Expat Employee Tax Services | Golding & Golding Tax Lawyers and Enrolled Agents
Preparing a business for tax related issues involving foreign employees working in the United States and/or U.S. employees being transferred overseas is very important.
There are various different laws that impact employees, depending on whether they are US employees being transferred overseas or if they are a foreign employee being transferred to the United States.
U.S. Citizens and Residents Working Overseas
For U.S. tax purposes, the United States taxes U.S. Taxpayers on their worldwide income. Therefore, if a US citizen or legal permanent resident of the United States is transferred overseas, chances are they will be subject to both foreign tax as well as US tax.
As a result, it is important that the employer and employee understand the different tax tools that can be used to eliminate the double tax issue, including treaty rights, foreign tax credits, and foreign income exclusion.
Foreign Citizens working in the United States
When foreign citizens come to the United States to work, they have additional tax issues as well. For example, a foreign person usually does not have to pay tax in their country of citizenship when they are working overseas. Rather, it is the country of the source employment income which has the right to tax the worker’s salary.
Nevertheless, a very complex issue can come into play depending on how long before an employee remains in the United States and of the foreign employee has additional income outside of the United States. This is what is commonly referred to as the substantial presence test and unfortunately if therefore an employee meets the substantial presence test, they may be subject to US tax on their worldwide income.
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.
Expat Tax Consultant Services
Golding & Golding provides expat tax consulting services to employers around the world. The following is a summary of the services we provide:
With the globalization of the United States economy, many companies are starting to suffer “growing pains” in the form of determining how to setup payroll and provide tax planning to foreign employees who are working in the United States, as well as to U.S. workers who are working overseas.
The United States’ tax system is entirely different than many other countries. Most notably, United States taxes individuals on their worldwide income no matter where they reside.
U.S. Employees Working Overseas: If a US worker is working overseas, living overseas and only earning foreign income, they are still required to file a US tax return and pay U.S. Tax unless certain exemptions/credits apply. When this is coupled by the fact that international tax is further complicated by issues such as the Foreign Earned Income Exclusion and Foreign Tax Credit, it is crucial that the employer and employee understand the tax ramifications of international employment.
Foreign Employees Working in the U.S: Alternatively, when a foreign employer transfers foreign employees overseas to the United States to work, the foreign employee will also be introduced to a much more complicated tax situation. It can get very confusing and frustrating for the foreign employer who wants to provide certain benefits to the worker they are sending to the United States, such as health insurance premiums, housing, per diem, meals, and are unsure of the tax ramifications.
Global Expat Tax Consulting
As one of the few boutique tax law firms and enrolled agent firms that focuses on international tax law and international tax planning, we are in a unique position to consult with employers, employees and expat communities both in the United States and worldwide involving ex-pat tax related issues.
In addition, we are also enrolled agents license by the IRS (The highest credential the IRS awards). As a result, not only can we provide our clients with the fundamental day-to-day tax preparation, analysis, and reporting issue assistance, but as experienced international tax lawyers we also provide additional assistance with tax Treaty analysis, US and foreign Tax Summaries, and presentations involving the interplay between, FATCA, GATCA/CRS, FBAR Reporting, FTC (Foreign Tax Credit) and FEIE (Foreign Earned Income Exclusion).
Expat Consulting – How Our Service Works
Depending on where our client resides and if our client is and Employer, Employee, or Expat Community – we will meet with the client in person or by Skype or (other electronic transmission) to determine what type of tax services are required and what the overall spectrum of services will be.
We have a network of translators around the world who we work with to provide translation services to ensure that nothing is lost in translation. Tax issues are difficult enough, without there being any miscommunication regarding translation.
Thereafter, we will develop a cost-effective program to provide the employer with a broad range of different services we can provide, including:
- General Tax Summary Presentation
- Tax Return Preparation
- Tax Planning Presentations
- Tax Return Analysis
- Tax Treaty Analysis
- FBAR and FATCA Presentation
- OVDP and IRS Streamlined Presentations for U.S. Expat Employees
- Presentations on Specific Areas of Tax Law
- Preparation of Tax Related HR Materials
- Individualized Summaries For Each Employee’s Particular Situation Several Other “Need-Based” Tax Consulting
- Legal Tax Opinion Letters
The format of our services depends primarily on the needs of our client. We receive requests to travel around the world providing expat consultation services. For some of our clients overseas or in the United States, they prefer that we provide a classroom/instructional type of presentation, which is no problem at all.
