IRS Targets "Tax-Aware" ETF and Fund Strategies in Notice 2026-62

On September 28, 2026, Treasury and the IRS released Notice 2026-62, which identifies a group of investment fund strategies they believe produce tax results "inconsistent with the purpose and proper application" of the Internal Revenue Code . At the same time, the IRS issued Revenue Ruling 2026-20. That ruling treats one of the most heavily marketed strategies, the so-called "Section 351 ETF conversion," as a taxable exchange.

The notice is not a final rule. It is a warning. It describes the transactions, asks for comments by October 28, 2026, and says that future guidance could include regulations, revenue rulings, or designating the transactions as listed transactions or transactions of interest. Any such guidance could apply retroactively . The IRS also says it may challenge these strategies on examination under existing law, including judicial doctrines .

If you have invested in, sponsor, or advise on any of the funds described below, now is the time to review your position.

Why ETFs Are at the Center

Most of the strategies rely on Section 852(b)(6). Under that rule, a regulated investment company (RIC) does not recognize gain when it distributes appreciated property to redeem shares at a shareholder's demand . ETFs use this rule every day. When an "authorized participant" redeems a creation unit, the ETF can hand over low-basis securities without triggering gain. This is a big reason ETFs are more tax-efficient than traditional mutual funds .

The IRS is not challenging ordinary ETF creation and redemption activity. The notice expressly says it does not address those routine distributions . The concern is that the redemption mechanism is being used "not simply to operate an ETF in the normal course," but to eliminate income or gain that Subchapter M and other Code provisions expect to be taxed .

The Strategies Under Scrutiny:

1. Section 351 ETF Conversions (See Rev. Rul. 2026-20)

In this strategy, investors transfer diversified portfolios of appreciated stock to a newly formed ETF and claim tax-free treatment under Section 351. Soon after, as part of the plan, the ETF issues creation units to an authorized participant for cash or "on-thesis" securities. It then redeems those units with the investor's original securities. The result is that the investor ends up owning a fund with a materially different portfolio, without recognizing any built-in gain .

Rev. Rul. 2026-20 applies substance-over-form and step-transaction principles and treats the ETF as a mere conduit. The investor is treated as making a taxable exchange under Section 1001 with the authorized participant, so Section 351 does not apply to the securities used to redeem the authorized participant assets.law360news+1. The ruling does not state an effective date or offer transition relief. 

The notice does carve out ordinary ETF "seeding." A Section 351 transfer of assets that fit the ETF's investment thesis, and that the fund expects to keep, is not covered .

2. Partnership "Exchange Fund" Variations

Investors whose holdings are too concentrated to qualify as a diversified portfolio under Section 351(e) have been offered a different path. They first contribute appreciated stock to a partnership that holds at least 20% non-securities assets, which is meant to avoid "investment company" status under Section 721(b). The partnership then carries out a Section 351 conversion . Treasury and the IRS are considering guidance that would deny nonrecognition to these contributions or recharacterize them .

3. Box Spread Funds

Some ETFs build returns similar to Treasury bills using "box spreads," which combine four options that together produce a short-term interest rate return. Before the gain options expire, the fund distributes them to redeem creation units. Shareholders receive no current dividends and instead recognize capital gain only when they sell . A related version pairs the box spread with a straddle, distributes only the gain leg, and deducts the loss leg .

4. Record Date Strategies

A "parent" ETF that holds other index ETFs can redeem out the acquired ETF shares just before a dividend record date and replace them with a different ETF tracking the same index. The parent ETF takes the position that it never recognizes the dividend income, even though its economic exposure stays essentially the same .

5. RIC Income Test Avoidance

To qualify as a RIC, a fund must get at least 90% of its gross income from qualifying sources under Section 851(b)(2). Some ETFs that hold commodities or digital assets, directly or through grantor trusts, distribute appreciated non-qualifying assets through redemptions. They then take the position that the unrecognized gain does not count against the income test . Commentators note that this piece could affect certain commodity and crypto fund structures.

"Tax-Aware" Funds: Manufacturing Capital Gain and Ordinary Loss

Section 3 of the notice moves beyond ETFs. It addresses "tax-aware" partnerships and separately managed accounts that use technical rules to pair capital gains (taxed at lower rates or deferred) with ordinary losses that offset wages or other ordinary income . The IRS says labeling a strategy "tax-aware" is not a problem in itself, and it recognizes traditional tax-loss harvesting as legitimate . The strategies it flags are:

• Mixed-character identified straddles. These pair a Section 988 foreign currency forward (ordinary) with an offsetting Section 1256 futures contract (60/40 capital), or an equity index swap with an index future. The futures leg is always terminated first, so gains come out capital and losses come out ordinary .

