Different Types of US Immigrant Visas and Tax Status

Some of the more common visas seen by educational institutions are F-1, J-1 and M-1 visas. Other visa types that are commonly seen include; The H-1b for specialty occupations such as teachers, trainees and researchers; and H-1c for foreign nurses. The O-1 visa is issued to foreign scholars, teachers, researchers or trainees, and the TN is issued to foreign scholars, teachers, researchers or trainees arriving from Canada or Mexico under a NAFTA treaty.

 

Immigration Status and Withholding Agents

A withholding agent should know that each visa type can have different social security, Medicare and income tax withholding requirements. Let’s examine a few of the visa types previously mentioned to illustrate this point.

 

Types of Immigrant Visas

Visa types F-1, J-1, M-1, Q-1, and Q-2 wages are exempt from social security and Medicare as long as the holder is a “non-resident alien”.

H-1b, H-1c, O-1, and TN visas are subject to social security and Medicare taxes whether the holder is a resident or nonresident alien.

F, J, M, Q, H, O and TN visas assigned to a resident alien are subject to special instructions but are generally taxed under the same graduated rate as U.S. citizens. Scholarship and fellowship payments made to foreign individuals holding these visas may be subject to a variety of different treatments such as;

  • A graduated rate subject to special instructions for payment for services
  • No withholding if the payment is a qualified scholarship under section 117;
  • Fourteen percent withholding on non-service income;
  • Or a lower rate specified under a tax treaty, unless the entire payment is exempt from taxes.

As you can see, a withholding agent needs to be familiar with the status of each foreign individual and vendor before payments are ever made.

 

Documentation Required for Employment in U.S.

Normally, the first time an employer becomes aware that a worker may be a nonresident alien is when the individual submits documentation and identification for I-9 and W-4 purposes. Once foreign workers are identified on the payroll the employer should divide these workers into two groups: Resident aliens and Nonresident aliens. Resident aliens are generally subject to the same tax treatment as U.S. citizens, subject to all social security, Medicare, and federal income tax withholding. Nonresident aliens are subject to additional withholding and reporting rules specific to their unique status as a foreign worker. Generally, the wages of nonresident alien workers are also subject to Social Security, Medicare and Federal income tax, but there are exceptions. A common exception is a nonresident alien employee who claims that he or she is exempt from employment taxes because of a tax treaty.

 

Treaty Exemption for Social Security and Medicare

If a foreign worker claims a tax treaty exemption from Social Security and Medicare, the foreign individual must complete a Form 8233, Exemption From Withholding on Compensation, for the U.S. employer. The employee is to complete and provide a Form 8233 with respect to the income that is exempt under a tax treaty. Publication 515 identifies countries that have treaties with the United States. All compensation not exempt under the tax treaty will be subject to employment taxes in conjunction with the nonresident alien’s Form W-4, which is also subject to special adjustment, for the applicable number of withholding allowances claimed. A nonresident alien who fails to file a valid Form W-4 should have federal income taxes withheld at the rates pertaining to an individual who is single status and zero withholding allowances.

 

Form 8233 Tax Withholding

Even if a nonresident alien employee submits a Form 8233, it is a good business practice to secure a Form W-4 from the employee and withhold accordingly until the submitted Form 8233 is not rejected by the IRS. A final word of warning: Do not equate a foreign individual’s “residence” with “citizenship.” Just because an individual has a passport from a particular foreign country does not mean that he or she is a legal resident of that country under the laws of that country or under a tax treaty. Residency is usually defined in an article of a tax treaty and it does not follow the provisions of the Internal Revenue Code.

 

What is A U.S. withholding agent?

If you are a U.S. withholding agent for such payments, you must collect, deposit and report the income and the withholding taxes to the IRS. In certain instances, the 30 percent withholding rate may also be reduced if there are other statutory rates (see Publication 515) or the item paid is to a foreign resident covered by a tax treaty that provides for a lower rate. However, if the U.S. source income paid to a foreign person is determined to be from the conduct of a trade or business within the United States it is considered “effectively connected income” (ECI).

 

What is Effectively Connected Income?

Effectively connected income is subject to the graduated income tax rates applicable to U.S. persons and not the 30 percent withholding rate. A foreign person receiving effectively connected income is required to file a U.S. income tax return because they are conducting a trade or business within the United States. When payments are deemed to be effectively connected income, the U.S. payer, or withholding agent, has reporting requirements as opposed to a withholding obligation.

