Bombshell: Denaturalized Citizen Forced To Exit, Can't Escape Exit Tax

Forbes

13 hours ago

The Trump administration is ramping up efforts to revoke the citizenship of naturalized Americans. ... More Can those stripped of their U.S. citizenship be subject to the U.S. tax expatriation rules even though they are not voluntarily giving up U.S. citizenship? It seems so.
In the heart of America's immigration debate, a lesser-known but seismic issue is emerging. The intersection of denaturalization and the expatriation tax regime is an explosive topic that has not yet been explored. If the expatriation regime applies to a denaturalized citizen, it imposes an exit tax through a deemed sale of worldwide assets as well as a transfer tax (current 40% rate) on gifts or inheritances received by U.S. individuals from the former citizen.
As the Trump administration ramps up efforts to revoke the citizenship of naturalized Americans, especially those accused of fraud or misrepresentation in their naturalization applications, a critical question comes to the fore. Can those stripped of their U.S. citizenship be subject to the U.S. tax expatriation rules even though they are not voluntarily giving up U.S. citizenship? If so, can they argue their U.S. citizenship was void from the outset, meaning they were never a citizen to begin with, thereby escaping the potentially crippling tax consequences?
Naturalized Americans Stripped Of U.S. Citizenship
This issue is steeped in legal complexity, and it has been heightened by recent policy shifts. It could have profound implications for vulnerable naturalized citizens who are high-net-worth individuals.
It has recently been reported that the U.S. Department of Justice under directives from President Donald Trump and Attorney General Pam Bondi, is aggressively pursuing denaturalization cases as part of a broader immigration enforcement agenda.
The DOJ's June 11, 2025 memorandum instructs its Civil Division to 'prioritize and maximally pursue denaturalization proceedings' against naturalized citizens who obtained citizenship through fraud, misrepresentation, or who pose national security threats, such as those with ties to terrorism or serious criminal offenses. This policy shift has sent shockwaves through immigrant communities comprised of over 25 million naturalized citizens.
High-profile cases, such as that of Elliott Duke, a U.K.-born military veteran denaturalized in June 2025 for crimes committed before naturalization, highlight the real-world stakes. Duke, now stateless after renouncing British citizenship, faces not only the loss of U.S. rights but also potential tax liabilities under the U.S. expatriation tax regime.
Rubbing Salt In The Wound: Expatriation Tax Regime
The current expatriation regime is embodied in IRC Section 877A, enacted in 2008 to deter wealthy Americans from renouncing citizenship to avoid taxes. The law imposes an 'exit tax' on 'covered expatriates' which includes U.S. citizens or long term residents who relinquish citizenship or green cards, respectively, and meet any one three criteria: (1) having an average annual net income tax liability above a threshold ($206,000 for 2025, adjusted for inflation), (2) having a net worth of $2 million or more, or (3) failing to certify tax compliance for the five years preceding expatriation. The tax operates as a mark-to-market regime, treating the individual as if he has sold all worldwide assets at fair market value the day before expatriation. Gain exceeding a certain exclusion amount is subject to income tax.
Another provision of the expatriation tax regime is a separate transfer tax under Code Section 2801 imposing a 40% tax on U.S. citizens or residents who receive gifts or bequests from a covered expatriate. This provision complements the Section 877A exit tax by targeting wealth transfers occurring any time in the future after expatriation.
Involuntarily Denaturalization And the Expatriation Tax Regime
Can the expatriation tax regime apply to an individual who was denaturalized involuntarily through a court order? Apparently, this seems so. Crucially, the tax law defines the expatriation date for various classes of cases, such as those who renounce U.S. citizenship, or give up long term residency. A special provision defines the expatriation date for denaturalized citizens as 'the date a court cancels a certificate of naturalization.' This explicitly includes involuntary loss of citizenship, meaning denaturalized individuals are subject to the exit tax if they meet the covered expatriate criteria. For high-net-worth individuals, the expatriation tax regime can result in hefty exit tax liability even though citizenship is stripped against their will.
The Ab Initio Argument: A Legal Long Shot For Those Whose Citizenship Is Revoked
A tantalizing defense for denaturalized citizens is to argue that their citizenship was void ab initio—from the beginning—due to fraud or misrepresentation in the naturalization process. If they were never legally a U.S. citizen, the argument goes, they cannot be an 'expatriate' under Section 877A(g)(2)(A), which applies to 'any United States citizen who relinquishes his citizenship.' Could this argument exempt them from the exit tax, sparing them significant financial consequences?
From an immigration perspective, the ab initio argument has merit. The United States Supreme Court in Johannessen v. United States, 225 U.S. 227, 228 (1912) held that denaturalization renders citizenship void, as if it never existed, because it was procured unlawfully.
The tax law, however, operates differently from the immigration laws. We have seen this, for example, in the case of expired green cards. Simply because the individual no longer has the right to permanently reside in the United States upon expiration of the card, does not mean he is no longer liable for U.S. income taxes. The green card must be relinquished according to specific procedures to escape U.S. tax liability.
Similarly, it appears, a naturalized citizen who has enjoyed citizenship benefits would be considered a citizen for tax purposes up until the court-ordered revocation date as specified in the expatriation tax regime rules. Allowing the ab initio argument to exempt denaturalized citizens from the exit tax could create a loophole, enabling those who fraudulently obtained citizenship to evade taxes. Given the right set of facts, however, a looming legal battle and challenge to application of the expatriation tax regime in such a case may be ahead.
Green Card Holders Must Be Extremely Cautious
The Trump administration's broader immigration crackdown, including policies targeting green card holders for alleged support of terrorism or criminal activity, carries the same tax risks. When the green card of a long term resident is revoked (or voluntarily relinquished), this is an 'expatriation' for tax purposes. The individual is treated the same as a U.S. citizen who gives up citizenship. The harsh U.S. tax consequences can apply if the individual meets any one of the tests for being a 'covered expatriate.'
Navigating Risks: Practical Advice
For naturalized citizens and long term residents, particularly those with significant wealth, the risks of denaturalization or green card revocation and the expatriation tax regime demand proactive measures.
Ensuring complete accuracy in immigration applications is the first step. If a denaturalization or revocation case arises, get proper U.S. international tax help to examine the expatriation tax issues. Planning is paramount to minimize the risks and tax hit.
This entire area is highly fluid and unpredictable. As such, it is critical for those with a stake to closely monitor ongoing events. Legal, political, and regulatory shifts can occur rapidly, with life-changing implications. Staying informed is essential.
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