U.S. Person For Tax Purposes (2018) – IRS International Tax Rules
U.S. Person For Tax Purposes (2018) – Foreign Income & Accounts
Understanding how U.S Tax impacts non-citizens can be very difficult, and unnecessarily complicated. There is a common misconception involving when a foreign person is considered a U.S. Person for U.S. tax purposes. Specifically, how a non-US citizen is required to pay and report taxes and foreign accounts just as if they were US citizen.
U.S. Person For Tax Purposes
Here is an example of how the process works:
U.S. Person is More than Citizenship
Excluding any issues with a business having to report in the United States, when it comes to US taxes and individuals, the analysis is relatively straightforward.
If a person is a U.S. Citizen, they are required to pay U.S. tax on their worldwide income, whether or not they reside in the United States. They are also required to file any necessary FATCA Form 8938 (Foreign Account Tax Compliance Act), FBARs (Report of Foreign Bank and Financial Account Forms), and various other informational reporting for Foreign Businesses, Foreign Corporations, Foreign Partnerships or other business ventures.
Legal Permanent Resident/Green-Card Holder
When a person is a Legal Permanent Resident or Green Card Holder they unfortunately have the same reporting requirement. In other words, once a person is considered a Legal Permanent Resident they are required to pay U.S. tax on their worldwide income, whether or not they reside in the United States.
They are also required to file any necessary FATCA Form 8938 (Foreign Account Tax Compliance Act), FBARs (Report of Foreign Bank and Financial Account Forms), and various other informational reporting for Foreign Businesses, Foreign Corporations, Foreign Partnerships or other business ventures.
Visa Holder or Foreign National
Here is where most people get confused (understandably so). Even if a person is not a Legal Permanent Resident or U.S. citizen, they are still required to file US tax returns and report their foreign accounts and assets just as if they were a U.S. Citizen or Legal Permanent Resident when they meet the Substantial Presence Test.
The Substantial Presence Test is a test that essentially “tests” whether you were “substantially present” in the United States sufficient to have toe file a U.S. tax return just as if you fell into one of the two aforementioned categories.
Typically, to meet this test a person must have been in the United States for 183 days over the last three years and at least 30 days in the present (some exceptions, exclusions, and limitations apply). It typically averages out to 121 days per year.
And, it is important to keep in mind that it is not a one to one ratio in years outside of the current. To better explain, please see the following analysis:
Substantial Presence Test
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:
Summary of 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.
Tax Liability – Substantial Presence Test
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.
*Please note, there are various exceptions, exclusions and other limitations
Out of Compliance – IRS Offshore Disclosure
Experienced IRS Offshore Disclosure Representation is crucial for a successful OVDP disclosure. There are only a handful of Law Firms that focus their entire tax practice on IRS Offshore Voluntary Disclosure (We are one of them!). We have represented several hundred clients in OVDP, Streamlined and Offshore Disclosure.
You will want to make sure you use an OVDP Attorney who has:
- Litigation Experience
- IRS Audit Experience
- 15-20 years of Attorney Experience
- An advanced Master’s of Tax Law Degree (LL.M.); and
- Either a CPA or Enrolled Agent (EA) license.
Why? Because you never know how the OVDP or Streamlined submission will go. Sometimes, a person is already under IRS investigation and may not know it. Then, when the person submits to OVDP they are rejected. In this type of situation, you need an Attorney with all the above required experience.
Using a CPA or Junior Attorney with no real experience, is not going to help (and you will then realize why the fees they charged were so low). We know this, because each year we receive many inquiries from clients seeking to retain our services after their initial OVDP or Streamlined junior tax attorney (without the experienced mentioned above) flubbed their submission and made numerous mistakes in the submission process.
Alternatively, once you are in OVDP, you may want to:
- Make an MTM Election
- Argue FAQ 55 Penalty Reductions
As a result, for this highly specialized area of law, you need an OVDP Attorney who is experienced specifically in OVDP, but also has the background and experience to fight on your behalf.
OVDP Attorney Fees
If you receive an OVDP Fee Quote from a CPA or Attorney that seems too Low…you should be careful.
That is not to say you should resign yourself to mortgaging your house for representation, but there are many CPAs and Attorneys who see a frightened human being as little more than a “Mark” or “Target.”
They will provide artificially low fee quotes to bait you in, only to request more money down-the-line. Most of the these Attorneys do not have real experience, and do not understand the comprehensive nature of an OVDP.
Golding & Golding, A PLC
At Golding & Golding, we have successfully handled numerous OVDP (Offshore Voluntary Disclosure Program) and IRS Streamlined Program applications for individuals and businesses around the globe with outstanding unreported foreign accounts ranging from $50,000.00 to nearly $40,000,000.00 in a single disclosure.
Contact us today, we can help you!
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, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
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