Form 8840 & Instructions: The Form 8840 and instructions are complex. Under IRS tax rules, the form is an exception to an exception, and helps foreigners avoid worldwide income and tax rules. Generally, foreigners are only subject to tax on U.S. sourced income.
If a foreigner meets Substantial Presence, they are subject to U.S. tax and reporting on their worldwide income. But, if a person can meet the closer connection exception with Form 8840, they can avoid worldwide income and reporting. This is important, because the Internal Revenue Service has take a very aggressive approach to foreign accounts compliance. If you are out of compliance for reporting offshore accounts, assets, investments, and/or income, the IRS can issue fines and penalties. These penalties can be reduce or avoided with offshore voluntary disclosure.
*The IRS Form 8840 is not just for Canadian Snowbirds (although it is a very common form for Canadians who visit the U.S. often)
Instructions for Filing
Form 8840 is an exception to an exception. Generally, a person (individual) is considered a U.S. Person if they qualify as a U.S. Citizen or Legal Permanent Resident. But, even resident aliens may still have U.S. status for tax purposes if they meet the IRS “Substantial Presence Test.”
A non-U.S. citizen or non-legal permanent resident may file an IRS Form 8840 (aka Closer Connection Exception Statement for Aliens) to avoid having to pay tax on non-U.S. sourced income (worldwide taxation).
The 8840 Closer Connection example may help alleviate U.S. tax issues if you are a resident for tax purpose using Substantial Presence. The form is filed along with an IRS Tax Form 1040-NR. It is sometimes referred to as “Snowbird rules” due to the number of Canadian Citizens who file the form each year.
US Tax Form 8840 must be filed properly and timely to be considered by the IRS.
Closer Connection Exception and Substantial Presence
Even if a foreign national meets the substantial presence test, they may be able to avoid U.S. Tax, by showing a connection to a foreign country that is “closer” than your connection to the U.S. — using IRS Form 8840.
In other words a resident alien (by meeting the Substantial Presence Test) may still avoid U.S. Tax as a non-resident alien, by showing a closer connection to a different country.
For some non-U.S. Persons (Aliens), who are neither U.S. Citizens nor Legal Permanent Residents — but meet the IRS Substantial Presence Test — they suddenly become subject to U.S. Tax and Reporting in the U.S.
Thankfully, the IRS developed an exception to the rule, which a taxpayer may claim by submitting a Form 8840.
Form 8840 is used to avoid the U.S. worldwide tax and reporting rules if you can show a closer connection to another country.
Worldwide Income and Global Reporting
Only U.S. Persons (Citizens and Legal Permanent Residents) are subject to U.S. Tax on worldwide income.
U.S. Tax and Reporting Exception to the General Rule
Non-U.S. Persons who meet the Substantial Presence Test are also subject to U.S. Tax and Reporting (FBAR, FATCA, PFIC, etc.) on their worldwide income, accounts, assets, and investments.
U.S. Tax and Reporting Exception to the Exception
Even if you meet the Substantial Presence Test, you may be excepted from U.S. Tax, if you can show a “Closer Connection.”
What is Substantial Presence?
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:
What does it Mean if you have “Substantial Presence”
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.
How Does the Substantial Presence Test Work?
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.
What is IRS Closer Connection?
As provided by the IRS:
Even though you would otherwise meet the substantial presence test, you will not be treated as a U.S. resident for 2018 if:
You were present in the United States for fewer than 183 days during 2018;
You establish that during 2018, you had a tax home in a foreign country; and
You establish that during 2018, you had a closer connection to one foreign country in which you had a tax home than to the U.S.
How do You Show a “Closer Connection?”
As provided by the IRS:
You can demonstrate that you have a closer connection to two foreign countries (but not more than two) if all five of the following apply:
1. You maintained a tax home as of January 1, 2018, in one foreign country
2. You changed your tax home during 2018 to a second foreign country.
3. You continued to maintain your tax home in the second foreign country for the rest of 2018.
4. You had a closer connection to each foreign country than to the United States for the period during which you maintained a tax home in that foreign country.
5. You are subject to tax as a resident under the tax laws of either foreign country for all of 2018 or subject to tax as a resident in both foreign countries for the period during which you maintained a tax home in each foreign country.
Tax Home in Another Country
In order to meet the exception, a person must show they had a tax home in another country. As provided by the IRS:
Tax Home Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual.
If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live. If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and Form 8840 (2019) Page 4 your tax home is wherever you work.
For determining whether you have a closer connection to a foreign country, your tax home must also be in existence for the entire year, and must be located in the foreign country (or countries) in which you are claiming to have a closer connection.
When is the Form Due to be Filed?
As provided by the IRS:
If you are filing a 2019 Form 1040-NR or Form 1040-NR-EZ, attach Form 8840 to it. Mail your tax return by the due date (including extensions) to the address shown in your tax return instructions.
If you do not have to file a 2019 tax return, mail Form 8840 to the Department of the Treasury, Internal Revenue Service Center, Austin, TX 73301-0215 by the due date (including extensions) for filing Form 1040-NR or Form 1040-NR-EZ.
Penalty for Form 8840 Late Filing
As provided by the IRS:
Penalty for Not Filing Form 8840 If you do not timely file Form 8840, you will not be eligible to claim the closer connection exception and may be treated as a U.S. resident.
You will not be penalized 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.
If you Do Not Meet Closer Connection & are out of Compliance
We can help!
If you are out of offshore compliance, the penalties can be severe. Therefore, you may consider entering the IRS offshore voluntary disclosure/tax amnesty, before it is too late.
What Should You Do?
Everyone makes mistakes. If at some point you discover that you should have been reporting your foreign income, accounts, assets or investments, the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure programs.
Non-Compliance with U.S. Tax Law
Whether it is because you did not you had to report foreign accounts, thought you were below the threshold for filing, did not realize non-bank accounts were required to be reported, and/or have other unreported income, accounts, investments or assets – we can help.
Golding & Golding (Board-Certified Tax Law Specialist)
We specialize exclusively in international tax, and specifically IRS offshore disclosure.
We have successfully represented clients in more than 1,000 streamlined and voluntary offshore disclosure submissions nationwide and in over 70-different countries. We have represented thousands of individuals and businesses with international tax problems.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.
- Learn more about the Board-Certified Tax Lawyer Specialist credential
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- Learn more about Golding & Golding’s Case Accomplishments
- Learn more about Golding & Golding Testimonials from prior clients
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants and Financial Professionals worldwide.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Golding & Golding Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
Interested in Learning More about Golding & Golding?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.
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.