• Hindsight Section 988(a)(1)(B) elections. The fund enters into same-day currency forwards and elects capital treatment only for the winners after the trading day ends, leaving the losers ordinary .

• Selective NPC terminations. The fund terminates appreciated short-term swaps just before a scheduled payment to claim capital treatment under Section 1234A, but holds losing swaps to maturity to claim ordinary expense .

What Taxpayers and Advisors Should Do Now

• Inventory exposure. Find clients who took part in a Section 351 ETF conversion or an exchange fund feeding one, or who hold interests in box spread, fund-of-ETF, commodity/digital asset, or "tax-aware" long-short vehicles.

• Revisit the reporting positions. Rev. Rul. 2026-20 sets out the IRS's view of current law. Clients who treated a conversion as tax-free should evaluate whether they need to amend, disclose, or take other protective steps, especially for years that are still open.

• Watch for listed transaction status. If any of these strategies becomes a listed transaction or transaction of interest, participants and material advisors could face Form 8886 and Form 8918 disclosure duties and significant penalties for failing to comply.

• Get the documentation from sponsors. Ask fund sponsors for their tax opinions, their descriptions of how redemptions are handled, and whether the fund plans to change its structure.

• Consider commenting. Sponsors and industry groups that believe their products are legitimately different from the transactions described have until October 28, 2026 to say so .

The Bottom Line

Notice 2026-62 shows that Treasury and the IRS are paying close attention to fund structures that turn Section 852(b)(6) and similar technical rules into tools for eliminating or recharacterizing income. The Section 351 ETF conversion has already been ruled a taxable exchange. The other strategies are clearly on the path to further guidance, possible listed transaction designation, and examination. Taxpayers who used these products should talk with their tax advisor before the next filing season.

Have IRS Tax Problems?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

This post is for general information only and is not legal or tax advice. The application of these rules depends on the specific facts. Please contact us to discuss your situation.

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References

1. Internal Revenue Service, Notice 2026-62, Guidance and Other Actions Being Considered Regarding Certain Potentially Abusive Investment Fund Strategies Involving Financial Products (Sept. 28, 2026). https://www.irs.gov/pub/irs-drop/n-26-62.pdf (also available at https://assets.law360news.com/2530000/2530914/n-26-62.pdf)

2. Internal Revenue Service, Rev. Rul. 2026-20, Determination of Amount of and Recognition of Gain or Loss (Sept. 28, 2026). https://www.irs.gov/pub/irs-drop/rr-26-20.pdf

3. KPMG TaxNewsFlash, "Rev. Rul. 2026-20 and Notice 2026-62: Potentially abusive transactions involving investment funds" (Sept. 28, 2026). https://kpmg.com/us/en/taxnewsflash/news/2026/09/tnf-rev-rul-2026-20-and-notice-2026-62-potentially-abusive-transactions-involving-investment-funds.html

4. Mitrade, "The IRS May Be Coming for Crypto ETFs Next: Which Funds Are at Risk?" (Sept. 28, 2026). https://www.mitrade.com/ae-en/insights/news/live-news/article-3-2122030-20260929

5. Internal Revenue Code §§ 311(b), 351(e), 721(b), 851(b)(2), 852(b)(6), 988(a)(1), 1092(a)(2), 1234A, 1256; Treas. Reg. §§ 1.351-1(c), 1.446-3.

Tax Court: A Corporate Offer-in-Compromise Can Cap the Owner's Trust Fund Penalty

Business owners in a cash crunch often make the same choice: keep the crew paid, keep the unions satisfied, keep the doors open, and deal with the IRS later. A recent Tax Court decision, Amodio v. Commissioner, T.C. Memo. 2026-96 (Sept. 28, 2026), confirms that this choice still makes the owner personally liable for the trust fund recovery penalty. But the decision also contains welcome news for responsible persons: once the IRS accepted the corporation's offer-in-compromise, the court held that the IRS could not collect more from the owner than the corporation still owed after the compromise.