 

Therefore, a U.S. withholding agent must consider two categories of payments to foreign persons in determining its compliance responsibilities to the IRS:

  • Payments that are U.S. source non-business income (that is Fixed or Determinable, Annual or Periodic – also known as FDAP) are subject to withholding taxes; and
  • Payments that are related to a trade or business activity in the United States or Effectively Connected Income (ECI) are taxed at graduated rates.

 

Non-Business FDAP Income

If a foreign person is engaged in a trade or business in the US, income that would normally be deemed non-business FDAP income may become effectively connected income if:

  • The income is derived from assets used in or held for the use in the conduct of that trade or business; or
  • The activities of that trade or business in the US are a material factor in the realization of that income.

Hence, rather than being subject to a 30 percent withholding tax, the non-business FDAP income would be combined with the ECI income and taxed at the regular graduated tax rates.

 

Who is a U.S. Withholding Agent?

You are a withholding agent if you have control, receipt, custody, or payment of any item of income belonging to a foreign person that is subject to withholding. A withholding agent is often described as the last person in the United States who has control over the money before it is paid to the foreign person. The term “withholding agent” includes, but is not limited to individuals, U.S. corporations, foreign intermediaries, and U.S. branches of a foreign entity.

What is the Purpose of an IRS Withholding Agent?

Aside from owing the amount of tax that should have been withheld and interest, a withholding agent can face such civil penalties as:

  • The 100 percent penalty equal to the total amount of tax evaded;
  • The 20 percent accuracy-related penalty of the amount of the underpayment of withheld tax in the case of negligence;
  • A 75 percent penalty for the underpayment of withheld taxes in the case of civil fraud;
  • Additional taxes of five percent to a maximum of 25 percent for the negligent failure to file a return; and
  • Additional taxes of 15 percent to a maximum of 75 percent for the fraudulent failure to file a return.

 

 

IRS Withholding From Foreign Persons

In general, a foreign person is subject to U.S. tax on U.S. source income. Foreign “persons” include nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts. The tax generally must be withheld from the payment made to the foreign person. A withholding agent is the person responsible for withholding tax on payments made to a foreign person or non-resident alien for U.S. tax purposes. First, it is essential for any non-American to understand what U.S. Source income is.

 

What is U.S. Source Income?

The income of foreign persons subject to U.S. income tax is divided into two categories: certain income that is effectively connected with a U.S. trade or business; and certain U.S. source income that is not effectively connected with a U.S. trade or business. Effectively connected income is taxed at graduated rates. Income not effectively connected with a U.S. trade or business is taxed at a flat 30 percent rate, subject to withholding.

 

Income is subject to withholding if it is fixed or determinable annual or periodical (FDAP) income

Income is subject to withholding if it is fixed or determinable annual or periodical (FDAP) income. Some examples of FDAP income include: interest, alimony, dividends, royalties, pensions and annuities, original issue discount, and compensation for personal services. There could be other items classified as source income depending on the taxpayer’s business. In addition, a payment may be subject to withholding if it is specifically required to be withheld even though it may not constitute U.S. source income.

 

Filing Requirement for U.S. Source Income – Form 1042

Every withholding agent or intermediary who receives, controls, has custody of, disposes of, or pays any FDAP must file annually Form 1042 and Form 1042-S:

  • Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, reports the withholding agent’s aggregate withholding tax liability under the Tax Code by each week of the year and the total deposits of withholding tax made during the course of the year.
  • Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, reports the gross amount of U.S. source income paid to the foreign person, the type of income, the rate of federal tax, the type of any exemptions, the amount of federal tax withheld, and identifying information if the payment was made through a flow-through entity that was not a qualified intermediary.

A separate Form 1042-S is required for each type of income that was paid to the foreign person but only one Form 1042 has to be filed consolidating all Form 1042-S recipient information. The Forms 1042 and 1042-S must be filed by March 15 of the year following the calendar year in which the income subject to reporting was paid. Form 1042 is a calendar year tax return. If Form 1042-S is filed on paper it must be filed with Form 1042-T for transmitting purposes. All forms are filed with the IRS Center in Ogden, Utah.

 

Hire Act and FATCA Changes for Withholding

In 2010, Congress passed the Hiring Incentives to Restore Employment (HIRE) Act. The new law requires a withholding agent to deduct and withhold a tax equal to 30 percent on any “withholdable payment” made to a foreign financial institution or to a non-financial foreign entity unless certain exceptions are present. Under the HIRE Act, a withholdable payment is, among other things, any payment of interest, dividends, rents, and other payments from sources within the United States.

