B1 Visa/B2 Tourist Visa U.S. Tax Dangers (FBAR, FATCA & PFIC)
- 1 Are B1/B2 visas Subject to U.S. Income Tax?
- 2 What is a B1/B2 Tourist Visa
- 3 Substantial Presence Test
- 4 Even For Non Citizens & Green Card Holders
- 5 Substantial Presence Test & U.S. Tax
- 6 Summary of Substantial Presence Test
- 7 Tax Liability – Substantial Presence Test
- 8 Substantial Presence Test – Exception
- 9 Form 8843
- 10 What if You Never Reported?
- 11 Golding & Golding, A PLC
B1 Visa/B2 Tourist Visa U.S. Tax Dangers (FBAR, FATCA & PFIC)
So, you like coming to the U.S. to visit your kids (and grandkids) but not up for undertaking the formalities of becoming a Legal Permanent Resident/Green Card Holder — and having to be taxed on your worldwide income.
The reality is, even as a B1/B2 Visa holder, you may be subject to U.S. Tax & Reporting on your worldwide income and accounts.
Common U.S. tax issues for B1 & B2 Visa Holders:
- Do I pay U.S. Tax if I Have a B1/B2 Tourist Visa?
- What is the Substantial Presence Test?
- Did I meet the Substantial Presence Test?
- What if I didn’t pay U.S. Tax?
- Can I lose my visa status?
- Can I be penalized?
Are B1/B2 visas Subject to U.S. Income Tax?
It depends. The B1/B2 does not enjoy the tax-free status of a J or F visa. So, if you happen to meet the Substantial Presence Test, you may become subject to U.S. tax.
What is a B1/B2 Tourist Visa
As provided by the USCIS:
You may be eligible for a B-1 visa if you will be participating in business activities of a commercial or professional nature in the United States, including, but not limited to:
- Consulting with business associates
- Traveling for a scientific, educational, professional or business convention, or a conference on specific dates
- Settling an estate
- Negotiating a contract
- Participating in short-term training
- Transiting through the United States: certain persons may transit the United States with a B-1 visa
- Deadheading: certain air crewmen may enter the United States as deadhead crew with a B-1 visa
- You must demonstrate the following in order to be eligible to obtain a B-1 visa:
- The purpose of your trip is to enter the United States for business of a legitimate nature
- You plan to remain for a specific limited period of time
- You have the funds to cover the expenses of the trip and your stay in the United States
- You have a residence outside the United States in which you have no intention of abandoning.
- You are otherwise admissible to the United States
Substantial Presence Test
A person who is a U.S. Citizen or Legal Permanent Resident (Green Card Holder) is generally required to file a 1040 Tax Return.
When filing a 1040 Tax Return, if the person has foreign bank accounts and meets the minimum threshold requirement, then they are required to file an FBAR (Report of Foreign Bank and Financial Accounts).
Even For Non Citizens & Green Card Holders
What Foreign Nationals must understand is that the responsibility to file a 1040 (and report foreign bank accounts) is not just for US Citizens or Legal Permanent Resident. If a Foreign National meets the Substantial Presence Test, they are also required to file a 1040 and FBAR (if they meet certain threshold requirements) even though they are not a US Citizen or Legal Permanent Resident.
Substantial Presence Test & U.S. Tax
When a person first comes to the United States to live, if they earned income they are required to file a tax return. Until they become a Legal Permanent Resident or US citizen, they finally 1040-NR.
The problem for many people is that once they have lived in the United States for a certain amount of time, they become subject to regular taxation just as if they were a US citizen or Legal Permanent Resident. Not only does this mean that the United States will tax the person on the worldwide income, but they are also required to comply with all foreign account reporting requirements.
The failure to comply with foreign account reporting may result in significant fines, penalties, and even criminal investigation depending on the facts and circumstances of their case. In addition, if the person is found to be willful and their failure to report then their entire foreign accounts can be subject to a 100% penalty.
The following is a summary of the Substantial Presence Test followed by a summary of FBAR reporting requirements:
Summary of Substantial Presence Test
As a non-US citizen and non-US green card holder, you are generally only required to pay tax on your “US Effectively Connected Income” (money you earn while working in the United States). However, if you qualify for the Substantial Presence Test, then the IRS will tax you on your WORLDWIDE income.