The Facts

Thomas Amodio, a former carpenter, organized Creative Solutions, Inc. ("Creative") in 2002 to provide construction services focused on retail display cases and millwork installation. Creative was a union shop. It owed union-scale wages and union benefits for employees who belonged to trade unions in the New York/New Jersey area.

In 2015 and 2016, a slow-paying major client and union demands created a cash-flow problem. To ease it, Creative's office manager and its third-party payroll company stopped paying over the employment taxes. Amodio did not make that decision, and he learned about the failure only afterward.

The IRS assessed trust fund recovery penalties (TFRPs) against Amodio for the quarters ended December 31, 2015, and June 30, September 30, and December 31, 2016. Some of those periods had been paid, so only the quarters ended December 31, 2015, and December 31, 2016, were still before the court.

On July 28, 2020, Creative and the IRS entered into an offer-in-compromise. It satisfied Creative's employment tax liabilities, in whole or in part, for several periods, including the two quarters at issue. Even so, the IRS issued a Notice of Determination on April 4, 2022, sustaining a levy to collect Amodio's remaining TFRPs. Amodio then filed a collection due process (CDP) petition under section 6330(d).

Issue One: Willfulness

Section 6672(a) imposes a penalty on any person who is required to collect, truthfully account for, and pay over tax and who "willfully fails" to do so.[^7] Amodio admitted he was a responsible "person." He argued only that he had not acted willfully.[^8] Because this was a CDP case in which he challenged the underlying liability, the court reviewed the issue de novo and placed the burden of proof on Amodio.

The court applied the familiar standard: willfulness is "a voluntary, conscious and intentional failure" to collect, account for, and pay over employment taxes. It is shown when a responsible person, after learning of unpaid employment taxes, uses unencumbered corporate funds for other purposes.

Amodio's facts met that standard. After he learned of the delinquencies, he kept Creative operating and paid other creditors, including employees' net wages and union benefits, instead of the overdue taxes. The court accepted that the pressure was real. If Creative had missed wage or benefit payments, the unions would have pulled their members off its jobsites. The court still rejected the defense, quoting the Second Circuit: "an employee to whom the corporate employer owes wages is simply another creditor."

It did not help Amodio that the original decision not to pay over the taxes was made by his office manager and payroll provider. His liability came from what he did after he found out.

Issue Two: The Corporation's Offer-in-Compromise

The second issue is the more significant one. The court described the TFRP as "derivative" of the employer's failure to pay. It treated the employer's employment tax liability and the responsible person's TFRP as joint and several, much like the liability on a married couple's joint income tax return. From that, the court drew a basic rule: the IRS may decide which jointly liable party to collect from, but it can collect a joint and several liability only once.

The record was "less than clear," but it appeared that Creative's offer-in-compromise had satisfied or extinguished its employment tax liabilities for the two quarters. If so, the court said, "common sense suggests" that Amodio's derivative TFRP liabilities for those quarters had been satisfied or extinguished too.

The IRS disagreed. It argued that it could still levy on the difference between Amodio's TFRP and Creative's liability as reduced by the offer. For support, it relied on the Internal Revenue Manual. IRM 5.8.4.22.1(2) (May 10, 2013), the version in effect during the periods at issue, provides that settling a corporation's liability through an offer-in-compromise does not eliminate a responsible person's TFRP, which may still be collected from that person. The current version, IRM 5.8.4.21.1(2) (Apr. 25, 2025), states that "[i]f the IRS enters into a compromise with an employer for a portion of the trust fund tax liability, the remainder of the trust fund taxes may still be collected from a responsible person."

The court was not persuaded. It noted that the parties agreed there was "scant authority" on the issue. It also rejected the IRS's argument that Mason v. Commissioner had "favorably" endorsed the IRM position. Mason mentioned the provision only in a footnote, after saying that the IRS's handling of the offers had "no direct bearing" on that case, and it described the IRM as IRS "policy," not legal authority. The court then held:

"There might be circumstances that 'may' support respondent's decision to collect from a responsible person a TFRP liability that exceeds a corporation's related employment tax liability that has been adjusted by an offer-in-compromise, but in the absence of a specific reason for doing so in this case we are more persuaded to proceed by applying common sense and the general principles that govern joint and several federal tax liabilities."