Withholding generally applies to payments made after December 31, 2012. Withholding is not required if there is an agreement between the IRS and the foreign financial institution to make certain disclosures. The foreign financial institution must agree, among other things, to disclose information about account holders.

 

What is FATCA Reporting?

The HIRE Act also adds a new reporting requirement for individuals. Under the HIRE Act, individuals with interests in “specified foreign financial assets” must attach to their income tax returns certain information with respect to each asset if the aggregate value of all the assets exceeds $50,000.

The HIRE Act is new and very complex. The new law also overlaps with older laws. The IRS is still working on how to implement the new rules. Our office will keep you posted of developments.

Nonresident Alien Tax Filing Status

Nonresident aliens generally are subject to U.S. income taxation only if they have U.S. source income or taxable income that is effectively connected with conduct of trade or business within United States. Election may be made to treat nonresident alien as U.S. resident so that alien may file joint return with spouse who is citizen or resident of United States. Beyond income taxes, non-resident aliens will have to contend with special estate tax rules in regards to their U.S. situs property.

 

Who is a Non-Resident Alien for Tax Purposes?

Individuals who are born or naturalized in the United States and subject to its jurisdiction are U.S. citizens. Individuals who are not U.S. citizens are aliens. An alien individual is a resident of the United States for purposes of the income tax laws if the individual has either been granted status as a permanent resident under the immigration laws or is physically present in the United States for more than 30 days during the calendar year and for more than 182 days during the current calendar year and the two preceding calendar years.  An individual who is neither a citizen nor a resident of the United States is a nonresident alien.

 

Nonresident Aliens and Paying U.S. Tax

A nonresident alien is normally subject to U.S. income tax, including the alternative minimum tax (AMT), only on income from sources within the United States and taxable income that is effectively connected with the conduct of a trade or business within the United States. A resident alien, on the other hand, is subject to U.S. income tax in the same manner as a U.S. citizen, on taxable income regardless of its geographical source. A nonresident alien who is a bona fide resident of Guam, American Samoa, the Northern Mariana Islands or Puerto Rico is subject to taxation on income in the same manner as a resident alien, except to the extent that the income is from sources within the possession of residence.

 

Filing a Joint Return with Non-Resident Alien

A husband and wife generally cannot file a joint return if either spouse is a nonresident alien at any time during the tax year. However, if one spouse is a citizen or resident of the United States, both spouses may file an election to treat the nonresident alien spouse as if he or she were a resident of the United States for the entire tax year, thereby permitting them to file a joint return. Electing spouses are taxed on their worldwide income, regardless of its source, and cannot claim the benefits of any tax treaty.

 

Spouses Making Election to File Joint Return

The spouses make the election by attaching a statement to their joint return. The spouses must file joint returns in the year they make the election, but they may file separate returns in subsequent years. The election is in effect for the tax year in which it is made, and for subsequent tax years until it is terminated.

 

Electing to Treat Nonresident Spouse as U.S. Taxpayer

The election is suspended during in any tax year in which both spouses are not citizens or residents of the U.S. Either spouse may terminate the election by revoking it.  The election is also terminated by the death of either spouse or the legal separation of the spouses under a decree of divorce or separate maintenance. There could be very powerful tax planning strategies with this technique.

 

IRS Terminating Election to Treat Nonresident Spouse as U.S. Taxpayer

The IRS may terminate the election if either spouse fails to keep and make available books, records and other information sufficient to allow the IRS to ascertain the spouses’ tax liability. If the IRS terminates the election, the couple may not make the election in subsequent tax years. Both taxpayers will be treated as filing U.S. taxes.

Giving Up U.S. Citizenship or Long Term Residency

A U.S. citizen who gives up U.S. citizenship or a long-term U.S. resident who gives up his residency status and who is a covered expatriate is subject to a mark-to-market rule under which his property is deemed to be sold on the day before the expatriation and he is taxed on the gain in excess of an inflation adjusted amount of $680,000 for 2014 ($668,000 for 2013).

 

Who is a Covered Expatriate?

A covered expatriate is any U.S. citizen who relinquishes citizenship, or any long-term U.S. resident who ceases to be a lawful permanent resident of the U.S, who meets one of the following tests:

(1) the individual’s average annual net income tax for the period of 5 tax years ending before the date U.S. citizenship or residency is lost is greater than an inflation adjusted amount that is $157,000 for 2014 ($155,000 for 2013),

(2) the net worth of the individual as of the date U.S. citizenship or residency is lost is $2,000,000 or more, or

(3) the individual fails to certify under penalty of perjury that he has met the requirements of the U.S. tax code for the 5 preceding tax years or fails to submit whatever evidence of his compliance that IRS requires.

