliance could be the death knell undermining an otherwise strong application.
For naturalized citizens, the stakes may be even higher. A history of tax fraud not only undermines the showing of good moral character required for naturalization but could later be construed as evidence that citizenship was “illegally procured.” This is the gateway to denaturalization and the potential triggering of the expatriation tax regime.
Practical Strategies For Applicants And Their Advisers
In this environment, proactive tax compliance planning is more important than ever. For applicants, this begins with ensuring current compliance by filing all required returns, paying any outstanding liabilities, and meeting foreign asset and accounts information reporting obligations.
Tax and immigration counsel can assist when lapses in compliance have occurred and the possibility of remediating them can be examined. While clearing up one’s tax problems may not completely erase prior issues, it can demonstrate the individual’s sense of responsibility and good faith. Seeking professional guidance early is key so that strategies can be examined and coordinated effectively.
Documenting positive attributes such as community involvement, steady employment, family support, and other meaningful contributions is also a wise move.
Advisors, especially immigration advisors, should make sure that naturalized citizens and those seeking citizenship are made aware of the connection between denaturalization and the expatriation tax regime, including the exit tax. Individuals with troublesome tax histories should seek advice on potential exposure and consider remedial steps.
One’s citizenship is not beyond challenge. I believe we will see more litigation testing the boundaries of denaturalization, more exit tax cases involving involuntary expatriation, and more disputes over the meaning of “good moral character.” Despite the uncertainty, one thing is clear – tax compliance is emerging as a central theme in all these arenas. Tax compliance is no longer just about avoiding IRS audits and penalties. It has increasingly developed strong ties to securing, maintaining, and defending an individual’s U.S. citizenship.
Posted September 18, 2025
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First published on Forbes September 8, 2025
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