Under that holding, the IRS may proceed with the levy, but "only in amounts that do not exceed the amount of Creative's employment tax liability for each period in dispute, as adjusted by the offer-in-compromise."[^20] The record did not show how much of Creative's liability, if any, remained for each quarter, so the court ordered that decision be entered under Rule 155.

Practical Takeaways

1. Paying employees first is still willful. Amodio is another case holding that a responsible person who knows about unpaid trust fund taxes acts willfully by paying wages, union benefits, or other creditors with available funds. Good motives, union pressure, and keeping the business alive are not defenses. An owner who learns of a payroll tax problem should stop paying other creditors ahead of the IRS right away and get advice.

2. Delegation protects you only until you know. An office manager or payroll company may cause the first missed deposits. Once the owner learns of them, every later decision to pay someone else can be willful.

3. A corporate offer-in-compromise may now limit the owner's TFRP. Responsible persons, and their CDP representatives, should check whether the employer has an accepted offer covering the same periods. If it does, they should argue that the TFRP cannot be collected beyond the employer's liability as adjusted by the offer, and they should request a period-by-period reconciliation.

4. Note the limits of the holding. Amodio is a memorandum opinion by a Special Trial Judge. It is not binding precedent. The court also expressly left room for the IRS to collect more where it gives a "specific reason" for doing so. The IRM's position that an employer's offer reflects only what can be collected from the employer is a likely source of such reasons. The IRS may also reconsider how it frames future offers and TFRP determinations. Practitioners should expect the IRS to raise these issues in later cases.

5. Plan corporate and individual resolutions together. When negotiating an employer's offer, consider at the same time the TFRP exposure of every potentially responsible person. Document how the offer affects each tax period. Amodio ended in a Rule 155 computation partly because the record could not show the employer's remaining liability by period.

6. Use CDP to contest the liability when it is available. Amodio challenged the TFRP in his CDP case, and the court reviewed it de novo. It also found that the required supervisory approval under section 6751(b) had been obtained before assessment. Representatives should review that approval in every TFRP case.

Have IRS Tax Problems?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

This post is for general information only and is not legal or tax advice. The application of these rules depends on the specific facts. Please contact us to discuss your situation.

Sources:

1. : Amodio v. Commissioner, T.C. Memo. 2026-96, slip op. at 4 (Sept. 28, 2026), available via Thomson Reuters Checkpoint; see also U.S. Tax Court docket no. 9959-22L (docket entry 50).
2. I.R.C. § 6672(a), 26 U.S.C. § 6672 (Cornell LII); Amodio, slip op. at 1 (citing Kalb v. United States, 505 F.2d 506, 510–11 (2d Cir. 1974), and Mason v. Commissioner, 132 T.C. 301, 321 (2009)).
3. IRM 5.8.4.21.1(2) (Apr. 25, 2025), Internal Revenue Service; Amodio, slip op. at 5 n.4.

No Joint Return, No Innocent Spouse Relief

On September 28, 2026, the U.S. Tax Court issued a short but instructive memorandum opinion in Daidone v. Commissioner, T.C. Memo. 2026-98. The taxpayer, Joanne Daidone, asked the Court to review the IRS's denial of her request for innocent spouse relief. She lost. Yet everyone involved — the taxpayer, the IRS, and even her ex-husband — agreed that she did not owe the tax at issue.

How can a taxpayer "lose" an innocent spouse case and still walk away owing nothing? The answer is simple: innocent spouse relief exists only for people who filed a joint return. Ms. Daidone never did.

The Facts

Joanne and Stephen Daidone married in 1980 and divorced in January 2023. While the divorce was pending, her tax professional advised her to file her returns separately, using married filing separately status.

Mr. Daidone's divorce attorney then asked whether she would file a joint Form 1040 for 2014. Her attorney said no — she would not sign or file a joint return. Mr. Daidone filed a joint 2014 return anyway. Instead of her signature, he put his own initials on her signature line. Ms. Daidone later filed her own separate 2014 return in July 2025.

In June 2023, Ms. Daidone filed Form 8857, Request for Innocent Spouse Relief, stating that she had no involvement with the joint return and did not sign it. The IRS denied relief, issuing a final determination letter in August 2024 that denied equitable relief under section 6015(f). She then petitioned the Tax Court.

The Proceedings

Ms. Daidone moved for summary judgment, arguing that she was not liable for any tax on the 2014 return because she neither signed it nor tacitly consented to its filing. The IRS agreed. Mr. Daidone, who intervened in the case, opposed the motion. He argued that she knew he was filing a joint return and that whether she tacitly consented was a factual question requiring a trial.