Sometimes, we find it better and more effective to have both the employer and employees in the room together when we are making a presentation so that everyone can ask their questions, as well as listen to the responses of other questions people ask and get on the same page regarding tax issues.
In addition to meeting with employers, we have also presented materials to ask back communities around the world as well, especially in light of the new FATCA and FBAR reporting rules. For many individuals who reside overseas and have been working out of the United States for several years, they may be out of tax compliance and subject to certain penalties – although we have worked with several ex-pats to get those penalties abated.
The following is a brief summary on FBAR Reporting, FATCA Compliance and some of the more important forms that are required to be filed with the IRS and DOT:
If you, your family, your business, your foreign trust, and/or PFIC (Passive Foreign Investment Company) have more than $10,000 (in annual aggregate total at any time) overseas in foreign accounts and either have ownership or signatory authority over the account, it is important that you have an understanding of what you must do to maintain FBAR (Report of Foreign Bank and Financial Accounts) compliance. There are very strict FBAR filing guidelines and requirements in accordance with general IRS tax law, Department of Treasury (DOT) filing initiatives, and FATCA (Foreign Account Tax Compliance Act).
Filing FBARs and ensuring compliance with IRS International Tax Laws, Rules, and Regulations is extremely important for anyone, or any business that maintains:
- Foreign Bank Accounts
- Foreign Savings Accounts
- Foreign Investment Accounts
- Foreign Securities Accounts
- Foreign Mutual Funds
- Foreign Trusts
- Foreign Retirement Plans
- Foreign Business and/or Corporate Accounts
- Insurance Policies (including some Life Insurance)
- Foreign Accounts held in a CFC (Controlled Foreign Corporation); or
- Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
Golding & Golding provides Foreign Account Reporting strategies for clients around the globe in order to report Foreign Bank Accounts and become FBAR compliant. We also defense clients who are under FBAR Audit by the IRS and DOT.
What is an FBAR?
In accordance with international tax law compliance, taxpayers who meet the threshold requirements are required to file an FBAR.
An FBAR is a “Report of Foreign Bank and Financial Accounts” form. It is a form that is filed online directly with the Department of Treasury. Unlike the tax return, the FBAR form must be filed by June 30th of the tax year and there are no extensions available for filing it late. If you attempt to file it late, there can be serious repercussions, including fines and penalties – since it is considered Quiet Disclosure or Silent Disclosure in an attempt to circumvent the OVDP or Streamlined Program rules and regulations.
**UPDATE: Starting in 2016 for Tax Year 2015 – filing of your 2015 FBAR will be in accordance with the same time periods to file your tax returns, which is by April, 2016 unless you receive an extension of time to file.
FBAR filings can be overwhelming, especially if you have never filed one before. If this is the case, our experienced international FBAR Lawyers can assist you in ensuring you are compliant with IRS FBAR Law and FATCA requirements.
Who is Required to File an FBAR?
Not everyone who has foreign accounts is required to file an FBAR. Rather, it is required to be filed by all U.S. Taxpayers (whether they reside in the U.S. or overseas) with foreign accounts that have an “annual aggregate total” exceeding $10,000 at any time during the year. Thus, if a U.S. Taxpayer (including Legal Permanent Residents “aka Green Card Holders”) maintains foreign accounts, including banks accounts, financial accounts, or insurance policies that have a combined value of more than $10,000 (or has indirect ownership of the account or signature authority), then that person is required to file an FBAR statement.
What if None of My Accounts Exceed $10,000?
It does not matter. It is important to remember that the threshold is the Annual Aggregate Total value at any given time during the year. This means if you have 101 bank accounts with $100 each at any given time during the year, you are STILL required to file the FBAR and list all the accounts on it, even if none of the accounts exceed $10,000. In other words, you are required to report the total value of all your foreign accounts located in any foreign country once you exceed the $10,000 annual aggregate total threshold on any given day during the year.
There are various accounts and other assets (insurance policies) which may or may not be included in your FBAR analysis. Please contact one of our experienced FBAR Lawyers for further assistance regarding specific account disclosures.
What if I did Not File an FBAR Statement?
