Each year, millions of foreign nationals visit the U.S. Many of them come for a holiday and do not stay a sufficient amount of time in the U.S. to require them to file anything with the Internal Revenue Service (IRS), the U.S. government agency responsible for the tax collection and tax law enforcement. However, foreign nationals who spend a significant amount of time in the U.S. may find themselves in the position of being required to report certain financial information to the IRS.
Under U.S. tax law, a foreign national who is physically present in the U.S. during the calendar year for 183 days or more is generally treated as an income tax resident of the U.S. There are some narrow exceptions to this rule (medical necessity, foreign government-related aliens, teachers or trainees and students).
While income tax nonresidents of the U.S. are only required to report on certain types of U.S. source income, income tax residents of the U.S. are required to report their worldwide income on their U.S. income tax returns. For foreign nationals who are unfamiliar with the U.S. tax laws and spend 183 days or more in the U.S. in a given calendar year, the income tax filing requirements can not only result in additional income tax liabilities, but can also result in a costly administrative burden necessary to comply with the disclosures required under the law with respect to offshore (non-U.S.) income and assets.
Some of the disclosures are associated with the reporting of income and others are simply for informational purposes. Some disclosures are filed as a part of the U.S. income tax return, while others are submitted separately. Failure to make full and adequate disclosure may result in the imposition of substantial penalties. The most common of these disclosures includes:
- Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)
- Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
- Form 8938, Statement of Specified Foreign Financial Assets
- Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations
- Form 8865, Return of U.S. Persons With Respect To Certain Foreign Partnerships
- Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
- Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner
- Form FinCEN 114, Report of Foreign Bank and Financial Accounts
It is sometimes possible for foreign nationals who stay in the U.S. for 183 days or more in the calendar year to avoid having to report as income tax residents in the U.S., especially if they are tax residents of a country with whom the U.S. has an income tax treaty that contains a provision regarding “Residence” (commonly referred to as the “tie-breaker” rules). If the foreign nationals can meet the criteria as enumerated in the “Residence” treaty article, they can qualify to report as income tax nonresidents in the U.S. Therefore, they are not required to report their worldwide income, only their U.S. source income, if any. However, the treaty exception only applies to the computation of the individual’s U.S. income tax liability. For all other purposes, the foreign nationals will be treated as U.S. tax residents. This means that the disclosures listed above may still be required to be filed. The time needed to compile the required information and the cost of the accurate preparation of the disclosures can be substantial.
This article discusses the U.S. income tax implications of spending substantial time in the U.S. It is not intended that this article address any of the associated issues with respect to U.S. immigration laws, which is beyond the scope and purpose of this article.