A U.S. Virgin Islands Income Taxation and FBAR Overview

The Virgin Islands Income Tax Basics

While the Virgin Islands (USVI) is part of the Caribbean, it is considered a U.S. territory — which (unfortunately) makes it unnecessarily complicated for U.S. tax purposes. To assist Taxpayers, the IRS developed Publication 570 to help explain the complexities and nuances for the taxation of U.S. Possessions such as the Virgin Islands. Moreover, in addition to the tax requirements for USVI residents, there are also very complicated international information reporting forms that may need to be filed. In some situations, the income and reporting may be considered U.S. sourced and then other situations, it may be considered foreign and subject to reporting on forms such as Form 5471 and Form 3520. Let’s briefly examine how the virgin islands are taxed and who has to report to the IRS.

Virgin Islands Bureau of Internal Revenue

First, it is important to note that the Virgin Islands has its own tax system. In general, the tax system in the US Virgin Islands mirrors that of the United States, although submissions are made to the Virgin Islands Bureau of Internal Revenue.

Publication 570 (The U.S. Virgin Islands)

IRS Publication 570 provides a good summary of how the process works for the Virgin Islands — as well as for other U.S. possessions. One of the key components in determining the tax implications of Virgin Islands income is whether or not the taxpayer is considered a bona fide resident of the Virgin Islands. This concept is similar to other territories in possession such as Puerto Rico.

Bona Fide Resident of the U.S. Virgin Islands

When a person is considered a bona fide resident of the United States Virgin Islands then generally most of the reporting will be done directly to the virgin islands bureau of internal revenue.

As provided by the IRS:

• • • File your tax return with the USVI if you are a U.S. citizen, resident alien, or nonresident alien and a bona fide resident of the USVI during the tax year.

      • Include your worldwide income on your USVI return. In determining your total tax payments, take into account all income tax withheld and paid to either the USVI or the United States, any credit for an overpayment of income tax to either the USVI or the United States, and any payments of estimated tax to either the USVI or the United States. Pay any balance of tax due with your tax return. Filing this return with the USVI generally also starts the statute of limitations on assessment of your U.S. income tax.

      • You generally do not have to file with the United States for any tax year in which you are a bona fide resident of the USVI during the tax year, provided you report and pay tax on your income from all sources to the USVI and identify the source(s) of the income on the return.

      • If you have self-employment income, you may be required to file Form 1040-SS with the United States. For more information, see Self-employment tax under Special Rules for the U.S. Virgin Islands, later. Form 1040INFO.

      • If you are a bona fide resident of the USVI and have non-USVI source income, you must also file Virgin Islands Bureau of Internal Revenue Form 1040INFO, Non-Virgin Islands Source Income of Virgin Islands Residents, with the USVI. Attach Form 1040INFO to your USVI tax return before filing. You can get Form 1040INFO by contacting the address or website given earlier.

      • If you are a bona fide resident of the USVI for the tax year, file your return and all attachments with the U.S. Virgin Islands Bureau of Internal Revenue at: Bureau of Internal Revenue 6115 Estate Smith Bay St. Thomas, USVI 00802

U.S. Citizen or Resident Alien (Not a Bona Fide Resident of the U.S. Virgin Islands)

When a person is considered a US citizen or resident alien — but is not a bona fide resident of the US Virgin Islands — then they have to file a tax return with the United States along with a copy to the virgin islands if there is certain income situations such as the following:

As provided by the IRS:

• • • Income from sources in the USVI, or 

    • Income effectively connected with the conduct of a trade or business in the USVI.

      • File your original Form 1040 or 1040-SR with the United States and file a signed copy of the U.S. return (including all attachments, forms, and schedules) with the U.S. Virgin Islands Bureau of Internal Revenue by the due date for filing Form 1040 or 1040-SR. Use Form 8689 to figure the amount of tax you must pay to the USVI.

NRA and Not a Bona Fide Resident of USVI

As provided by the IRS

• • • ‘Nonresident Alien (Other Than a Bona Fide Resident of the U.S. Virgin Islands) If you are a nonresident alien of the United States who does not qualify as a bona fide resident of the USVI for the tax year, you must generally file the following returns.

      • A USVI tax return reporting only your income from sources within the USVI. In this situation, wages for services performed in the USVI, whether for a private employer, the U.S. government, or otherwise, are income from sources within the USVI.

      • A U.S. tax return (Form 1040-NR) reporting U.S. source income according to the rules for a nonresident alien. See the Instructions for Form 1040-NR.

FBAR

FBAR is used to report foreign bank and financial accounts to the US government. The general rule is that a person will be considered a resident of the United States sufficient to have to file an FBAR,  they are considered to be a resident of the United States, including territories and possessions:

• • • U.S. Resident: To determine if a person is a resident of the United States, apply the residency tests in Section 7701(b)(1)(A)(i)-(iii) of Title 26 of the United States Code (USC). When applying the residency tests, the United States includes the States, the District of Columbia, all U.S. territories and possessions (i.e. American Samoa, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, Guam, and the U.S. Virgin Islands), and the Indian lands defined in the Indian Gaming Regulatory Act.

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.