An Overview of New Immigrant U.S. Tax Rules (Examples)

The Tax Responsibilities for New Immigrants to the United States

When foreigners first move to the United States or otherwise become U.S. persons for tax purposes, learning how to file their U.S. tax returns is not usually their main concern – especially since filing taxes in most foreign countries is infinitely easier than it is in the U.S. In many foreign countries, taxpayers do not file much in the form of a tax return. Rather, income is withheld at the source it is generated, and then the Taxpayer receives a confirmation about the taxes paid. Sometimes the Taxpayer may have to file some minimal paperwork but nothing compared to having to file a Form 1040 and all the different schedules and attachments. Recently, the IRS published information to assist international taxpayers with some of the basics when it comes to being a U.S. person and what those tax and reporting responsibilities are. While there are many different considerations a new immigrant must consider when it comes to U.S. taxes, let’s focus on a few examples of some of the more common talks and reporting requirements

Worldwide Income Taxation

First and foremost, unlike almost every other country across the globe, the United States taxes individuals based on their U.S. person status and not merely their residence. Thus, Taxpayers are required to report their worldwide income on their U.S. tax return even if income is overseas and even if foreign taxes were paid on that income. Noting, some Taxpayers may be able to reduce their overall U.S. tax liability based on foreign taxes paid or the Foreign Earned Income Exclusion (FTC) but from a baseline perspective — all income is technically reportable.

• • • Example: Jeffrey is a new Lawful Permanent Resident who relocated to the United States at the beginning of the year. Jeffrey has a significant amount of foreign passive income which is tax exempt in the foreign country. Jeffrey is still required to include this information on his U.S. tax return.

    • Example: Danielle is a Lawful Permanent Resident who also relocated to the United States in the current year and has a significant amount of passive income generated from foreign sources. Danielle pays foreign taxes on the income, but she must include that information on her U.S. tax return as well as claim her foreign tax credits to see if she can reduce or eliminate her U.S. tax liability on that foreign income.

Foreign Bank Account Reporting (FBAR)

Taxpayers who are considered U.S. persons for tax purposes are also required to report foreign accounts, assets, and investments that they have overseas — whether or not the accounts, assets, or investments were owned before they became a U.S. person and even if those foreign accounts do not generate any income.

• • • Example: Brad is a Lawful Permanent Resident who had several foreign accounts before he relocated to the United states. These accounts do not generate any income and they were opened several years ago before Brad never had U.S. persons status prior. Brad is still required to disclose these accounts on the FBAR. They total $45,000 at the end of the year and never exceeded $60,000

    • Example: Phyllis is a Lawful Permanent Resident who does not have any foreign bank accounts — but she does have a foreign pension plan worth $900,000 because she previously worked in a foreign country before coming to the United States. Even though Phyllis does not have bank accounts, the FBAR is not limited to only bank accounts but also includes foreign financial accounts such as investment accounts and pension plans — so Phyllis has to report this information on the FBAR as well.

Form 8938 (FATCA)

Another common international information reporting form that new residents will have to file once they become U.S. persons if they meet the threshold requirement is IRS Form 8938. Form 8938 is a relative newcomer and requires taxpayers to report their specified foreign assets.

• • • Example: Expanding upon the examples above, even though the type of accounts that Brad has are reportable for Form 8938 purposes — and he met the threshold requirements for filing the FBAR — he does not meet the threshold requirements for filing Form 8938, so he is not required to file the form in the current year. If the value of the accounts incerases in subsequent years,  he may then have a Form 8938 filing requirement.

    • Example: Even though Phyllis already reported her foreign pension plan on the FBAR, the maximum value of the plan in the current year was $900,000. Therefore, Phyllis must duplicate the reporting she already did on the FBAR by reporting her foreign pension on Form 8938.

Form 3520 Gift

When a U.S. person receives a gift from a foreign person non-resident alien, they are required to file Form 3520 if they meet the threshold requirements (which vary based on whether the person giving the gift is an individual, entity, or trust).

• • • Example: Scott is a U.S. person and in the year after becoming a green card holder he received a $300,000 gift from his mom, who is a non-resident alien (NRA) living in a foreign country. Even though this is simply a gift that Scott received from his mom, he still must report it on Form 3520 — although there is presumably no tax implication for receiving the gift.

    • Example: Randy is a U.S. person who received three gifts from related family members, each in the amount of $40,000. Even though Randy did not receive more than $100,000 from any one non-resident alien, since Randy received more than $100,000 in aggregate total from related persons, she too must file Form 3520.

    • Example: Ralph is a U.S. person who received a $3,000 distribution from a foreign non-grantor trust. Currently, there is no de minimis rule for foreign trust distributions — so Randy may still have to file form 3520.

The Tip of the Iceberg

The goal of this article is to help clarify some of the basics of U.S. tax filings and international information reporting. Reporting foreign income and assets to the U.S. tax authorities can be very complicated, especially when it involves additional items such as foreign life insurance policies, foreign corporations, foreign partnerships, and transactions between U.S. persons and foreign companies. Taxpayers should try to stay in compliance if they are already in compliance or should consider getting into compliance if they have not properly filed the necessary reporting forms if for no other reason than the fact that the IRS has made offshore compliance a key enforcement priority and has been issuing fines and penalties for non-compliance. 

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.  *This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.