If you are one of the numerous Americans that waits until April to file your return, you have a lot of catching up to do. Take the already complex subject, taxes, add a near and looming deadline, April 15th, and you may suddenly feel overwhelmed. Adding another layer of complexity is that you might be subject to worldwide U.S tax reporting obligations if you have spent a significant number of days in the United States. In fact, your obligation to the IRS does not depend on immigration status, but rather on “tax resident” status!
Who is considered a U.S Tax Resident?
- U.S. Citizens
- Green Card holders
- Individuals who meet the Substantial Presence Test (SPT)
– Learn More by reading Moving to the United States? Don’t Forget Your Pre-Immigration Income Tax Planning
What happens if you qualify as U.S. Tax Resident?
A. As a U.S tax resident, you will be subject to U.S tax on worldwide income;
- Form 1040: you will use this form to report your worldwide income. A 1040 form is the standard Internal Revenue Service (IRS) form that individuals use to file their annual income tax returns.
B. And, you will be subject to worldwide reporting obligations, and will/may be required to file the following information returns (this is not an exclusive list):
- FinCen 114 Report of Foreign Bank and Financial Accounts: you may need to file this form if you hold a financial interest in or signatory authority over foreign financial accounts.
- Form 8938: you may need to file this form if you own directly an interest in special foreign financial assets.
- Form 3520: you may need to file this form if you have any reportable transactions with a foreign trust or the receipt of a gift or bequest of a foreign person. the “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.”
Foreign entity reporting: If you hold an interest in a foreign entity, you may need to file the following forms:
- Form 8621, you will need to file this form if you have received certain direct or indirect distributions from a Passive Foreign Investment Company (PFIC) regardless of whether the PFIC is disposed or makes a distribution.
Note on PFICs: if you hold an interest in a foreign corporation that earns “passive” income you might be subject to U.S. tax at the highest rate and to an interest charge. You may be able to prevent this result with appropriate Tax planning.
- Form 5471, you may need to file if you have acquired an interest in a foreign corporation or if you control a foreign corporation.
- Form 8865: you may need to file this form if you control a partnership, you own an interest in a foreign partnership controlled by other U.S. persons, or if you contributed property to the partnership.
What happens if you are classified as a Non – U.S. Tax Resident?
- You may be subject to U.S Income tax on income you receive from U.S. sources and you will have to report only U.S financial assets.
- You may need to file the following Tax returns (this is not an exclusive list):
- Form 1040NR / 1040NR-EZ: if you receive income from U.S. sources, you will need to file form 1040NR. This tax form is used by non-U.S. tax residents of the U.S. to report on an annual basis the income received from U.S. sources and the payments of U.S. tax.
- Form 1042-S. If you receive payments from U.S. sources where the payor has withheld any tax, you will receive Form 1042-S.
- Form W-8: This form is provided by a foreign recipient to a payor to certify the recipient’s tax residency and status as beneficial owner of the income paid.
- Form 8843: You must file this form even if you are an “exempt individual” under the SPT and are not required to file any income tax return.
Finally, what are the taxpayer’s major deadlines and penalties for failure to file these returns?
- U.S. tax residents must file by April 18, 2016, but if you live abroad you can utilize an automatic 2 months extension. Although with the extension the return is due by June 15, the tax is due by April 18, 2016.
Form 1040 NR,
- Non-U.S. tax residents must file either by April 18, 2016 or June 15, 2016 depending on whether you received wages subject to withholding or not.
- Form 3520
- Form 8621
- Form 8938
- Form 5471
- Form 8843
- U.S. residents should file by June 30 2016, the Fin Cen 114 Form.
- U.S. Non-resident aliens who are exempt from the Substantial presence test but did not earn any U.S. source income during the tax year, should file by June 15, 2016 Form 8843.
Failure to File Penalties:
Failure to file Form 1040 and 1040 NR and failure to pay taxes:
- If you file more than 60 days after the due date, there is a minimum penalty due and if you fail to file after 60 days, there is a late filing penalty up to a maximum of 25%.
- If you didn’t pay taxes owed by due date, there is a late payment penalty of up to 25% of underpayment of tax owed.
Failure to file Form 3520:
- the initial penalty is equal to the greater of $10,000 or
- 35% of the gross value of any property transferred to a foreign trust, or
- 35% of the gross value of the distributions received from a foreign trust, or
- 5% of the gross value of the portion of the trust’s assets treated as owned by a U.S.
Additional penalties can be imposed if the noncompliance continues after the IRS mails the notice of failure to comply.
Failure to file Forms 8938, 8621, 5471 and 8865:
- $10,000 initial penalty and If not completed within 90 days after the IRS mails you a notice, you may be subject to an additional penalty of $10,000 for each 30-day period
Failure to file FinCen 114 Form:
- The IRS can impose a penalty for each non-willful violation of the FBAR filing requirement up to 10,000 per account.
- When a person willfully fails to file an FBAR, the IRS may impose a penalty equal to the greater of $100,000 or 50 percent of the account’s highest balance
Failure to file Form 8843:
There is no penalty. However, days of presence that are excluded must be properly recorded by filing Form 8843.
Authored by Beatrice Bianchi Fasani
Barbosa Legal is a boutique international law firm located on the historic Lincoln Road in the heart of Miami Beach, Florida. The primary focus of the firm is to aid international citizens that desire to invest in the United States, specifically navigating the complexities of the United States tax codes and how they interact with international laws.
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