The Court then ordered Ms. Daidone to show cause why the case should not be dismissed because no valid joint return had been filed. In her response, she conceded that section 6015 relief is unavailable without a valid joint return.

The Court's Analysis

Was There a Valid Joint Return?

Spouses who file a joint return are generally jointly and severally liable for the entire tax for that year. However, a missing signature does not by itself defeat a joint return. Under the "tacit consent" rule, a spouse's intent to file jointly may be inferred from acquiescence or tacit approval. Relevant factors include whether the nonsigning spouse filed a separate return, whether that spouse objected to a joint filing, and whether prior filing history shows an intent to file jointly.

Here, every factor pointed one way. Ms. Daidone explicitly refused to file jointly and filed her own separate return. Mr. Daidone's own court filing hurt his position: he admitted that he "placed his initials on the spouse line to reflect on her refusal" and that she "refused to sign." Based on those admissions, the Court held that there was no genuine factual dispute. Ms. Daidone did not tacitly consent, and no valid joint return was filed for 2014.

Why Relief Was Still Denied

That conclusion decided the case — against the person who won the argument. Section 6015 offers three types of relief from joint and several liability: traditional innocent spouse relief under section 6015(b), allocation of liability under section 6015(c), and equitable relief under section 6015(f). Each depends on a joint return. In a "stand-alone" case — one that seeks only review of a section 6015 denial — the Court's jurisdiction is limited to deciding whether section 6015 relief is available.

The Court explained that a joint return is a condition for relief, but not for the Court's review of a denial. Because no joint return existed, there was nothing the Court could grant under section 6015. And the Court has no equitable power to expand its jurisdiction "no matter how unfair the circumstances may seem." Quoting an earlier case, the Court noted that, "[g]iven the narrow scope of our section 6015 jurisdiction, this conclusion ends the case."

Using Tax Court Rule 121(g), which allows summary judgment for a nonmoving party after notice and an opportunity to respond, the Court denied Ms. Daidone's motion and affirmed the IRS's denial of relief. The Court also recorded the IRS's agreement that the joint return was invalid and that she is not liable for the tax reported on it.

Practical Takeaways

1. A forged or unauthorized signature is not an innocent spouse issue. Innocent spouse relief protects people from a joint liability they actually took on. If a spouse never agreed to file jointly, the real argument is that no joint liability ever existed. The IRS's own instructions to Form 8857 say this: if a signature was forged, there is no valid joint return, and the taxpayer "will be removed from the account and . . . no longer be liable for any taxes owed for that return."

2. Document the refusal. A name signed on a return is presumed to have been signed by that person. Ms. Daidone's case was easy because the refusal was documented through attorney communications, her separate return, and her ex-husband's admissions. Taxpayers in contested divorces should keep a written record of any refusal to file jointly and, when appropriate, file their own separate return.

3. Tacit consent is a real risk. The facts that won this case — an express objection and a separate filing — are often missing. A spouse who stays silent, provides tax documents, or has a long history of filing jointly may be found to have consented to a joint return even without signing it. In that case, section 6015 becomes the main defense.

4. Choose the right path. If the issue is that no joint return was filed, the most direct solution is usually to ask the IRS to remove the nonsigning spouse from the joint account. Filing Form 8857 is still useful because it raises the issue, but taxpayers and their advisors should frame the request correctly from the start. In Daidone, the issue appeared in the original Form 8857, yet the dispute still went to Tax Court.

5. Close the loop after the decision. Although the Court affirmed the denial, the IRS's agreement that Ms. Daidone is not liable is an important part of the record. Taxpayers in her position should confirm that their IRS account transcripts actually reflect the correction and that collection activity on the invalid joint return has stopped.

Conclusion

Daidone shows that a winning argument can produce a formal loss. Section 6015 relief is unavailable when a spouse did not file jointly. Even so, the absence of a joint return, if clearly proven, can protect that spouse more completely than innocent spouse relief. For practitioners, the first question in any innocent spouse matter should be: was there actually a valid joint return?

This post is for general information only and is not legal or tax advice. Readers should consult a qualified tax professional about their own circumstances.