All the property of a covered expatriate is treated as sold on the day before the expatriation date for its fair market value. Any gain on the deemed sale is recognized notwithstanding any other nonrecognition rules and is taken into account for the tax year of the deemed sale, but losses may not be recognized if they would otherwise not be recognized. The basis of the assets will be adjusted by the amount of gain or loss taken into account.

 

Consequences of being Covered Expatriate

A covered expatriate may make an election to defer the payment of tax attributable to any property that is deemed sold under the mark-to-market rule. A tax deferred under these rules bears interest from the due date of the taxpayer’s return for the expatriation year and is permitted only if the expatriate provides adequate security.

Deferred compensation items of a covered expatriate are subject to special rules. Eligible deferred compensation is subject to 30% withholding. The present value of deferred compensation that is not eligible deferred compensation is treated as received by the covered expatriate on the day before the expatriation date as a distribution. In addition, deferred compensation items that would otherwise not be taken into account under Code Sec. 83 will be treated as becoming transferable and not subject to a substantial risk of forfeiture on the day before the expatriation date.

 

What happens if people expatriate?

For individuals who expatriated after June 3, 2004 and before June 17, 2008, the above rules do not apply. Instead, Code Sec. 877 applies under which individuals who meet certain monetary thresholds are subject to regular U.S. income tax on their worldwide income for ten years following the date of expatriation.

 

Foreign Tax Credit and Completing Form 1116

US citizens and residents determine their US tax considering the income from all sources around the world. This sometimes results in US citizens end up paying double tax on the same income: the government of the foreign country where it originated income and also the US government.

 

Why does the Foreign Tax Credit Exist?

The foreign tax credit was created to help taxpayers avoid this double tax. If you are living outside of the United States or have income outside of the United States, it is very important to become familiar with the foreign tax credit Form 1116. Properly claiming foreign tax credits can significantly reduce the amount of taxes owed the the U.S. Government.

 

What is the Foreign Tax Credit (FTC)?

The foreign tax credit allows taxpayers a credit for taxes paid to the government of the foreign country where the income originated and is subject to US tax. For residents of Puerto Rico, the foreign tax credit reduces the liability fully or partially taxpayer so paid or accrued during the year to Puerto Rico. The foreign tax credit is completed for Form 1116 for individual taxpayers. In certain circumstances, it might be best for an individual taxpayer to claim the foreign earned income exclusion instead of using foreign tax credits.

 

Who Can Take the Foreign Tax Credit (FTC)?

US citizens living in Puerto Rico compute both taxes, the US and in Puerto Rico based on their income from all sources. These taxpayers can take the foreign tax credit to reduce your tax liability US.

To determine when the taxpayer can take the foreign tax credit, you must know if the taxpayer is cash basis or accrual basis:

  • A cash basis taxpayer reports income when currently receives, and report expenses when they are paid. Most people who file a tax return are cash basis.
  • Accrual basis taxpayer when computing the income that they earn now. Its deductions are computed when the debts are incurred, but not necessarily paid.

Most individual taxpayers are cash basis taxpayers. Cash basis taxpayers can elect to use the accrual method for determining the foreign tax credit. However, once taken this option, the taxpayer must use the equity for foreign tax credit on all future tax returns method.

Cash basis taxpayers can choose to take the foreign tax credit for taxes in Puerto Rico in the year in which these taxes were paid or accrued.

  • If you take credit for the taxes on income in the year they were paid, then they can claim payments and withholdings as a foreign tax credit. Additional taxes paid by other government contributions to Puerto Rico for that year are not included.
  • If you take the foreign tax credit the year in which the taxes were accrued, then they can claim all your tax liability of Puerto Rico to December 31 for foreign tax credit, regardless of whether or not they have paid taxes.

Most employees of the US government living in Puerto Rico used to determine the cumulative foreign tax credit method. Because Puerto Rico taxes accumulate in December 31 and paid after year end.

 

Completing Form 1116 for Foreign Tax Credit

At the top of Form 1116, Foreign Tax Credit (Individual, State, or Managed), taxpayers indicate the type of foreign income they received. The most common categories of income that you will find are:

  • Passive income including dividends, interest, royalties, rents, and annuities
  • General category income includes wages, salaries and compensations outside of an individual as an employee

To calculate the maximum amount of foreign tax credit a taxpayer can claim you should compare your foreign income that was taxed by the US his total taxable income US.