If a person fails to file the FBAR, there is still hope. Depending on whether the person also had unreported foreign income (income that was earned overseas and not reported on the U.S. tax return – even if it was reported in a foreign country and foreign tax was paid), the IRS and DOT will determine if a penalty will be issued; usually the taxpayer will be penalized but the amount of the penalty will vary.
FATCA is the Foreign Account Tax Compliance Act. It is an IRS International Tax Law that is designed to reduce offshore tax evasion and tax fraud. FATCA requires U.S. Taxpayers to disclose unreported foreign bank accounts, foreign financial accounts, and foreign income to the IRS; otherwise the Taxpayer can be subject to extremely high fines, penalties, and outstanding tax liabilities.
Unfortunately, most people only learn of FATCA when they receive a letter (“FATCA Letter”) from their foreign bank or foreign financial institution requiring the U.S. Taxpayer to show proof that they are in FATCA compliance.
I Have Unreported Overseas Accounts, Now What?
To make matters worse, you or your friend probably conducted some quick online research and gathered enough misinformation to:
- Assume that the IRS and Department of Treasury will be kicking in your door at any minute to interrogate you;
- Resign yourself to the fact that your only options are either doing a hard 20 in federal prison, or escaping into the middle of the night under a cloak of darkness and assuming a new identity; or
- Contact CPAs, enrolled agents, or inexperienced international tax attorneys (or any inexperienced attorney) who use fear and scare tactics in an attempt to sell you.
Under FATCA, Does the IRS Want to Arrest People?
As one of the few small international tax law firms in the country that has represented numerous taxpayers in both the offshore voluntary disclosure program (OVDP) and newly implemented modified streamlined program in the United States and overseas, we can tell you that there is almost nothing to be afraid of. The purpose of these international tax law programs is to “generate revenue” for the United States.
The IRS accomplishes this by mandating individuals who have not otherwise complied with US tax law involving overseas and foreign accounts to either enter one of the voluntary disclosure programs or risk facing significant monetary penalties and possible prison time for noncompliance (which can be resolved by entering one of these programs).
International Tax Forms
We have compiled a non-exhaustive list of some of the more common forms international taxpayers should review to determine whether their specific tax situations calls for them to prepare these forms in addition to the filing of a 1040.
- 1120F: Use Form 1120-F to report the income, gains, losses, deductions, credits, and to figure the U.S. income tax liability of a foreign corporation. Also, use Form 1120-F to claim any refund that is due, to transmit Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), or to calculate and pay a foreign corporation’s branch profits tax liability and tax on excess interest.
- 3520: U.S. persons (and executors of estates of U.S. decedents) file Form 3520 to report: Certain transactions with foreign trusts, Ownership of foreign trusts under the rules of sections 671 through 679, and Receipt of certain large gifts or bequests from certain foreign persons.
- 5471: Generally, all U.S. persons described in Categories of Filers below (in the 5471 instructions) must complete the schedules, statements, and/or other information requested in the chart, Filing Requirements for Categories of Filers, on page 2. Read the information for each category carefully to determine which schedules, statements, and/or information apply.
- 5472: Generally, a reporting corporation must file Form 5472 if it had a reportable transaction with a foreign or domestic related party.
- 8938: Use Form 8938 to report your specified foreign financial assets if the total value of all the specified foreign financial assets in which you have an interest is more than the appropriate reporting threshold. See Reporting Thresholds Applying to Specified Individuals (described in detail in the IRS instructions).
- FBARs: FBAR or FinCEN 114 forms must be filed by any individual who has an annual aggregate that exceeds $10,000 for the combined value of all of their foreign applicable bank and financial accounts.
- W8-BEN: This form is required with respect to the fact Foreign persons are subject to U.S. tax at a 30% rate on income they receive from U.S. sources that consists of: Interest (including certain original issue discount (OID)); Dividends; Rents; Royalties; Premiums; Annuities; Compensation for, or in expectation of, services performed; Substitute payments in a securities lending transaction; or Other fixed or determinable annual or periodical gains, profits, or income.
- W8- ECI: Foreign persons are generally subject to U.S. tax at a 30% rate on income they receive from U.S. sources. However, no withholding under section 1441 or 1442 is required on income that is, or is deemed to be, effectively connected with the conduct of a trade or business in the United States and is includible in the beneficial owner’s gross income for the tax year.