Legal Permanent Residents/Green Card Holder Tax Guide (2018 Update)
Legal Permanent Residents/Green Card Holder Tax Guide (2018 Update)
At Golding and Golding, our managing partner is one of less than 400 Tax Attorneys (out of 200,000 practicing attorneys in California) who is a Board Certified Tax Law Specialist.
Common questions receive from Green Card Holders regarding US Tax
- What income do I have to pay U.S. tax on?
- What if I already paid taxes in a foreign country?
- I had my foreign accounts before I became a U.S. Person?
- I have never transferred the money to the United States?
- What do I do about my foreign business?
- What if I have foreign investment income?
- What if I only have Passive income generated from abroad?
US Tax of Legal Permanent Residents
We practice exclusively in the area of international tax.
We have spoken with thousands of Legal Permanent Residents/Green Card Holders during our many years of representation, and realize that there are many common misunderstandings amongst Legal Permanent Residents/Green Card Holders as to what their tax and reporting requirements and liabilities may be.
Especially with the recent introduction of FATCA (Foreign Account Tax Compliance Act), and renewed interest in FBAR (Report of Foreign Bank and Financial Account), U.S. Tax rules have become much more complex.Since this is a very complex area of tax, especially for individuals who may have no tax background at all, we think using an example may help.
U.S. Income Tax
U.S. income tax refers to any tax the person would have to pay to the U.S. government on income that was generated either in the United States, or outside of the United States.
Active income refers to income that is earned from sources such as employment, consulting, or independent contractor work.
Passive income is income that is generated from non-active means, such as interest, dividends, capital gain, royalties, rental income, and other passive means.
FBAR (FinCEN 114)
FBAR is the Report of Foreign Bank and Financial Account form (aka FincEN 114). Whether or not a person has to file a US tax return (because they earn less than the threshold amount required to file a tax return), a Green Card Holder still has to file an FBAR in any year that he or she has an annual aggregate total of more than $10,000 in foreign accounts.
FATCA (Form 8938)
FATCA is the Foreign Account Tax Compliance Act. It is similar to the FBAR, but requires much more information to be disclosed. Unlike the FBAR, Form 8938 is filed alongside your tax return. There are various threshold requirements to determine whether you may or may not have to file the form, but if you do not meet the threshold requirements for having to file a tax return, you do not have to file a separate form 8938 (whereas you may still have to file the FBAR)
Green Card Tax Example – Meet Thomas
Tom is originally from Australia. Before coming to the United States, Tom lived in Taiwan, Hong Kong and United Kingdom. Tom came to the United States in 2014 when he married a U.S. spouse.
Prior to coming to the United States Tom had earned some significant income, and therefore was not necessarily reliant on earning U.S. income — at least immediately upon arriving in United States.
Tom has the following money (links to Golding & Golding Free Resources):
- Bank Accounts
- A Stock Trading Account
- Mutual Funds
- Rental properties
- UK Pension
Tom Moves to the United States
In September, 2014, Tom arrived in the United States. While Tom did not speak with any tax professionals, he did join an Expat group in the United States and was able to pick up just enough information get himself into a bit of a pickle.
First Mistake: Tom is a Non-Resident for U.S. Tax
The first tidbit of misinformation Tom received was that he is not subject to U.S. Tax during his first year in the United States, unless it is U.S. sourced income.
Why? Because Tom did not meet this Substantial Presence Test in 2014 because Tom was in United States for less than 183 days and was not in the United States at all during the two prior years (he met his future wife while she was on vacation in Australia)
This is False
Once a person is considered a Green Card Holder, the Substantial Presence Test does not apply. The Substantial Presence Test is used for non-US citizens and non-Green Card Holders.
Since Tom arrived in United States, already with Green Card in hand, Tom would be filing a US tax return starting from when he first received a Green Card (whether or not he was residing in United States or not)
*There are some additional rules regarding filing dual returns, etc. during the first year another complexities beyond the scope of this example. All Tom really needs to know at this point is that he is considered a US person at the time he received a Green Card.
Second Mistake: Tom Does Not Pay Tax on his Foreign Income
This is also incorrect. The United States is one of only two countries the practices worldwide income taxation. In other words, the United States taxes individuals on their worldwide income. Since Tom is a Green Card Holder, Tom is subject to Tax on his Worldwide Income.
Common questions we receive on this topic include:
I Earned the Money Before I Came to the United States
From the US tax perspective, this is a nonissue. That is because even though the basis or foundation of the money was earned prior to coming to United States, the current income being generated is being generated while you are U.S. person and therefore the income is taxable in the U.S.
