IRS International Tax Guide – Legal Permanent Residents & Visas
- 1 U.S. International Tax Guide
- 2 IRS Tax Survival Guide
- 3 IRS Offshore Tax Lawyers – About Krantz Attorneys, A PLC
- 4 Are you a Legal Permanent Resident?
- 5 U.S. Visa Holder & Substantial Presence Test
- 6 Who is a U.S. Person?
- 7 Do You File Form 1040 or 1040 NR?
- 8 When is the 1040 Filing Due Date?
- 9 What if I Reside Overseas?
- 10 What do I Include on my Tax Return?
- 11 What is Worldwide Income?
- 12 What is Worldwide Reporting?
- 13 What if the Income is Tax-Free?
- 14 Foreign Earned Income Exclusion
- 15 Foreign Tax Credit
- 16 Form 8833 Treaty Position
- 17 Form 8840 Closer Connection Exception
- 18 What if I don’t File a U.S. Tax Return?
- 19 What if I give up my U.S. Legal Status?
- 20 Interested in Filing under IRS Amnesty Procedures?
IRS International Tax Guide – Legal Permanent Residents & Visas
International Tax is hard, and the IRS does not make it any easier — especially for legal permanent residents and U.S. visa holders, who are new to the U.S. tax system.
U.S. International Tax Guide
At Krantz Attorneys we work with hundreds of legal permanent residents (Green card holders) and U.S. visa holders each year, on matters involving international & offshore reporting of foreign accounts, assets, investments, and income.
And, when many of our clients learn for the first time that they may be out of compliance with the IRS — they all tend to have the same common sense first question:
But nobody told me I had to Report foreign accounts and income when I came to the U.S.?
IRS Tax Survival Guide
We agree with our clients, that it is altogether unfair that the IRS requires a “new” U.S. person to have a seemingly intricate knowledge of U.S. taxes (especially when considering the complexities of Offshore/International tax) just because they now have U.S. status.
Therefore, we wanted to provide a basic, introductory “virtual’ pocket guide to help new U.S. Permanent Residents and U.S. Visa Holders, regarding international tax.
IRS Offshore Tax Lawyers – About Krantz Attorneys, A PLC
We specialize exclusively in international tax, and specifically IRS offshore disclosure.
We have successfully represented clients in more than 1,000 streamlined and voluntary offshore disclosure submissions nationwide and in over 70-different countries. We have represented thousands of individuals and businesses with international tax problems.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.
- Learn more about the Board-Certified Tax Lawyer Specialist credential
- Learn more about the Enrolled Agent credential
- Learn more about Krantz Attorneys’s Case Accomplishments
- Learn more about Krantz Attorneys Testimonials from prior clients
Please feel free to search our free, online international tax law library for more specific articles on any points of interest.
The article is ordered for an introductory, basic, step-by-step analysis:
Are you a Legal Permanent Resident?
If the answer is yes, then you are now subject to U.S. tax on your worldwide income and must report your worldwide assets, unless certain exceptions, exclusions or limitations apply.
U.S. Visa Holder & Substantial Presence Test
Even if you are neither a U.S. citizen nor legal permanent resident, depending on how much time you spend in United States each year, you may be subject to U.S. tax the same way that a legal permanent resident or U.S. citizen is subject to U.S. tax.
The test is called the substantial presence test. If you meet the substantial presence test then you may be required to file a form 1040, and report your worldwide income and assets.
*It is important to note that there are specific requirements and exceptions to meeting this test.
For example, in order to qualify for the test, you must be in United States for at least 30-days in the current year. In addition, even if you would otherwise meet the substantial presence test, if for example you are in the U.S. on an F1 visa, then during the first five (5) years of your Visa –you are typically not considered a U.S. person.
*You may still file for an exception of Substantial Presence, by using the Closer Connection Test, Form 8840.
Who is a U.S. Person?
When it comes individuals, U.S. persons are broken down into three categories:
- Legal Permanent Resident
- U.S. Citizen;
- Non-citizen/Non-permanent resident who meets the substantial presence test.
Do You File Form 1040 or 1040 NR?
For individuals who are considered legal permanent residents or otherwise meet the substantial presence test — they are required to file a form 1040 (even if they consider themselves non-residents).
When is the 1040 Filing Due Date?
Generally, the 1040 filing due date is April, but a person is entitled to an extension until October — as long as they timely file the necessary extension form(s) with the IRS.
What if I Reside Overseas?
If a person resides overseas, then they generally get an additional two (2) months from April to June to file their taxes. Even if a person resides overseas they can attain an extension through October by filing the proper extension form
*Depending on the specific facts and circumstances, a person may also be able to extend their filing date even further, to December.
What do I Include on my Tax Return?
Generally, a U.S. tax return has two major components to it when it involves foreign money: income and reporting.
