Form 8840: When a foreign person resides in the U.S., they are not automatically subject to U.S. tax on worldwide income or IRS foreign asset reporting requirements. Once a person becomes a U.S. Citizen or Legal Permanent Resident, they are subject to tax on worldwide income and asset reporting.
But, if a foreign national meets the substantial presence test, they become a U.S. person for tax purposes. Even so, the person may still circumvent U.S. person tax status by filing form 8840 and showing they have a closer connection with a foreign county — or multiple foreign countries.
The form can be complicated, and has a strict due date. It is filed with the form 1040-NR (Non-Resident Aliens).
With the IRS taking an aggressive approach towards foreign accounts compliance, along with the increased issuance of offshore penalties — U.S. person status can be very detrimental to a foreign nationals. These penalties can be reduced or avoided with offshore voluntary disclosure.
Introduction to International Tax Concepts
Form 8840 is an exception to an exception.
The 8840 Closer Connection example may help alleviate U.S. tax issues if a foreign national qualifies as a resident for tax purpose using Substantial Presence
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.”
IR Calculate IRS Substantial Presence
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.
IRS Form 8840 Instructions
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 & Form 8840
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.
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)
If you Do Not Qualify to File Form 8840?
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.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
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:
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
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.