When it comes to US tax liability, one of the more confusing aspects of tax liability is how foreigners who have relocated to the United States will be taxed during the “interim” period of waiting to become a Legal Permanent Resident “Green Card Holder.”
When a foreign investor obtains a visa by way of an EB -5 it means that they have invested a significant sum of money into a US business in exchange for a visa (this is a very simplified version of the EB-5 visa)
Where the investor gets into a problem is when the investment begins profiting, and the visa holder is residing in the United States – but unsure what their current status is in terms of paying US tax. Specifically, the EB -5 visa holder is not yet a US citizen or Legal Permanent Resident, but is earning source income (“FDAP”)in the United States.
While there may be various exceptions and exclusions depending on which country the investor is from and whether there is a tax treaty involved, a very important aspect to this relationship with the United States is the substantial presence test.
Substantial Presence Test
IRS Substantial Presence Test generally means that you were present in the United States for at least 30 days in the current and a total of 183 days over 3 years, as follows:
- 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: If you were here 100 days in the current year, 30 days in the prior year and 120 days in the year before that, it would breakdown ads 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
Portfolio Interest Income (Resident vs. Non-Resident)
For nonresidents of the United States, portfolio income such as interest income is generally exempted from US tax liability. The problem is once a foreign investor meets the substantial presence test and therefore is now subject to US tax on income, they may no longer qualify for the portfolio income interest exception because they are no longer nonresidents (despite the fact that the individual has not become a US citizen or receive their green card).
If you are in this type of tax situation is important that you speak with an experienced international expat tax lawyer in the United States.
The following is a summary of general ex-pat tax law for investors seeking to relocate to the United States should be aware of:
Expat Tax Summary
Ever since the international tax law, FATCA (Foreign Account Tax Compliance Act) was introduced, foreign tax law compliance has become much more complicated. Under the new stricter compliance requirements, Expats are finding themselves under the watchful eye of the IRS and Department of Treasury. The failure to comply may result in having their entire foreign account balance forfeited, as well as the loss of their freedom to travel.
Retaining an Expat Tax Lawyer to resolve IRS Tax issues can help get you, your family, and your business back into IRS Tax compliance.
Prior to the introduction of FATCA, international tax law compliance was relatively easy, if non-existent. U.S. citizens could simply pack up and move overseas without much hassle and/or Legal Permanent Residents could just relinquish their green cards and return home. Moreover, the “Expatriation Tax” was much simpler to circumvent – with a much less strict definition of covered expatriates.
Then came 9/11 followed by stricter international regime and subsequently, FATCA. Even beyond FATCA , there is a new international tax law brewing which is called GATCA/CRS (Global Account Tax Compliance Act/Common Reporting Standard). GATCA/CRS is commonly referred to as the Global FATCA.
Worse yet, the U.S. is threatening individuals with more than $50,000 in tax debt of having their passport revoked – all of which has made the transition to Expat a lot more murky and dangerous.
EXPATS & FATCA
When it comes to U.S. Expats, the biggest change in international law is in the form of FATCA (Foreign Account Tax Compliance Act). Under FATCA, U.S. Taxpayers (Expats, US citizens, Legal Permanent Residents, and Foreign Nationals subject to US tax) are required to annually report their overseas and foreign accounts to the Internal Revenue Service and Department of Treasury; the failure to do so can be very costly, with FBAR penalties alone reaching 100% of the account value.
Why are U.S. Expats Required to File Tax Returns
The requirement to file U.S. tax returns (unless a person is otherwise exempted or excluded) is a requirement that comes along with being a US citizen and/or legal permanent resident. Under U.S. tax law, the United States taxes U.S. taxpayers on their worldwide income. That means that even if you are a U.S. Expat and earn the money outside of the United States (Whether you are a resident of the U.S or not), you are required to file a tax return, report the income and usually pay tax on the money (Unless the Foreign Tax Credit or Foreign Earned Income Exclusion applies).
Why are U.S. Expats Required to Report Foreign Accounts?
While people who oppose FATCA have many different reasons as to why FATCA is unfair, for the most part the law itself is not unfair – the real problem is how foreign financial institutions and other foreign banks are interpreting and applying the law.
