While every situation is unique, and each person has their own story – oftentimes the catalyst that brings an individual foreigner into the murky waters of IRS offshore tax and reporting non-compliance is common to other similarly situated taxpayers.
With tax season approaching, we want to provide a summary of how the the tax process works, and how the rules change once a person reaches various milestones on their path from student to citizen.
Not everybody will start as a student, and not everyone will become naturalized, but hopefully this summary can help provide our readers with some tax knowledge, depending where you are on the U.S. tax filing spectrum.
U.S. Tax Journey
Let’s start with the common theme that makes U.S. tax and offshore reporting so hard – worldwide income and U.S. Person status.
Worldwide Income and U.S. Person Status
To be labeled a U.S. person for tax purposes does not mean that the individual is a U.S. citizen.
This is an (understandably) common misconception. Rather, when a person is either a U.S. citizen, Legal Permanent Resident, or foreign national (but not necessarily an actual visa holder) who meets the substantial presence test, they become subject to U.S. tax on their worldwide income.
It does not matter if the individual resides outside of United States, or if the money is sourced from outside United States.
The baseline position is that a U.S. person is subject to U.S. tax and asset reporting on their worldwide income and assets.
F-1 Visa Journey Begins in College or Grad School
Many of the taxpayers that we work with first came to the United States on an F-1 visa.
The F-1 visa is a student visa. And, even if a person meets the substantial presence test while on the F-1 Visa, they are not considered a U.S. person for tax purposes during the first 5-years.
They are subject to U.S. tax on their US income, but instead of filing a form 1040, if applicable, they will file a form 1040NR (nonresident).
Two main issues we deal with:
- 1040 vs. 1040NR: if a person filed a form 1040 instead of the 1040 NR, then from a U.S. tax perspective it appears they are claiming to be a resident. This would require worldwide income and asset reporting – until the issue is resolved by fixing the incorrect tax returns.
- 5 years: The F-1 exemption from U.S. person tax status is only applicable for five years.
Oftentimes, before moving into permanent employment the individual will receive an OPT. OPT refers to optional practical training and is an offshore of the F-1 visa. It helps F-1 isa holders gain practical experience.
While OPT is technically part of the F-1 Visa, there is a some concern as to the tax status of a person on OPT.
*If you are on OPT, and especially if you are at the end of the 5-year exemption period, you should speak with experienced counsel.
Work Visa (H-1B, L-1, O-1, E-2 or E-2)
When a foreign national obtains one of these types of listed visas (or any other type of visa such as b1/b2) they are now potentially subject to U.S. tax on their worldwide income and required to report their offshore assets, investment, and accounts.
The key phraseology is whether the individual meets the substantial presence test.
When an individual who is a foreign national and on a work visa meets the substantial presence, test they will become subject to U.S. tax and reporting requirements on their global income and assets.
Intention of Becoming a Permanent Resident & Expatriation
One very important issue to consider is whether the person intends on becoming a permanent resident or not.
If a person decides they do not want to become a permanent resident, then as long as they do not meet substantial presence – they will not be subject to U.S. tax on their global income and assets.
Once a person becomes a green card holder, they become subject to U.S. tax and reporting on their global income and assets — even if they reside outside of the United States.
And, until they voluntarily relinquish their green card status (such as filing a Form I-407), they are considered a U.S. person for tax purposes.
Finally, the expatriation and exit tax rules only apply to green card holders that meet the definition of a long-term resident, and U.S. citizens — not visa holders.
A few common issues we come across:
- Substantial Presence does not require 182 days in one year. Rather, it is an aggregate total of 182 days over three years, using a weighted day-to-year model.
- In order to meet the substantial presence test a person must be in the United States for at least 30 days in the current year.
- There are some exceptions to including certain days that are used to visit the United States for interview or house searching purposes come along with some other exceptions as well.
Even if a person meets the substantial presence test, they may still be able to avoid becoming a U.S. person for tax purposes if they are able to show that they had a closer connection to one or more other countries, and file Form 8840.
Even if a person meets the substantial presence test, they may be able to meet one of the exceptions for substantial presents and not become a U.S. person for tax purposes by filing Form 8843.
An EB-5 is an investor visa.
Even though this is an investor visa, it is not exempt from the substantial presence test.
Therefore, if an individual meets the substantial presence test while on an EB-5 Visa, they become subject to US tax on their worldwide income and asset reporting.
Green Card Holder – Tax & FBAR Compliance
A Green Card holder is considered a “Permanent Resident.”
As a permanent resident, an individual is subject to U.S. tax similar to a U.S. citizen. Thus, a Permanent Resident is required to pay U.S. tax on their worldwide income.
It does not matter if the individual resides in the United States or outside of the United States (although the Foreign Earned Income Exclusion may apply for individuals residing outside of the United States).
It also does not matter if the income was sourced from the United States or in a foreign country (even if that type of income is not taxed in the foreign country — such as passive income in most Asian countries).
Therefore, if you are a Green Card Holder (or former long-term Green Card Holder who did not properly relinquish their green card) you are required to make sure that you are in tax compliance with US tax law.
This would generally mean filing a form 1040 tax return each year — unless you do not meet the threshold requirements for having to file a return.
Moreover, you also have to report your worldwide interests in items such as:
- Receipt of foreign gifts
- Ownership of foreign corporate interests
- Ownership of foreign partnership interests
- Interest in a foreign mutual fund
- Interest income earned in a foreign country
- Dividend earned in a foreign country
- Capital gains earned in a foreign country
- Inheritance received in a foreign country (possibly depending on the source of the inheritance)
Are You Out of Compliance?
If you are out of compliance and seeking to get back into compliance-or in the compliance for the first time – one of the best and safest methods is through IRS offshore voluntary disclosure.
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.