The Money is Tax-Free Abroad
In many countries, there are various types of savings accounts and investments which grow tax-free in that jurisdiction. Unfortunately, unless that particular type of income/account/investment is identified in a U.S. Tax Treaty (or otherwise) as being tax-exempt in the US , the income is going to be taxable on a US tax return — even if it is tax free abroad.
I Already Paid Foreign Tax on the Income
If you already paid foreign tax on income abroad, you may qualify to use a Foreign Tax Credit to offset any taxes that would otherwise be due in United States on the same income.
It is important to note that is an equation that is used to determine the full applicability of the foreign tax credit, and it is not always a dollar-for-dollar credit (the idea behind the equation is to ensure that none of the foreign taxes paid are being used to offset US source income tax due on US income)
The Overseas Money was Never Withdrawn
The United States is not taxing you on the withdrawal of the money (save for certain retirement accounts). Rather, the US tax is on the income being generated.
Therefore, if the income is being generated abroad (even if it was not distributed) it is still usually subject to tax.
Does Tom Report his Foreign Accounts?
Tom also received some misinformation regarding his foreign accounts.
He was told that since the accounts were opened before coming to the United States, he did not have to report these accounts to the IRS or FinCEN.
Again, this is incorrect but it should be noted but this is a very common issue we deal with from our clients who are green card holders.
Common questions we received on this issue include:
I opened the Account Before Coming to the U.S.
Common sense would dictate if you open an account before coming to the United States, and before you were U.S. person — with money you receive before you were U.S. person — you would not need to report this money to the IRS.
You will find over your lifetime the IRS does not necessarily act in accordance with common sense. In fact, the best way to think about it, is imagine what the commonsense response should be…and then determine the exact inverse – and that is how the IRS operates.
When you are reporting your foreign accounts, you are providing the US government with a snapshot of what you have for that reporting year.
It is not an account history and therefore the IRS does not care about how you receive the money, when you received the money, or if you were a U.S. person when you received the money.
The Money was a Gift
This is a nonissue. Remember, you are not reporting the sources of money or how you received it. Rather, you are reporting what the annual aggregate total maximum values are during the year, broken down by account
The Account was Only Opened For A Short Period of Time
This is also a non-issue. It is important to keep in mind that the IRS does not care why the account was open (to receive money before transferring it out of the account) or for how long it was opened (if is less than week).
If the account was open during the compliance period, and even if the account was dormant or inactive, it should still be recorded on an annual reporting statement FBAR/FATCA.
Additional Common Questions
Back To Tom and His Tax Filings
Since Tom received some bad information regarding what needs to be filed, Tom did not prepare his tax returns properly. Tom used TurboTax, but since he did not have any U.S. sourced income during his first few years in United States, he did not report any of his foreign income.
In addition, because Tom believed that the accounts were not subject to reporting (as they were opened before becoming a Green Card Holder aka before coming a US person), he did not file a Form 8938 or FBAR.
Finally, Tom also has interest in three businesses overseas, primarily real estate rental businesses he shares with his brother and sister in Australia.
The businesses are PVT LTD and therefore Tom may have to report the businesses on a form 5471 or 8938, along with possibly reporting the income (CFC and Subpart F rules apply)
Is Tom Going to Jail for Life and Face Deportation?
No. And please, this is where have to do your best to not allow fear-mongers or scare-mongers play on your weakness. They know you are in a vulnerable state and will try to scare you into believing that this is anything more than a mere basic compliance issue.
You will undoubtedly research the research the information on Google, and you will undoubtedly contact some attorneys who offer free initial telephone conversations.
The goal of these conversations is to sell you, by scaring you.
In this particular situation, Tom should have no problem getting himself into compliance safely with minimal penalties if not possibly having the penalties waived.
IRS Foreign Money Penalties
Depending on facts facts and circumstances of the noncompliance the IRS has the right to issue extremely lopsided penalties against any individual who is out of IRS compliance.
Even a cursory review of the IRS penalties and the Standard of Proof required by the IRS to prove the penalties reflects that even minor infractions can result in significant penalties.
Not Everyone Gets Penalized
We understand that as you research issues online, many attorneys and CPAs seem to enjoy the fear mongering aspect of being tax professionals – we do not.
They toss around terms like “five years in prison,” “$500,000 Fine”, or “Tax Fraud” to scare you. They do this, without providing examples of the penalties and without placing these penalties into context.
For example, if an individual was clearly non-willful, they are not going to jail for five years or being penalized millions of dollars for tax evasion.
Still, some attorneys go out of their way to unnecessarily scare individuals with relatively benign facts with jail or prison, but of course neglect the fact that the U.S. Government still must prove a person acted beyond a reasonable doubt to pursue criminal charges.
