What is a US Person for IRS tax purposes?
Please note: The below discussion focuses on individuals, however, entities, such as corporations, partnerships, and trusts are also US persons and have worldwide tax and reporting obligations as well, including the FBAR or Fincen form 114.
We have this discussion all the time, whether you are an investment advisor, family office, fund manager, trustee, business founder, etc. or an individual, there is a lot of confusion who falls within the United States tax net. And there are consequences to both sides for a failure to understand.
The United States imposes its Income Tax on US PERSONS based on the person’s worldwide income. It does not matter where you live – if you are a US PERSON or have a US PERSON in your investment structure, you (or they) are subject to US Income Tax.
If you owe US Income Tax and do not pay the tax when due you are also liable for substantial penalties for ‘failure to pay’ the tax as well as for the ‘late payment’ of the tax and for ‘interest’ on the late payment.
If that is not enough, the US requires a substantial number of ‘information’ reports…these include reports on the US persons financial accounts and interest in non-US corporations, partnerships and trusts. Failure to file these informational reports can also result in sizeable penalties. For example, failure to report an interest in a non-US trust can result in a penalty of more than $10,000 per report per year.
How will the IRS find me?
The IRS now has many ways of finding people outside the US who are not filing their tax returns. Hiding is not an option. They have whistle blower programs and have initiated new Voluntary Disclosure programs since 2009 where many people have come forward. As previously reported on this blog, by learning from this data, the IRS has been able to find others without their knowledge. But the biggest global initiative by far is the Foreign Account Tax Compliance Act (FATCA) passed by the US in 2010. Starting in 2014, this law requires foreign financial institutions like your local bank, stock brokers, hedge funds, pension funds, insurance companies, trusts, etc. to report directly to the IRS all their clients who are US PERSONS. The penalties for the institutions that do not cooperate are punitive.
What is a US PERSON?
- All US citizens. An individual is a citizen if that person was born in the United States or if the individual has been naturalized as a US citizen.
- You can also be a US citizen, even if born outside the United States if one or both of your parents are US citizens.
- You are a ‘tax resident’ of the United States. You can become a tax resident under two rules: 1) The ‘substantial presence test’. This is a ‘day count test and based on the number of days you are in the US over a three year period and 2) The ‘green card’ test. A person who has obtained a ‘green card’ has been granted the right to lawful permanent residence in the United States.
The rules relating to US citizenship at birth outside the US are complex. You may want to visit your local US embassy or contact a qualified immigration lawyer to understand your specific circumstances.
One point to consider though is that if you are born a US citizen you are a citizen. Having your birth registered or obtaining a US passport is not a prerequisite – you are a citizen and will remain a US citizen and subject to US tax unless you renounce your citizenship. Here is some information on expatriation and those requirements.
Green card Holders and Tax Residents
Like US citizens, green card holders and tax residents (through visas or otherwise) are subject to US income tax on their global income.
Importantly for Green card holders – “Your tax responsibilities as a green card holder do not change if you are absent from the US for any period of time. Your income tax filing requirement and possible obligation to pay US taxes continue until you either surrender your green card or there has been a final administrative or judicial determination that your green card has been revoked or abandoned. Therefore, even if the US Citizenship and Immigration Service (USCIS) no longer recognizes the validity of your green card because you have been absent from the United States for a certain period of time or the green card is more than ten years old, you must continue to file tax returns until there has been a final determination that is not subject to appeal that your green card has been revoked or abandoned.”
The above point on green card holders cannot be emphasized enough. Many foreign nationals come to the US to work for a time period or have children who initially come over for education. They often get green cards. If they leave, they usually don’t think to officially surrender their green cards. That leaves them still in the IRS’ sights and therefore in the tax net.
Through our US Expansion practice, we see founders or staff members who start commuting back and forth to the US to promote or start their business, without realizing it, they often cross the threshold of residency (substantial presence test). Residency means you are taxed on worldwide income and have reporting obligations. Without proper planning, inadvertently subjecting your worldwide assets and income to the US tax system may have serious consequences.
SUMMARY US PERSONS
- Born in the United States
- Born outside the United States of a US parent
- Naturalized citizens
- Green Card Holders
- Tax residents