What is the definition of a US Person for tax purposes?
One of the first questions posed to us by local advisors (investment managers, law firms, accounting firms, trustees) and by their clients is, What is the definition of a US Person for tax purposes?
The US tax system imposes its income tax on “US Persons”; and the tax reaches all forms of income and gains whether US-sourced or arising outside the US.
The concept of a US Person includes individuals, corporations, partnerships, trusts, and estates.
Individuals: Citizens, Green Card Holders and those individuals that meet the US residency tests.
Citizens include individuals born in the United States and in many cases individuals born outside the US with at least one US parent.
Green Card Holders are individuals who have been granted permanent right to reside in the US as long as they comply with any restrictions imposed on the grant.
A cautionary note 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surrender your Green Card or there has been a final administrative or judicial determination that your Green Card has been revoked or abandoned.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to file tax returns until there has been a final determination that is not subject to appeal that your Green Card has been revoked or abandoned.”
US Residents are individuals who have met the Substantial Presence Test. (A three-year day count test.)
Entities: Corporations and partnerships formed under US (state) law; Trusts that meet a combination “US court” and “US control” test (regardless of the legal jurisdiction in which they are formed); and Estates (based on a “facts and circumstances” test that looks at the residence of the executor and the location of a majority of the assets.
Failure to file the income tax return timely or with an understatement of income will generally result in a penalty being imposed. The penalty is generally based on the amount of the taxpayer’s tax liability.
In addition to an annual income tax return, all taxpayers (individuals and entities) are faced with a substantial number of “informational returns”. These returns relate to a taxpayer’s interest in all things “foreign”, e.g. foreign financial accounts and assets, foreign corporations, foreign partnerships, and foreign trusts. Failure to file these forms timely or with incorrect information can result in the imposition of large penalties, usually beginning at $10,000.
How will the IRS find me?
“Hiding” from the IRS is increasingly hard. With the passage of the Foreign Account Tax Compliance Act (FATCA) passed by the US in 2010 foreign financial institutions, including foreign trustees, must report their US account holders to the IRS. Further, individuals who have come forward under one of the various “voluntary disclosure” programs have often had to identify US persons with whom they have contacts.
Information is also shared between the US and its numerous treaty partners. Finally, individuals can be paid large sums to act as “whistle-blowers”.
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
- Corporations formed under US (state) law
- Partnerships formed under US (state) law
- Trusts regardless of where formed if they meet the “US Court” and “US Control” tests
- Estates: With US executors and assets
Contact us if you have any questions.