 

Calculating Foreign Tax Credits on Form 1116

Some taxpayers are compensated for services performed partly within and partly outside the US When you can not segregate their compensation, you spread the income timebase. Determine how much income should be regarded as originating from abroad multiplying it by the fraction:

  # Days worked outside the US this entry

  Total compensation X = foreign income
  Total of days worked by this income

 

Taxpayers who receive pension income by working part conducted in the US and partly in Puerto Rico or another foreign country, foreign income should be calculated using the formula:

# Years in a foreign country

  X = Number of annual pension abroad
 Total years in service for pension

 

When calculating the income subject to tax originating abroad for foreign tax credit, subtract expenses related to foreign income, losses, etc., foreign income.

In line 2, enter the deductions that are definitely related to foreign income such as:

  • Business Expenses
  • Moving expenses
  • Contributions to IRA and Keogh
  • Professionals and by union dues

In lines 3a and 3b, type the deductions that are not definitely related to a specific input as:

  • Certain itemized deductions or the standard deduction
  • Other deductions (eg deduction for food pensions paid)

No modification is necessary for personal exemptions.  For taxpayers who do not itemize their deductions, online 3a, writes:

  • Your standard deduction or
  • The allowable portion of your standard deduction (line 2d Publication 1321 worksheet) for taxpayers who received free from income tax under IRC 933

For taxpayers who itemize their deductions, online 3a, scores certain detailed as deductions:

  • Medical Expenses
  • Real Estate Tax

These amounts were taken from lines 4 and 6 of Annex A and have already been modified due to exempt from income tax under IRC 933. In line 3b, list some other deductions that are not definitely related to a specific type of income, such as alimony (Form 1040, line 31a).

For these assignments only, overseas gross income on line 3d and 3e gross income online:

  • Includes exempt and excluded income (such as tax-exempt income Puerto Rico)
  • Do not include COLA

3d online scores overseas gross income for income category labeled at the top of Form 1116. In line 3e, scores gross income from all sources and categories, both US and abroad.

If the taxpayer only has income of Puerto Rico and only this filing Form 1116 for a category, 3d and 3e line will be equal.

Interest expense is subject to a separate amendment in line 4.

Taxpayers who have gross income exempt from tax in Puerto Rico:

  • $ 5,000 or less may assign all your expenses for mortgage interest income US and not have to include it here.
  • More than $ 5,000, divide the deductible on your mortgage interest (including points) using the method of gross income. Use the worksheet in the instructions for Form 1116.

Notice: If an expense or deduction is not related to a specific type of income, should be assessed regardless of when, where, and that income was paid.

 

Specifics of Completing Form 1116

Use Form 1116, Part II, to establish the number of qualified foreign taxes paid or accrued during the year.

This table has instructions on how to complete each line in Part II.

Column (s) Addresses
Box hyi Indicated in the box if the taxpayer is claimed taxes paid or accrued.
j Report date on which taxes were paid or accrued. For cash basis taxpayers using the accrual method writes the last day of this year.
k to n Ignore these columns to taxpayers who are claiming tax paid only Puerto Rico; these lines are for taxpayers who paid foreign tax in foreign currency.
or until r Write the type of income for which the taxpayer paid foreign tax. R Use column for taxes paid or accrued salaries and pensions.

Some taxpayers, such as those with salary and pension income must complete more than one Form 1116. For those taxpayers, includes only the amount of foreign tax in the form of income for the type of Form 1116 that is used.

 

Calculate the Foreign Tax Reduction

Use Form 1116, Part III, to implement the comprehensive formula of limitation. This determines the maximum amount in foreign tax credit the taxpayer.

This table has instructions on how to complete each line in Part III.

Line (s) Addresses
9 Enter the amount of foreign tax Part II
10 Overseas tax transferred from other years; Please refer to Publication 514 for more information
12 Report reduction in foreign tax, if applicable; this is discussed later in this topic
14-21 Calculations to determine the maximum amount of credit
22 Reports the Foreign Tax Credit allowed; this is the lesser of:

  • Line 14: foreign tax credit available
  • Line 21: Limiting

On Form 1116, Part II all taxes paid or accrued Puerto Rico in both income exempt and not exempt from tax, can be displayed in calculating the credit. However, taxes paid in tax-exempt income are not allowed as part of the foreign tax credit. Tax-exempt income allocated to Puerto Rico should be included in Part III, line 12, as a reduction in foreign tax.

To find the reduction in foreign tax the taxpayer, use this formula:

Puerto Rico income not subject
to federal taxation under IRC 933
Deductible expenses
assigned to this entry


x Tax paid or accrued to Puerto Rico
Total taxable income
in Puerto Rico
Deductible expenses
assigned to this entry

Summary of Appropriations Separate Parts III

Use Form 1116, Part IV, to summarize the credit.

