- 1 IRS International Individual Tax Matters
- 2 U.S. Taxation of Green Card Holder
- 3 U.S. Person vs. U.S. Citizen
- 4 Green Card Holder Living Abroad
- 5 Giving up Green Card Holder Status
- 6 Green Card Holder Status
- 7 Covered Expatriate
- 8 Penalties for Non-Compliance
- 9 Specific Offshore Penalties
IRS International Individual Tax Matters
Common IRS Individual Tax Matters impacting Green Card Holders typically include Income Tax Filing, FBAR & FATCA. A Green Card Holder is another term for Legal Permanent Residency, and considered a U.S. Person for U.S. Tax purposes. In nearly all situations, a Green Card Holder will be subject to U.S. Tax in the same way that a U.S. Citizen will be taxed.
Therefore, it is crucial that Green Card Holders have a basic understanding of key IRS Tax issues, including:
U.S. Taxation of Green Card Holder
U.S. Taxation of Green Card Holder is a complex area of law. Generally, Green Card Holders have the same U.S. tax and offshore reporting requirements as U.S. Citizens; the general phrase is Offshore Tax Compliance and/or International Tax Law.
This may come as a surprise to individuals who have Green Card Holder status, only recently came to United States and may have believed that money they earn outside of the United States either currently (or before they were considered a U.S. person) is not taxable by the US Government.
U.S. Person vs. U.S. Citizen
This is an issue that comes up often. So much so, that we dedicated an entire article to the distinction between a U.S. person and a U.S. citizen for tax purposes. Essentially, when a person is a U.S. person, they are considered similar to a U.S. citizen for tax purposes, and therefore they must pay tax on their worldwide income.
It does not matter that the Green Card Holder is a citizen of a foreign country. It also does not matter that the investments and accounts that theGreen Card Holder may have were obtained prior to that person becoming a US Person.
All that matters, is that the individual who is a Green Card Holder has US status as a US person. That is the baseline position in conducting a tax analysis.
For all intents and purposes, if a person is a Green Card Holder then they are considered a “permanent” resident of the United States and therefore must pay tax on their worldwide.
Green Card Holder Living Abroad
If a person is considered a Green Card Holder then their country of residence is not dispositive as to whether they are subject to US tax on their worldwide Income. Merely because someone who has obtained US person status resides abroad does not impact their requirements to file and pay US tax (along with reporting their foreign accounts).
If a person is a Green Card Holder and resides outside of the United States, they may qualify for the foreign earned income exclusion and/or apply foreign tax credits to income they earn overseas, but does not eliminate the requirement to file.
Giving up Green Card Holder Status
When a person relinquishes their Green Card Holder it will impact whether they have to file taxes going forward. With that said, simply throwing out for sending back a green card is not automatically eliminate US income tax or offshore reporting requirements. The Internal Revenue Service and US government do not make it that easy.
Green Card Holder Status
A person is usually considered to be a Long Term Green Card Holder in which they have resided in the United States for at least eight of the last 15 years. When a person has resided in the United States for at least eight of the last 15 years, there are certain filing requirements they must meet when it’s time to give up their green card.
It is still called “expatriation” even though the person is not actually a US Citizen.
If a person is a Green Card Holder then the big question will become whether they qualify as a covered expatriate. If the person is a covered expatriate and they may be subject to significant tax liability when exiting the United States and relinquishing their Legal Permanent Resident status.
The individual must file a form 8854, and provide the necessary information regarding their financial background Key factors include:
- Total value of worldwide assets
- Annual tax liability Amount
- Whether they can certify that they have been in tax compliance for the last five years
The analysis of these factors will determine whether they will have a tax liability on the way out aka exit tax once they leave the United States and relinquish their green card.
Penalties for Non-Compliance
A major issue fora Green Card Holder to contend with is what to do when they find out that the last three, five, 10, or 20 years that they’ve been residing in the United States, they should have been paying US tax on their worldwide income, and should have been reporting foreign accounts.
For most individuals, the safest and most effective method for getting into compliance is through one of the IRS Offshore voluntary disclosure programs. It will typically help eliminate significant fines and penalties that the IRS may issue against the person.
Specific Offshore Penalties
The reason why is so important is because the IRS has taken to issuing gargantuan penalties against individuals whose issues seem relatively minor (Read: is the world going to explode because Marty didn’t report his foreign account?)
When it comes to penalties, the IRS has extreme leeway. On the one hand, if a person can show reasonable cause then often times penalties will be waived. On the other hand, the IRS has the right to issue penalties which can reach 100% value of the foreign account in a multiyear audits scenario (noting, that up until recently the IRS issued 300% penalties for unreported FBARs, when a person was found to be willful).
The following is a summary of penalties as published by the IRS:
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.
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.
Underpayment & Fraud Penalties
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.
Even Criminal Charges are Possible…
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 is subject to a prison term of up to five years and a fine of up to $250,000. 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.