One of the main reasons why US expats are required to disclose their foreign accounts is so that the United States can track the value of their foreign accounts for estate planning/estate tax and gift tax purposes. For example, in the United States the gift and estate tax exemption is $5.45 million per person. For purposes of this example, let’s assume that the person is single. With this exemption it means that if the person was to die in 2016 (absent complicated gift tax and claw-back rule) and he was worth $5 million, then there would be no estate taxes due.
On the other hand, let’s is the same facts only the person is worth $10 million. Now, that person’s estate may have to pay estate tax at the rate of 40% for every dollar over $5.43 Million. In other words, the state would have to pay roughly $1.85 million estate tax. Now, if the person who is a US citizen but is also US expat lives overseas and has their money in a foreign account with a foreign beneficiary that the IRS cannot trace or locate, the IRS cannot collect that nearly $2 million in tax money. As a result, by requiring all US taxpayers to report and disclose their foreign offshore accounts, the IRS can track each person’s value. (There is a specific rule for long-term U.S. Residents who relocate overseas and then gift money back to the United States)
FATCA is being interpreted unfairly and impacting U.S. Expats
Although the purpose behind FATCA may be legitimate, the law itself is being interpreted poorly by foreign countries which is having a severely negative impact on US Expats. Many foreign countries do not want to deal with a headache of reporting US taxpayer accounts to the United States and instead are either refusing to open new accounts or actually closing or downgrading US expat accounts.
**If you are US expat residing overseas and are unable to open a bank account this can be a very difficult if not impossible situation.
While this is not the intent of FATCA, it is the direct result of poor planning on behalf of the United States.
What if the U.S. Expat Does not Disclose the Information
If a U.S. Expat fails to disclose their foreign account information to the United States, then they may suffer significant fines and penalties if not forfeiture of their money. The penalties involved with the failure to disclose international and foreign money is archaic and completely unfair to the taxpayer.
What forms are U.S. Expats required to file?
The number of forms that are required to be filed will depend on the amount of offshore assets, and whether the taxpayer is married filing jointly or not. Here’s a brief list of some of the more common forms that are required to be filed by U.S. Taxpayers, including U.S. Expats:
- FBAR (FInCEN 114): This form is required to be filed with the Department of Treasury if the total aggregate total of your overseas accounts exceed $10,000 in them or more on any given day (if you have 101 accounts with $100 each of them you still have to report all the account). This form is not filed with your tax return but rather is filed directly with the Department of Treasury and is now required to be filed online. This form cannot be filed late otherwise it is considered a silent disclosure and could lead to potential fines and even criminal penalties.
- IRS Form 8938: This form is filed with your tax returns, and the thresholds for filing them depends on whether you are single or married, and if you reside in the U.S. or overseas. The minimum threshold is that if you have $50,000 or more in foreign accounts on the last day of the year or $75,000 in the account at any time during the year then you are required to file this form.
- Schedule B: Schedule B is generally filed when you earn a certain amount of dividends or interest income during the year (U.S. or Foreign Interest/Dividend income). It is important to note that if you have any interest in a foreign account then you are still required to file the form even if you did not earn any interest or dividends another job.
***If you filed a Schedule B but did not disclose your foreign accounts in accordance with question 7, you should speak with an international tax attorney to discuss the implications.
- IRS Form 3520: this form is required to be filed depending on whether you have an overseas trust or receive gifts that meet or exceed the threshold amount.
What can the IRS do to a U.S. Expat who lives in a Foreign Country?
If you are a U.S. Expat who lives in a foreign country and the IRS finds that you were required to, but did not file you U.S. tax returns, they will seek to put a lien or levy – or worse – against both your United States and foreign bank accounts and property. The reason they will be able to do this is because many countries have entered into intergovernmental agreements (IGAs) with the United States, which are reciprocal arrangements by the countries to report and take any means necessary in order to ensure all taxes are paid.
Further, in countries that do not have an intergovernmental agreement (IGA) with the IRS, if your bank account in this country is either a US bank, a bank that has US branches, or a foreign bank that uses a third-party US-bank such as HSBC to transfer funds to different countries, U.S. Expats will most likely get caught in the web as well.
Golding & Golding, A PLC
We have successfully represented clients in more than 1,000 streamlined and voluntary disclosure submissions nationwide and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.