U.S. Visa & Green Card Holder IRS Tax Returns, FBAR & FATCA Compliance
- 0.1 Green Card Holder – Tax & FBAR Compliance
- 0.2 Visa Holder – Tax and FBAR requirement
- 0.3 What is the Substantial Presence Test?
- 0.4 Summary of Substantial Presence Test
- 0.5 Out of Compliance?
- 1 IRS Voluntary Disclosure of Offshore Accounts
One of the most important aspects of U.S. tax law is understanding whether you are subject to US tax on your worldwide income, or just your U.S. “source” income only.
The most important indicator in determining whether you are taxed on your worldwide income, or U.S. source “income is whether you are considered a U.S. Person for taxes or a Foreign Person not subject to tax on your worldwide income.
Here is where it can get very confusing: For most people, even though they are United States’ Green Card Holders — they are still citizens of another country. Therefore, they may already be paying tax as a citizen of another country on passive income earned in that country (or other countries outside of the United States).
Nevertheless. they still may have to pay tax in the United States on their worldwide income.
This is true, even if when they first came to the United States (whether they currently reside in the U.S. or not) they came on a work visa, fiancée visa-or other type of visa and did not necessarily have any intent to become a U.S. “Permanent Resident.”
While they may be able to claim the Foreign Earned Income Exclusion or Foreign Tax Credit, it is still a relatively big undertaking to have to report the income in the United States, and then claim a credit or exemption — as opposed to not having to even report the income in the United States.
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)
Visa Holder – Tax and FBAR requirement
A visa holder has a potentially more complicated tax scenario. That is because of visa holder is considered a “temporary” resident of the United States. There many different types of visas depending on the purpose of the stay in the United States. Generally, because a visa is temporary, an individual is only required to report their US sourced income — not their worldwide income.
Moreover, since they are considered a foreign person they may receive certain benefits such as not having their portfolio interest taxed, not paying tax on capital gain – aside from real estate sales — and receiving severely reduced tax liability for dividends.
This can all change though once a person meets the Substantial Presence Test.
What is the Substantial Presence Test?
The Substantial Presence Test is a test that is utilized for a visa holder or other person who is neither a U.S. Citizen nor Legal Permanent Resident, but has resided in the United States for a significantly long period of time – enough to make them subject to U.S. Tax just as if they were a U.S. Citizen or Legal Permanent Resident. This is usually common when a person resides in the United States on an H1B, L1, or E2 visa.
Not all visa holders are subject to this tax. Most commonly, a student in the United States is not subject to tax liability for the first five (5) years they reside in the United States.
How does the Substantial Presence Test work?
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.
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. A summary is provided below:
IRS Voluntary Disclosure of Offshore Accounts
Offshore Voluntary Disclosure Tax law is very complex. There are many aspects that go into any particular tax calculation, including the legal status, marital status, business status and residence status of the taxpayer.
When Do I Need to Use Voluntary Disclosure?
Voluntary Disclosure is for individuals, estates, and businesses who are out of compliance with the IRS and the Department of Treasury. What does that mean? It means that if you are required to file a U.S. tax return and you don’t do so timely, then you are out of compliance.
If the IRS discovers that you are out of compliance, you may become subject to extensive fines and penalties – ranging from a warning letter all the way up to tax liens, tax levies, seizures, and criminal investigations. To combat this, you can take the proactive approach and submit to Voluntary Disclosure.
Golding & Golding – Offshore Disclosure
At Golding & Golding, we limit our entire practice to offshore disclosure (IRS Voluntary Disclosure of Foreign and U.S. Assets). The term offshore disclosure is a bit of a misnomer, because the term “offshore” generally connotes visions of hiding money in secret places such as the Cayman Islands, Bahamas, Malta, or any other well-known tax haven jurisdiction – but that is not the case.
In fact, any money that is outside of the United States is considered to be offshore; the term offshore is not a bad word. In other words, merely because a person has money offshore (a.k.a. overseas or in a foreign country) does not mean that money is the result of ill-gotten gains or that the money is being “hidden.” It just means it is not in the United States. Many of our clients have assets and bank accounts in their homeland countries and these are considered offshore assets and offshore bank accounts.
The Devil is in the Details…
If you do have money offshore, then it is very important to ensure that the money has been properly reported to the U.S. government. In addition, it is also very important to ensure that if you are earning any foreign income from that offshore money, that the earnings are being reported on your U.S. tax return.
It does not matter whether your money is in a country that does not tax a particular category of income (for example, many Asian countries do not tax passive income). It also does not matter if you are a dual citizen and/or if that money has already been taxed in the foreign country.
Rather, the default position is that if you are required to file a U.S. tax return and you meet the minimum threshold requirements for filing a U.S. tax return, then you have to include all of your foreign income. If you already paid foreign tax on the income, you may qualify for a Foreign Tax Credit. In addition, if the income is earned income – as opposed to passive income – and you meet either the Bona-Fide Resident Test or Physical-Presence Test, then you may qualify for an exclusion of that income; nevertheless, the money must be included on your tax return.
What if You Never Report the Money?
If you are in the unfortunate position of having foreign money or specified foreign assets that should have been reported to the U.S. government, but which you have not reported — then you are in a bit of a predicament, which you will need to resolve before it is too late.
As we have indicated numerous times on our website, there are very unscrupulous CPAs, Attorneys, Accountants, and Tax Representatives who would like nothing more than to get you to part with all of your money by scaring you into believing you are automatically going to be arrested, jailed, or deported because you have unreported money. While that is most likely not the case (depending on the facts and circumstances of your specific situation), you may be subject to extremely high fines and penalties.
Moreover, if you knowingly or willfully hid your foreign accounts, foreign money, and offshore assets overseas, then you may become subject to even higher fines and penalties…as well as a criminal investigation by the special agents of the IRS and/or DOJ (Department of Justice).
Getting into Compliance
There are five main methods people/businesses use to get into compliance. Four of these methods are perfectly legitimate as long as you meet the requirements for the particular mechanism of disclosure. The fifth alternative, which is called a Quiet Disclosure a.k.a. Silent Disclosure a.k.a. Soft Disclosure, is ill-advised as it is illegal and very well may result in criminal prosecution.
We are going to provide a brief summary of each program below. We have also included links to the specific programs. If you are interested, we have also prepared very popular “FAQs from the Trenches” for FBAR, OVDP and Streamlined Disclosure reporting. Unlikes the technical jargon of the IRS FAQs, our FAQs are based on the hundreds of different types of issues we have handled over the many years that we have been practicing international tax law and offshore disclosure in particular.
After reading this webpage, we hope you develop a basic understanding of each offshore disclosure alternative and how it may benefit you to get into compliance. We do not recommend attempting to disclose the information yourself as you may become subject to an IRS investigation insofar as you will have to answer questions directly to the IRS, which you can avoid with an attorney representative.
If you retain an attorney, then you will get the benefit of the attorney-client privilege which provides confidentiality between you and your representative. With a CPA, there is a relatively small privilege which does provide some comfort, but the privilege is nowhere near as strong as the confidentiality privilege you enjoy with an attorney.
Since you will be dealing with the Internal Revenue Service and they are not known to play nice or fair – it is in your best interest to obtain an experienced Offshore Disclosure Attorney.
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.)