Have an IRS Tax Problem?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

 

Sources

• Daidone v. Commissioner, T.C. Memo. 2026-98 (Sept. 28, 2026) (Guider, J.), Docket No. 17172-24, available through the U.S. Tax Court's DAWSON docket system and Thomson Reuters Checkpoint.
• I.R.C. § 6013(d)(3); Butler v. Commissioner, 114 T.C. 276, 282 (2000), cited in Daidone, T.C. Memo. 2026-98, at *4.
• Daidone, T.C. Memo. 2026-98, at *4 (citing Hennen v. Commissioner, 35 T.C. 747, 748 (1961); Okorogu v. Commissioner, T.C. Memo. 2017-53, at *19–21; Heim v. Commissioner, 27 T.C. 270, 274 (1956), aff'd, 251 F.2d 44 (8th Cir. 1958); Howell v. Commissioner, 10 T.C. 859, 866 (1948), aff'd per curiam, 175 F.2d 240 (6th Cir. 1949); Carroro v. Commissioner, 29 B.T.A. 646, 650 (1933)).
• I.R.C. § 6015(a), (b), (c), (f); Daidone, T.C. Memo. 2026-98, at *4.
• IRS, Instructions for Form 8857 (line 11).
• I.R.C. § 6064; IRS, Instructions for Form 8857 (line 11).

Expatriation Hits a Six-Year High: Should I Stay or Should I Go?

More Americans and long-term green card holders are leaving the U.S. tax system than at any point since 2020. Over the four most recent quarters, 5,790 names appeared in the Treasury Department's quarterly list of individuals who have chosen to expatriate. That is the highest four-quarter total since 2020, according to an analysis of Federal Register data by Greenback Expat Tax Services.

If you live abroad, hold a second passport, or have been a U.S. green card holder for many years, these numbers matter less as a headline and more as a reminder: leaving the U.S. tax system is a tax event, and it has to be planned.

What the Numbers Show

Every quarter, Treasury publishes the names of individuals who lost U.S. citizenship, and of long-term residents who ended their U.S. residency, as required by Internal Revenue Code Section 6039G. The most recent releases show a clear climb:

Quarter ending	Federal Register notice published	Names listed
September 30, 2025	November 17, 2025	1,593
December 31, 2025	January 23, 2026	954
March 31, 2026	April 22, 2026	1,462
June 30, 2026	July 23, 2026	1,781
Rolling four-quarter total		5,790

 

Source: Greenback Expat Tax Services analysis of Federal Register notices; March 2026 quarter confirmed in the Federal Register, April 22, 2026.

Some other figures stand out:

·         The second quarter of 2026 was up 68.5% year over year. The 1,781 names published in July compare with 1,057 for the same quarter of 2025 (Greenback).

·         The first half of 2026 was up 38.5%. The first two quarters produced 3,243 names, versus 2,342 in the first half of 2025 (Greenback). That is almost as many as were published for all of 2023 (Andrew Mitchel LLC).

·         The long-term trend is up. The eight-quarter moving average has risen from about 750 names in 2022 to about 1,360, an increase of roughly 80% in four years (Andrew Mitchel LLC).

·         2026 could be the second-highest year on record. At the current pace, 2026 would end at about 6,500 names, behind only 2020, which had roughly 6,700 (IMI Daily).

A Word of Caution on the Data

The quarterly list is the best public data available, but it is imperfect:

·         It tracks reporting, not renunciation dates. Each notice lists the individuals "with respect to whom the Secretary received information during the quarter" (Federal Register). Someone who renounced in 2024 may not appear until 2026. Published figures lag actual renunciations by 12 to 18 months on average, and sometimes by more than two years (IMI Daily).

·         It includes former green card holders. Long-term residents who end their U.S. residency are treated as if they were citizens who lost citizenship (Federal Register).

·         It does not match State Department figures. The State Department and Treasury measure different populations and different stages of the process, so their totals differ (Greenback).

The trend is real. Just treat a single quarter as a rough signal, not a precise count.

Why More People Are Leaving

No single cause explains the increase, but several factors keep coming up.

Compliance burden abroad. The United States taxes its citizens on worldwide income wherever they live. For Americans abroad, that means annual U.S. returns, FBARs, FATCA reporting, and often trouble with foreign banks. Advisers report that tax, compliance, and banking friction, including mortgage refusals and account closures for U.S. persons, are leading motives (IMI Daily). Among commenters on the State Department's fee proposal who gave a figure, the median annual compliance cost was about $1,200 (Greenback).