If the taxpayer claimed:

  • One category of foreign income, write the amount from line 22 on line 28 and then complete line 30
  • More than one category of foreign income and has a multiple Forms 1116, complete Part IV in only one of them; for these taxpayers, complete lines 23 through 30

 

General Summary of U.S. Immigration Terms

There are many different terms used in an immigration context and a tax context. It is important to understand the immigration terms that are used by the IRS. This is essential when filing taxes as an immigrant in the United States.

 

IRS Immigration Term Definitions

  • Alien – An individual who is not a U.S. citizen or U.S. national. For Income tax purposes, aliens are classified as Residents or Nonresidents.
  • Bona fide Resident – A residence established in a foreign country or countries for an uninterrupted period which includes an entire year that extends into the current tax year.
  • Dual Status – Aliens who are both Residents and Nonresidents of the U.S. within the same tax year.
  • Exempt Individual – Aliens who, because of the terms of their visa status, are not considered to be “present in the United States.” For purposes of the Substantial Presence Test.
  • Exempt Status – A visa status that provides for a defined period of time in which the days an alien is physically present in the U.S. are not counted for purposes of the Substantial Presence Test.
  • Expatriation Tax – An additional tax that may apply to US citizens who have renounced their citizenship and long-term residents who have ended their US resident status for federal tax purposes. Different rules apply according to the date upon which you expatriated.
  • Green Card – An alien registration card issued by U.S. Citizenship and Immigration Services (USCIS) giving an individual the privilege, according to the immigration to the immigration laws, of residing permanently in the United States as an immigrant.
  • Taxpayer Identification Number – A unique number used by individuals and other tax entities to file tax forms with the IRS.
  • Individual Taxpayer Identification Number (ITIN) – A tax processing number issued by the Internal Revenue Service. It is a nine-digit number that always begins with the number 9. ITINs are for federal tax reporting only, and are not intended to serve any other purpose. IRS issues ITINs to help individuals comply with the U.S. tax laws, and to provide a means to efficiently process and account for tax returns and payments for those not eligible for Social Security Numbers (SSNs). An ITIN does not authorize work in the U.S. or provide eligibility for Social Security benefits or the Earned Income Tax Credit. NOTE: ITINs issued after December 31, 2012 will expire after 5 years from the date when it is issued. At the end of the expiration period, you must reapply for a number.
  • Nonresident Alien – An alien who is temporarily residing in the U.S., a resident alien who has abandoned permanent residence in the U.S. or an alien who has never been in the U.S.
  • Resident Alien – Aliens admitted to the U.S. under permanent immigration visas are generally resident aliens and meet the substantial presence test or lawful permanent residency test. (Green Card Test)
  • Substantial Presence Test – A rule applied in determining if an alien is a U.S. Resident for tax purposes. Generally, an individual meets the substantial presence test if the individual was in the United States for at least 31 days during the current calendar year and was present in the United States for at least 183 days during the current year and the two preceding calendar years. (Note: For purposes of the substantial presence test, an individual does not count days of temporary presence in the United States under certain visas.)
  • Social Security Number (SSN) – A nine-digit number issued by the Social Security Administration to U.S. Citizens and aliens permitted to work in the U.S. Treaty Benefits – Provisions of a tax treaty that allow for various items of tax relief or responsibility not provided for under general tax laws.
  • Nonimmigrant Visas – Allows a nonimmigrant to enter the United States in one of several different categories, which correspond to the reason the nonimmigrant was allowed to enter the United States.
  • Nonimmigrant – An alien who has been granted the right to reside temporarily in the United States. Immigrant – An alien who has been granted the right to reside permanently in the United States and work without restrictions. Also known as a Lawful Permanent Resident (LPR), they are eventually issued a “green card”. Passport – An official government document that certifies one’s identity and citizenship and permits a citizen to travel abroad.
  • U.S. National – An individual who, although not a U.S. citizen, owes his/her allegiance to the United States. U.S. nationals include individuals born in American Samoa or the Commonwealth of Northern Mariana Islands. U.S. Citizen – An individual born in the United States, Puerto Rico, Guam or the U.S. Virgin Islands, or an individual whose parent is a U.S. citizen, or a former alien who has been naturalized as a U.S. citizen.

Offshore Voluntary Disclosure Program OVDP

The IRS has reopened the offshore voluntary disclosure program (OVDP) to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs. The newest program is similar to the 2011 program in many ways, but with a few key differences. Unlike the 2011 program, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers or decide to end the program entirely at any point.

