Do U.S. Visa Holders Pay Taxes and Report Foreign Accounts?

 
Do U.S. Visa Holders Pay Taxes and Report Foreign Accounts?

Do U.S. Visa Holders Pay Taxes and Report Foreign Accounts?

Do U.S. Visa Holders Pay Taxes and Report Foreign Accounts?

The United States offers various types of visas to taxpayers seeking to spend time in the United States as an alternative to becoming a U.S. citizen or lawful permanent resident. Where it can get very complicated for taxpayers who are in the United States on a visa is that, depending on how long they remain in the United States in the current year — as well as calculating the amount of time they spend in the United States and the two prior years — it may result in a significant tax implication. That is because taxpayers who remain in the United States for an extended period may become subject to U.S. taxes on their worldwide income, like a U.S. citizen or lawful permanent resident. Likewise, taxpayers may also be required to report their foreign assets and investments on various international information reporting forms, which can become an onerous task. Let’s look at the basics of how the different visas in the United States are taxed.

Baseline is that Visas are taxed the same

First, most visas are taxed the same in that if the taxpayer remains in the United States for an extended period of time, meets the substantial presence test, and does not qualify for any exceptions or limitations, then they will pay tax on their worldwide income. If the taxpayer does not meet the substantial presence test, then typically they are only taxed on their U.S.-sourced income and not taxed on their worldwide income.

Does Not Need to be on an ‘Employment Visa’

One common misconception is that taxpayers believe they have to be on an employment or a work visa, like an H-1B or L-1, to be taxed on their worldwide income, but that is not correct. Taxpayers may be in the United States on a tourist visa, for example, such as a B1/B2 visa, and still be taxed on their worldwide income if they meet the substantial presence test.

Substantial Presence Test

The substantial presence test is essentially a ‘counting days test.’ Thus, if the taxpayer is in the United States for a significant amount of time in the current year as well as a significant amount of time in the two prior years, then they may meet the substantial presence test and then become subject to U.S. tax on their worldwide income, as well as having to report and disclose their foreign accounts, assets, and investments. 

Worldwide Income and Reporting

By worldwide income and reporting, it means that the United States taxes visa holders just as if they were a lawful permanent resident or U.S. citizen — which means that the United States taxes them on all the income they earn in the United States and abroad. It doesn’t matter if they live outside of the United States for a significant amount of time; they may still be subject to US taxes on their worldwide income. In addition, the visa holders also have to report their foreign accounts, assets, and investments on various foreign information returns, such as the FBAR and Form 8938.

Exceptions and Treaty Elections for Visa Holders

There are certain exceptions and limitations to having to report worldwide income and global assets. For example, even if the taxpayer meets the substantial presence test, if they qualify for the closer connection exception, then they would only be taxed on their U.S.-sourced income.  Likewise, some taxpayers may qualify for a five-year exception under the F-1 visa or a possible 2-year treaty exception under the J-1 visa, depending on their citizenship. Other exceptions, exclusions, and limitations may apply as well, but from a baseline perspective, if the taxpayer meets the substantial presence test, then generally, they report their worldwide income and are required to disclose their global assets.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. Contact our firm today for assistance.