United States IRS Definition of US Person
All United States tax laws and regulations apply to every US Person whether he/she is working in the United States or in a foreign country. When it comes to your international tax obligations, it’s important to understand exactly how ‘US Person’ is defined by the IRS and what it means to you. Failure to understand your tax responsibilities as a US Person can result in hefty penalties associated with your US expat tax liability.
- Every United States Citizen. You are liable for US income taxes whether you are a citizen who was born in the United States or outside of the United States with at least 1 parent who is a US Citizen. If you are a naturalized citizen, you are also considered a US Person.
- Every United States Tax Resident. There are 2 different methods of becoming a tax resident. One of these methods is to meet the Substantial Presence Test by having either been in the United States for at least 31 days out of 1 year or 183 days out of the 3 year period prior to the current tax year. The other method is to meet the Green Card Test; this method applies to any person who has obtained a US Green Card.
United States Citizens Born Outside of the United States
If you were born outside of the United States and have dual citizenship with the US and the foreign country in which you were born, you have a different set of options – especially if you’ve never lived in the United States. It’s important to realize, however, that – until you exercise those options – you are still considered a US Person for tax reporting purposes, and you must meet all of your US tax obligations. If you wish to voluntarily terminate your US Citizenship to avoid being responsible for US taxes, you have the right to do so.
Inactive Green Card Holders
If you have never surrendered your US Green Card and your Green Card is considered to be expired by the USCIS (US Citizenship and Immigration Service) you are still obligated to file a US expat tax return every year. You will be required to file an annual US expat tax return until you either surrender your Green Card or there has been a judicial ruling that your Green Card has been abandoned or revoked. If you have ever held a Green Card in the United States and you are not sure whether or not you have any current tax liability, it will be in your best interest to find out and take care of any outstanding tax obligations.
Your Tax Obligations as a US Person
Depending on a variety of circumstances including filing status, source of income, and whether or not you can be claimed as a dependent; any US Person who earns more than the minimum threshold of around $6K-$10K dollars in a calendar year is required to file a US income tax return. If you are living and working abroad, you are still required to file an annual US expat tax return – even if you wind up not owing any taxes.
In addition to being required to file an annual US expat tax return, you are also required to report any foreign banking or investment activity if you have an account balance of more than $10K. It’s important to realize that the $10K threshold applies to all of your accounts combined. For example, if you have a foreign checking account with a balance of $5K, a savings account with $4K, and an investment account worth $2K; you will be required to report all of this activity on Form TD F 90-22.1 and mail this form to the United States Department of Treasury. If you have a vested interest in any foreign corporations, partnerships, or trusts; you will be required to report this information, as well. If you have earned income from investments or interest on your foreign accounts, you must report this income on your US expat tax return.
Consequences for Ignoring Your Tax and Reporting Obligations
If your foreign income exceeds the minimum filing requirement established by the IRS and you fail to file a US expat tax return, you will be subject to a number of fines. If you wind up having owed taxes to the United States you will be assessed both a Failure to Pay Fee and a Late Payment Fee. Additionally, you will be charged interest on a daily basis until your US tax obligations are met. If you have not filed a US expat tax return for 1 or more years, we can help get you caught up with minimal fees by filing back taxes with the IRS.
If you have foreign accounts with a balance of $10K or more and you fail to report this activity to the Department of Treasury you will be subject to both a $10K fine and up to 50% of your foreign account balances. Additionally, you may have to face criminal evasion charges and potentially serve time in federal prison. If you have failed to submit Form TD F 90-22.1 for 1 or more years, you may be able to escape these hefty penalties by taking advantage of the OVDI (Offshore Voluntary Disclosure Initiative), which allows US Persons with foreign bank accounts to ‘come clean’ on their own accord for a guarantee of no criminal charges and reduced penalties. If you wait until the IRS tracks you down, you will not qualify for the lenient terms of the OVDI.
How Will the IRS know if I’m Earning Foreign Income or Have Foreign Accounts?
The IRS is continuously seeking new methods of identifying US taxpayers who have not met their US tax filing and reporting obligations in previous years. Not only has the IRS begun to hire more international employees to track down US tax evaders, it has also gone to greater lengths holding foreign institutions responsible for not reporting the income or banking activity of US Persons. Additionally, the United States has more than 40 active treaties with other countries in which there is an agreement to share all tax related information. For US Persons ignoring their US tax obligations, it’s not a matter of IF the IRS will catch up to you; it’s a matter of WHEN. If you are proactive and become compliant before the IRS tracks you down, you have a much better chance of escaping punitive charges.
Because of all the different circumstances of US Persons living and working abroad, filing a US expat tax return can get quite complicated. At Taxes for Expats, we have expat tax professionals available to answer your questions and/or file a US expat tax return on your behalf.