IRS Substantial Presence Test generally means that you were present in the United States for at least 30 days in the current year and a minimum total of 183 days over 3 years, using the following equation:
- 1 day = 1 day in the current year
- 1 day = 1/3 day in the prior year
- 1 day = 1/6 day two years prior
Example A: If you were here 100 days in 2016, 30 days in 2015, and 120 days in 2014, the calculation is as follows:
- 2016 = 100 days
- 2015 = 30 days/3= 10 days
- 2014 = 120 days/6 = 20 days
- Total = 130 days, so you would not qualify under the substantial presence test and NOT be subject to U.S. Income tax on your worldwide income (and you will only pay tax on money earned while working in the US).
Example B: If you were here 180 days in 2016, 180 days in 2015, and 180 days in 2014, the calculation is as follows:
- 2016 = 180 days
- 2015 = 180 days/3= 60 days
- 2014 = 180 days/6 = 30 days
- Total = 270 days, so you would qualify under the substantial presence test and will be subject to U.S. Income tax on your worldwide income, unless another exception applies.
Tax Liability – Substantial Presence Test
Once a person meets the substantial presence test, they are required to report their worldwide income in the United States on a 1040 instead of at 1040 NR. Depending on any tax treaties the United States has with any particular country, the foreigner may find himself or herself under heavy tax scrutiny by the United States.
Substantial Presence Test – Exception
There is an exception to this filing rule, depending on the purpose of the foreigner being in the United States and what role/job the person is doing in the United States.
The IRS provides the following involving the substantial presence exception:
Do not count days for which you are an exempt individual. The term “exempt individual” does not refer to someone exempt from U.S. tax, but to anyone in the following categories:
- An individual temporarily present in the U.S. as a foreign government-related individual under an “A” or “G” visa, other than individuals holding “A-3” or “G-5” class visas.
- A teacher or trainee temporarily present in the U.S. under a “J” or “Q” visa, who substantially complies with the requirements of the visa.
- A student temporarily present in the U.S. under an “F,” “J,” “M,” or “Q” visa, who substantially complies with the requirements of the visa.
- A professional athlete temporarily in the U.S. to compete in a charitable sports event.
If you exclude days of presence in the U.S. for purposes of the substantial presence test because you were an exempt individual or were unable to leave the U.S. because of a medical condition or medical problem, you must include Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, with your income tax return. If you do not have to file an income tax return, send Form 8843 to the address indicated in the instructions for Form 8843 by the due date for filing an income tax return.
If you do not timely file Form 8843, you cannot exclude the days you were present in the U.S. as an exempt individual or because of a medical condition that arose while you were in the U.S. This does not apply if you can show, by clear and convincing evidence that you took reasonable actions to become aware of the filing requirements and significant steps to comply with those requirements.
Closer Connection Exception to the Substantial Presence Test
Even if you passed the substantial presence test you can still be treated as a nonresident alien if you qualify for one of the following exceptions;
- The closer connection exception available to all aliens. Please refer to Conditions for a Closer Connection to a Foreign Country.
- The closer connection exception available only to students. Please refer to The Closer Connection Exception to the Substantial Presence Test for Foreign Students and Sample Letter.
If you meet the exception, you must file IRS Form 8843 to avoid taxes and penalties. The IRS provides the following instructions/summary regarding the use of this form:
Exempt Individuals For purposes of the substantial presence test, an exempt individual includes anyone in the following categories.
- A teacher or trainee (defined on this page).
- A student (defined on the next page).
- A professional athlete temporarily present in the United States to compete in a charitable sports event.
The term exempt individual also includes an individual temporarily present in the United States as a foreign government-related individual under an “A” or “G” visa. If you are present under an “A” or “G” visa, you are not required to file Form 8843.
What if You Never Reported?
If you never properly reported your foreign income or accounts, you may qualify for one of the IRS tax amnesty programs/voluntary disclosure programs. You may also qualify for a reduced penalty — or even a penalty waiver!
Golding & Golding, A PLC
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
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