 

What is Offshore Voluntary Disclosure Initiative (OVDI)?

Under the 2011 Offshore Voluntary Disclosure Initiative (OVDI), the penalty framework required individuals to pay 25-percent of the amount in the foreign bank account in the year with the highest aggregate account balance covering the 2003 to 2010 period. The IRS also created a new penalty category of 12.5-percent for “small offshore accounts.” Taxpayers whose offshore accounts or assets were less than $75,000 in any calendar year covered by the OVDI qualified for this lower rate. In addition, some taxpayers qualified for a 5-percent penalty, including taxpayers who did not open the foreign account, or cause the account to be opened, if additional requirements were met; and foreign residents who were unaware that they were U.S. citizens.

 

OVDI Penalty Structure

The overall penalty structure for the new program is the same as that for the 2011 program, except for taxpayers in the highest penalty category. For OVDP, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. Some taxpayers will be eligible for 5-percent or 12.5-percent penalties; these remain the same in the new program as in 2011.

 

How to enter the offshore disclosure program

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years, as well as pay accuracy-related and/or delinquency penalties. Taxpayers who have come forward to make voluntary disclosures since the 2011 program closed will be treated under the provisions of the new OVDP.

 

OVDP Penalties

The OVDP can be a significant benefit to affected taxpayers. Penalties outside the program can be onerous and can include, among others: penalties for failing to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR); civil penalties; penalties for failing to file a return; and accuracy related penalties. In addition, criminal prosecution may be a risk.

 

What are the offshore disclosure penalties?

The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations, including dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.

Form 8938 FATCA Form Foreign Asset Reporting

FATCA Form 8938 is used to report your specified foreign financial assets if the total value exceeds different thresholds.

 

Who must file the FATCA Form 8938?

Form 8938 is applicable to U.S. citizens, U.S. individual residents, and a very limited number of nonresident individuals who own certain foreign financial accounts or other offshore assets (specified foreign financial assets) must report those assets. This form is one of the common expat tax forms and must also be filed along with. Form 8938 for 2014 must be filed with the taxpayers tax returns. The FBAR form is filed at another time.

 

What is FATCA Form 8938?

The Form 8938 is required if a person has at least US$50,000 in total foreign financial assets at any time during the year. (There are higher thresholds for taxpayers who are living outside the US.) The Form 8938 is similar in concept to the foreign bank account report. But there are some differences. Form 8938 asks about foreign financial assets. A foreign account (such as a checking, savings or investment account) is a foreign financial asset. Any financial assets that are not held through an account (such as stock owned directly) may also need to be reported on the Form 8938. This could happen when you receive share certificates.

 

Difference between FBAR and Form 8938

Many people ask what the difference is between the FBAR and Form 8939. Both are closely are different, but more people will probably file the FBAR than Form 8938 in 2014. One report is the foreign bank account report (TD F 90.22-1). The other report is Form 8938. The foreign bank account report is filed with the US Treasury, the Form 8938 is filed with the IRS along with the rest of the tax return.

IRS form 8938 is a filing that goes with your return, and lists any foreign assets you have over $50k at the end of the year (or over $75k at any point during the year). Those amount are raised to 100k / 150k for married filing joint. This includes stock, loans to foreign individuals, foreign estates, bank accounts, etc.

 

What is FinCEN 114?

The FinCEN 114 is filed with the treasury department in June, and is a listing of all foreign bank accounts you have signature authority over, even if you do not have any rights to the money. Form 8938 is only required for certain foreign financial assets, including bank accounts and interests in entities. You don’t have to file the 8938 if you own certain assets like land or gold directly.

There are also exceptions to filing form 8938 made for certain trusts and assets held by bona fide residents of U.S. possessions. One important exception applies to an interest in a social security, social insurance, or other similar program of a foreign government. If you have any questions about the types of assets that are excluded from the definition of specified foreign financial asset, please contact our office.

Beyond the FBAR and Form 8938, American expats may be able exclude some or all of their wages from US taxes using the foreign earned income exclusion (see Form 2555 and Publication 54).

 

IRS Resources for 2014 Form 8938

The IRS anticipates issuing regulations that will require a domestic entity to file Form 8938 if the entity is formed or used to hold specified foreign financial assets and the total asset value exceeds the appropriate reporting threshold. Until the IRS issues such regulations, only individuals must file Form 8938. For more information about domestic entity filing, see Notice 2013-10.