A much lower renunciation fee. On April 13, 2026, the State Department cut the fee for a Certificate of Loss of Nationality from $2,350 to $450 (AILA), returning it to its 2010 level (BDO). Because of the reporting lag, only one published quarter so far covers the period after the cut, so its effect has not shown up in the data yet (Greenback).

Politics and personal ties. In Greenback's surveys, the share of U.S. expats planning or seriously considering renunciation rose from 20% in 2023 to 49% in 2025, and dissatisfaction with the direction of the U.S. government became the leading factor in 2025 (Greenback). Other common reasons include strong ties to another country and the wish to keep options open.

The Tax Side of Leaving

Renouncing citizenship, or giving up a long-held green card, does not end your U.S. tax obligations by itself. The tax consequences depend largely on whether you are a "covered expatriate."

Who Is a Covered Expatriate

For 2026 expatriations, you are generally a covered expatriate if you meet any one of these tests:

1.       Net worth test. Your net worth is $2 million or more. This amount is not adjusted for inflation.

2.      Tax liability test. Your average annual net income tax for the five years before expatriation is more than $211,000 (Rev. Proc. 2025-32).

3.      Compliance certification test. You cannot certify on Form 8854, under penalty of perjury, that you complied with all U.S. federal tax obligations for the five years before expatriation.

The third test catches many people by surprise. Someone with modest wealth can still become a covered expatriate simply because their past filings are not in order. Limited exceptions apply to certain dual citizens from birth and to some individuals who expatriate before age 18½.

What Covered Expatriates Face

·         The exit tax. Under Section 877A, covered expatriates are generally treated as having sold all of their worldwide property at fair market value the day before expatriating. For 2026, the first $910,000 of net gain is excluded (TSCPA; Rev. Proc. 2025-32). Deferred compensation, specified tax-deferred accounts such as IRAs, and interests in nongrantor trusts follow separate rules.

·         A tax on future gifts and bequests to U.S. persons. Under Section 2801, U.S. citizens and residents who receive gifts or inheritances from a covered expatriate may owe tax on them. This can affect family members who remain in the United States.

Green Card Holders Are Included

A "long-term resident" is a lawful permanent resident in at least 8 of the last 15 tax years. Long-term residents who give up their green card, or who claim treaty residence in another country, can be subject to the same expatriation rules as citizens. Many green card holders do not realize this until after they have filed Form I-407.

Practical Steps Before Expatriating

If you, a family member, or a client is considering renunciation or giving up a green card, plan ahead:

·         Get current first. Make sure the last five years of income tax returns, FBARs, and information returns (such as Forms 5471, 8865, 8938, and 3520) are filed and accurate. Where they are not, consider the available compliance programs before expatriating, not after.

·         Value assets early. Determine whether you are near the $2 million net worth threshold and estimate any exit tax. Gifting, timing, and restructuring may be worth considering, but they need careful analysis.

·         Review retirement accounts, deferred compensation, and trusts. These receive special treatment under Section 877A and can produce unexpected tax or withholding.

·         Consider the family. If heirs will remain in the U.S., Section 2801 can change the estate plan significantly.

·         File Form 8854 on time. The form is due with your tax return for the year of expatriation. Failing to file can make you a covered expatriate regardless of your wealth and can bring a $10,000 penalty.

·         Coordinate the immigration and tax timelines. The date on your Certificate of Loss of Nationality, or the date your green card residency ends, drives the tax analysis.

The Bottom Line

The rise in expatriation reporting reflects a growing number of Americans and long-term residents deciding that the costs of U.S. status outweigh the benefits. With the renunciation fee now $450, the administrative cost of leaving has dropped. The tax cost has not. For anyone near the covered-expatriate thresholds, or with gaps in past compliance, the difference between a planned exit and an unplanned one can be substantial.

Should I Stay or Should I Go?

Need Advise on Expatriation?

 

Contact the Tax Lawyers at 

Marini & Associates, P.A.   

for a FREE Tax Consultation contact us at:

www.TaxAid.com or www.OVDPLaw.com 
or Toll Free at 888-8TaxAid (888) 882-9243

Disclaimer: This article is for general information only and is not legal or tax advice. Expatriation has significant and often irreversible tax and immigration consequences. Consult a qualified tax professional about your specific situation before taking action.