When it comes to the income, some of the more common categories of income, include:
- Earned income from employment or consulting work;
- Passive investments such as dividends, capital gains and royalties; and
- Retirement income such as pensions, superannuation, and provident funds
When it comes to the reporting, some of the more common categories of income, include:
- Bank Accounts
- Investment Accounts
- Retirement Accounts
- Foreign Corporations
- Foreign Partnerships
- Foreign Real Estate
What is Worldwide Income?
Once you become a legal permanent resident, you become subject to U.S. tax on your worldwide income. The United States operates differently than almost every other country in the world, in that citizenship or U.S. Person status will dictate requirements for tax filings, not residence, per se.
In other words, if a person is a green card holder or meets the substantial presence test, then they will file a form 1040 and report their worldwide income, no matter where they reside, and no matter from which country the income was generated from.
Worldwide Income Example
For example, a U.S. Legal Permanent Resident who resides in Taiwan but earns tax-free money from investments in Bolivia, and consulting fees from work she performed in Australia — will still report all of the income on her US tax return.
What is Worldwide Reporting?
In addition to being subject to U.S. taxes on worldwide earnings, a person is also subject to worldwide reporting. That means that the person is now required disclose foreign accounts, assets, and investments from anywhere across the globe.
It does not matter when the assets were acquired, if you’re only as signatory on the assets, or if you can withdraw the money.
There is a laundry list of reporting requirements, but the majority of them tend to involve the following forms:
- FBAR (FinCEN 114)
- Form 3520
- Form 3520-A
- Form 5471
- Form 8621
- Form 8865
- Form 8938
What if the Income is Tax-Free?
If the income is tax-free in the foreign jurisdiction come it is still included under US tax return and is taxable. For example, in Singapore, the CPF (retirement) income grows tax-free, but you still pay U.S. Tax on CPF accrued, non-distributed gain within the fund.
But, there are exceptions, exclusions, and limitations that apply.
Foreign Earned Income Exclusion
If a person is a US person, resides overseas for the majority of the year and meets either the Bona-Fide Residence Test for Physical Presence Test — in addition to the tax home test — they may qualify to exclude a portion other income from their US tax return. In addition, if foreign housing was paid, this may also help to reduce U.S. tax liability.
- Taxpayer includes form 2555 with their tax return.
Foreign Tax Credit
When a person earns income abroad, and already paid tax in a foreign country — the income is still included on the U.S. tax return.
BUT, the taxpayer may apply for foreign tax credits to try to reduce the US tax liability.
It is not a dollar for dollar reduction, and in most situations, depending on the size of the foreign tax credit (generally more than $50,000 per year) the IRS may request more documentation to prove the tax for actually paid.
- Individual taxpayers include form 1116 with their tax return
Form 8833 Treaty Position
The United States has entered into several types of tax treaties with many different countries across the globe. Oftentimes, these treaties will reduce, limit, exempt or exclude certain taxes that would otherwise be due on the tax return.
Different treaties, include:
When a person wants to take a treaty position with their tax return, they will also include an IRS Form 8833 detailing the position.
Form 8840 Closer Connection Exception
Sometimes, even when certain taxpayers may be subject to US tax (for example, because they met the substantial presence test) they may still not believe they should be subject to US tax — and the IRS may agree.
In this type situation, the taxpayer will file a form 8840 closer connection test form.
This is common for snowbirds on the east coast who may visit from Canada, and reside part time in United States.
What if I don’t File a U.S. Tax Return?
If a person does not file a U.S. tax return, they may be subject to extensive fines and penalties. One very important point about not filing a tax return when it was otherwise due, is that until the tax return is filed, the statute of limitations for the IRS to pursue an audit or examination does not begin to run.
Therefore, while generally the IRS has three (3) to six (6) years to commence an audit, if that person never filed a tax return, then the 3-to-6-year timeframe does not start to run.
In addition, when a person does not file a tax return(s), the IRS may assess fines and penalties which can result in significant enforcement procedures such as:
- Auditor examination
- Failure-to File Penalty
- Failure-to-pay Penalty
- Substantial underpayment penalty
- Fraud penalty
- Offshore penalties
What if I give up my U.S. Legal Status?
Non-Legal Permanent Resident
When a person is and non-green card holder, then once they stop meeting the substantial presence test they are no longer subject to US tax in future years (unless they have U.S. sourced income).
But, the IRS can continue to audit or examine the individual for any year a return was filed, or should have been filed.
Legal Permanent Resident
When a person is a legal permanent resident, they may become subject to an exit tax if they are considered a covered expatriate. The rules involving expatriation are detailed and comprehensive.
A common situation which gets a person in trouble, is hat they simply file an I-407, and believe that is the end of it.
Interested in Filing under IRS Amnesty Procedures?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
Krantz Attorneys specializes in offshore tax and reporting amnesty. Contact our firm today for assistance with getting compliant.
Ezra 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. Krantz's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.
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