How to Value Foreign Financial Assets for FATCA Form 8938

Taxpayers will need to determine the value of their specified foreign financial assets. Generally, the IRS has explained that specified individuals may rely on periodic account statements for the tax year to report a financial account’s maximum value unless the taxpayer knows or has reason to know that the statements do not reflect a reasonable estimate of the maximum account value during the tax year. The IRS has provided guidance on valuing other types of specified foreign financial assets.

 

Failure to File Form 8938?

Remember, failure to file Form 8938 can lead to large penalties. There is a failure to file (Form 8938) penalty of $10,000 and an additional penalty of up to $50,000 for continued failure to file after notification by the IRS.

Filing 2014 FBAR on FinCen 114 by June 30 2015

When American expats are their 2014 tax returns, it is very important that they also do not forget about filing their 2014 FBAR by June 30, 2015. If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding certain thresholds, the BSA may require you to report the account yearly. The big change is that FinCEN Form 114 supersedes TD F 90-22.1

 

Filing 2014 FBAR on FinCen 114 by June 30 2015

The IRS continues to focus on reporting foreign bank accounts. Filing the FBAR properly on FinCEN Form 114 will be more important than ever before. Now that the FBAR forms are filed electronically, it will be much easier for the IRS to check data with banks who are reporting this through the Foreign Account Tax Compliance Act (FATCA). As FATCA compliance becomes more prevalent amount international banks, it will be interesting to see how to see how the IRS uses it to find foreign bank accounts of Americans.

 

FinCEN Form 114 supersedes TD F 90-22.1

In March 2012, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced a one-year exemption from mandatory electronic filing of the FBAR. The exemption for electronic filing of the FBAR was available until July 1, 2013, and is now considered ended unless the Treasury Department announces another extension.

The 2014 is a separate document that is not filed with the IRS, but rather filed with another Department of the Treasury division that enforces financial crimes. In 2013, the FBAR got a new name and is now known as FinCen Form 114. Since the new FinCen 114 form is not filed directly with the IRS, it can be something that taxpayers easily miss if they have foreign financial assets and are required to report them on the FBAR for 2014. It is important to remember that if you filed TD F 90-22.1 before, you must currently file FinCen Form 114.

 

Why File an FBAR in 2014?

This form is not that complicated and requires that the taxpayer list their foreign bank and financial holdings. The taxpayer should report the highest balance in these foreign accounts. It should be the best practice to when in doubt report foreign financial assets on the FBAR form. Failure to file an FBAR in 2014 can lead to substantial penalties that could of been easily avoided by filing the FinCen form on time. The penalties certainly can be significant. They can be up to $10,000 for even a non-willful failure, and that’s a penalty that applies per account. For example, if someone had 10 bank accounts that were not properly reported on their 2014 FBAR they could be liable for up to $100,000 in penalties!

Thus, the FBAR is relevant to both American expats (U.S. Citizens living abroad) and also to inpats (foreign citizens who have kept bank accounts in their home countries.).

 

Filing 2014 FBAR with FinCen 114

The e-filing system allows the filer to enter the calendar year reported, including past years, on the online FinCEN Report 114. It also offers filers an option to “explain a late filing” or to select “Other” and enter up to 750-characters within a text box to provide a further explanation of the late filing or to indicate whether the filing is made in conjunction with an IRS compliance program.

Individual filers can now file their FBAR, now known as Form 114, online with the following link:

http://bsaefiling.fincen.treas.gov/NoRegFBARFiler.html

 

Instructions for filling out the electronic FBAR for 2015 are here:

www.fincen.gov/forms/files/FBAR%20Line%20Item%20Filing%20Instructions.pdf

 

More Information About Foreign Financial Assets on 2014 FBAR. The IRS held a “webinar” on June 4, 2014 devoted to the subject of the new electronic FBAR filing requirements. The video recording (about 1 hour) is visible here: “Reporting Foreign Financial Accounts on the Electronic FBAR”

 

What is Form 8938 and FATCA?

When filing an FBAR, it is important not to forget about form 8938. American expat taxpayers may need to file this form in addition to the FBAR if their foreign financial assets exceed a certain threshold. New Form 8938, Statement of Specified Foreign Financial Assets, is similar to the FBAR but has some important differences. The threshold for filing Form 8938 is higher than the FBAR (and the threshold varies depending on the taxpayer’s status and location).  Form 8938 also applies – at this time – to only specified individuals and covers only specified foreign financial assets. This form is also known as the FATCA form and came into effect due to the FATCA law on foreign bank accounts that affects Americans living abroad.