You Have Methods for Getting IRS Compliant
In reality, the IRS doesn’t issue penalties against every individual with undisclosed or unreported foreign money. In addition, the IRS offers various amnesty program to facilitate compliance.
In addition, depending on your facts and circumstances you may qualify for various alternatives to amnesty, which may result in a complete penalty waiver.
IRS Offshore Penalty List
The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:
A Penalty for failing to file FBARs
United States citizens, residents and certain other persons must annually report their direct or indirect financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the year. The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
FATCA Form 8938
Beginning with the 2011 tax year, a penalty for failing to file Form 8938 reporting the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities, and interests in foreign entities, as required by IRC § 6038D. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 3520
Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Taxpayers must also report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts under IRC § 6048. This return also reports the receipt of gifts from foreign entities under IRC § 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
A Penalty for failing to file Form 3520-A
Information Return of Foreign Trust With a U.S. Owner. Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
A Penalty for failing to file Form 5471
Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain United States persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
A Penalty for failing to file Form 5472
Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C. The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
A Penalty for failing to file Form 926
Return by a U.S. Transferor of Property to a Foreign Corporation. Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
A Penalty for failing to file Form 8865
Return of U.S. Persons With Respect to Certain Foreign Partnerships. United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests under IRC §§ 6038, 6038B, and 6046A. Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Fraud penalties imposed under IRC §§ 6651(f) or 6663
Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)
Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)
If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.
An Accuracy-Related Penalty on underpayments imposed under IRC § 6662
Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty
Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)
Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).
A person convicted of tax evasion
Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000. A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000. A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.
What Should You Do?
Everyone makes mistakes. If at some point 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 program.
Summary of IRS Offshore Voluntary Disclosure
IRS Voluntary Disclosure of Foreign or Offshore Accounts is a legal method for getting into IRS Tax and Reporting compliance before the IRS finds you first. At Golding & Golding, we limit our entire tax law practice to IRS Offshore Voluntary Disclosure.
Why IRS Voluntary Disclosure?
With the introduction and enforcement of FATCA (Foreign Account Tax Compliance Act) and FATCA penalties, coupled by the renewed interest in the IRS issuing FBAR (Report of Foreign Bank and Financial Account Form aka FinCEN 114) penalties — which are both very steep – it is typically a better strategy to be proactive and get into compliance, than to play “defense.”
FBAR penalties alone can reach ~$12,500 per account, per year (adjusted inflation from $10,000). While this is the maximum penalty, the “recommended penalty” is still $12,500 per year (usually 3-6 years).
4 Types of IRS Offshore Voluntary Disclosure Programs
There are typically four types of IRS Offshore Voluntary Disclosure programs, and they include:
- Offshore Voluntary Disclosure Program (OVDP)
- Streamlined Domestic Offshore Procedures (SDOP)
- Streamlined Foreign Offshore Procedures (SFOP)
- Reasonable Cause (RC)
We Specialize in IRS Voluntary Disclosure
We have successfully handled a diverse range of IRS Voluntary Disclosure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
Unlike other attorneys who call themselves specialists but handle 10 different areas of tax law, purchase multiple domain names, and even practice outside of tax, we are absolutely dedicated to IRS Voluntary Disclosure.
No Case is Too Big; No Case is Too Small.
We represent all different types of clients. High net-worth investors (over $40 million), smaller cases ($100,000) and everything in-between.
We represent clients in over 60 countries and nationwide, with all different types of assets, including (each link takes you to a Golding & Golding free summary):
- Foreign Mutual Funds
- Foreign Life Insurance
- Fixing Quiet Disclosure
- Foreign Real Estate Income
- Foreign Real Estate Sales
- Foreign Earned Income Exclusion
- Subpart F Income
- Foreign Inheritance
- Foreign Pension
- Form 3520
- Form 5471
- Form 8621
- Form 8865
- Form 8938 (FATCA)
Who Decides to Go OVDP
All different types of people submit to OVDP. We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, and more.
You are not alone, and you are not the only one to find himself or herself in this situation.
…We even represent IRS Staff with getting into compliance.
Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist
Our Managing Partner, Sean M. Golding, JD, LLM, EA is the only Attorney nationwide who has earned the Certified Tax Law Specialist credential and specializes in IRS Offshore Voluntary Disclosure and closely related matters.
In addition to earning the Certified Tax Law Certification, Sean also holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS.)
He is frequently called upon to lecture and write on issues involving IRS GreVoluntary Disclosure.
Less than 1% of Tax Attorneys Nationwide
Out of more than 200,000 practicing attorneys in California, less than 400 attorneys have achieved this Certified Tax Law Specialist designation.
The exam is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. It is a designation earned by less than 1% of attorneys.
Our International Tax Lawyers represent hundreds of taxpayers annually in over 60 countries.