Unintentional U.S. Tax Status - Worldwide Income & Reporting

Unintentional U.S. Tax Status – Worldwide Income & Reporting

Unintentional U.S. Status and Worldwide Income & Reporting

Unintentional U.S. Status and Worldwide Income & Reporting: It is not difficult (at all) for a foreign national who is neither a U.S. citizen nor legal permanent resident (green card holder) to unintentionally become subject to U.S. tax as if they were.  The problem lies in what is referred to as substantial presence. If a foreign national visits the United States often enough and takes residence in the U.S. he or she may become subject to US tax a worldwide income reporting requirements. The tax rules and requirements are similar to a U.S. citizen or legal permanent resident.

Unintentional U.S. Status

Unintentional U.S. status is an unfortunate consequence of visiting the U.S. for long-stretches of time, over a short period. As a result,  “An alien may become a resident alien by passing either the green card test or the substantial presence test”

Still, even if a foreign person meets the substantial presence test, if they can prove they have a closer connection with a different country – they may be able to avoid U.S. tax and reporting.

Examples of Inadvertently Becoming a U.S. Person

Here are three common examples that we deal with often:

H-1B Visa Overstayed

David came to the U.S. on an H-1B visa from India. He planned on staying for a few months, on a temporary project. David ended up staying in the U.S. for several years, and even applying for his green card. He has close to $600,000 in Indian bank accounts, FD, Mutual Funds, LIC and PPF — but never reported nor paid tax in the U.S. on the Indian-sourced income.

B1 & B2 Visa

Michelle and her husband are new grandparents from Taiwan (congratulations!). They received a B1/B2 visa to travel to the U.S to visit the grandkids. They planned on staying only a few months each year, but it looks like baby #2 is on the way. Michelle and her husband ended up staying in the U.S. 9-months in the current year – which excludes them from the closer connection exception.

Making matters worse, Michelle received a large payout for various capital gains on stock sales.

Expired Visa

Scott is a consultant from the U.K. He came to the U.S. on a visa that expired. He has been living in the U.S. for several years. Scott thought he could game the system, since he is paid from clients outside the U.S. He thought he could escape U.S. tax, even though he is a sole proprietor.

Recently, Scott learned that as a foreign national who meets the substantial presence test, he is now subject to U.S. tax on his worldwide income.

Exception for a Closer Connection to Another Country

When a non-U.S. Citizen or Legal Permanent Resident meets the substantial presence test, they can try to avoid substantial presence by meeting the closer connection exception with Form 8843.

As provided by the IRS:

Even if you meet the substantial presence test, you can still be treated as a nonresident alien if you:

– Are present in the United States for less than 183 days during the year,

– Maintain a tax home in a foreign country during the year (Refer to Chapter 28 of Publication 17 for a discussion of the tax home concept), and

– Have a closer connection during the year to one foreign country in which you have a tax home than to the United States (unless you have a closer connection to two foreign countries, discussed next).

For determining whether you have a closer connection to a foreign country, your tax home must also be in existence for the entire current year, and must be located in the same foreign country for which you are claiming to have a closer connection.

How to Show a Closer Connection to a different country?

As provided by the IRS:

You can demonstrate that you have a closer connection to two foreign countries (but not more than two) if you meet all of the following conditions:

– You maintained a tax home beginning on the first day of the year in one foreign country,

– You changed your tax home during the year to a second foreign country,

– You continued to maintain your tax home in the second foreign country for the rest of the year,

– You had a closer connection to each foreign country than to the United States for the period during which you maintained a tax home in that foreign country, and

– You are subject to tax as a resident under the tax laws of either foreign country for the entire year or subject to tax as a resident in both foreign countries for the period during which you maintained a tax home in each foreign country.

How to Establish a Closer Connection

You will be considered to have a closer connection to a foreign country than the United States if you or the IRS establishes that you have maintained more significant contacts with the foreign country than with the United States.

In determining whether you have maintained more significant contacts with the foreign country than with the United States, the facts and circumstances to be considered include, but are not limited to, the following:

  • The country of residence you designate on forms and documents
  • The types of official forms and documents you file, such
  • The location of: Your permanent home; family, personal belongings, business activities, and more

Who Cannot Use the Closer Connection?

There are exclusions to the test, which prevents certain individuals from applying for the exception:

You were present in the United States 183 days or more in calendar year 2019. 

You are a lawful permanent resident of the United States (that is, you are a green card holder.

You have applied for, or taken other affirmative steps to apply for, a green card; or have an application pending to change your status to that of a lawful permanent resident of the United States.

U.S. Status with Unreported Income & Accounts?

Golding & Golding represents clients worldwide in over 70-countries exclusively in Streamlined, Offshore and IRS Voluntary Disclosure matters. We have successfully completed more than 1,000 streamlined and voluntary disclosure submissions.

How to Hire Experienced PFIC Counsel?

Generally, experienced attorneys in this field will have the following credentials/experience:

  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA
  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience

How to Hire Experienced Streamlined Counsel?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 Streamlined Domestic Offshore Procedures. Contact our firm today for assistance with getting compliant.

Golding and Golding, Board-Certified Tax Law Specialist

Golding and Golding, Board-Certified Tax Law Specialist

Golding & Golding: Our international tax lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70+ different countries. Managing Partner Sean M. Golding is a Board-Certified Tax Law Specialist Attorney (a designation earned by < 1% of attorneys nationwide.). He leads a full-service offshore disclosure & tax law firm. Sean and his team have represented thousands of clients nationwide & worldwide in all aspects of IRS offshore & voluntary disclosure and compliance during his 20-year career as an 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. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
Golding and Golding, Board-Certified Tax Law Specialist