Overseas Green Card Holder & US Tax Residency | Tax Lawyer & Attorney

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While most US taxpayers understand that a US permanent resident who resides in the United States is a US tax resident, there seems to be a great deal of confusion over whether the same is true with respect to a US permanent resident who resides overseas (hereinafter, “Overseas Green Card Holder”). In other words, the question is whether an Overseas Green Card Holder should be considered a US tax resident?

It is important to clear up this confusion, because an individual non-resident only needs to report to the IRS his US-source income and income effectively connected to the United States. On the other hand, a US tax resident must disclose to the IRS his worldwide income and his foreign assets. A failure to report foreign income and foreign assets will expose the noncompliant taxpayer to IRS penalties. In the context of US international information returns, these IRS penalties can be particularly cruel; FBAR penalties and FATCA penalties are the most important examples of the severity with which the IRS may punish noncompliant green card holders.

Now that we understand the importance of determining whether an individual is a US tax resident, we can proceed with answering the question of whether an Overseas Green Card Holder is a US tax resident. The answer is an emphatic “yes”.

A US Permanent Resident is always a US tax resident (unless his permanent residency is stripped away for noncompliance with US immigration laws). The location of his physical residency does not matter. This means that an Overseas Green Card Holder should properly report his worldwide income and his foreign assets to the IRS, including the filing of any required FBARs and/or Forms 8938.

For example, if a US Permanent Resident resides in the United Kingdom, earns a salary and owns UK bank accounts, he should disclose his UK income in the United States and report his UK bank accounts on his Schedule B to Form 1040. He should also verify if he needs to disclose his UK bank accounts on FBAR and Form 8938, among other potential US tax requirements.

Contact Sherayzen Law Office for Professional Hep With Your US Tax Compliance if You Are an Overseas Green Card Holder

If you are a US permanent resident who resides in foreign country, contact Sherayzen Law Office for professional tax help as soon as possible. Our highly-experienced international tax attorney, Mr. Sherayzen, will personally analyze your legal situation, determine the US tax requirements that may apply in your situation and create your tax compliance plan, including one that includes an offshore voluntary disclosure to remedy any past US international tax noncompliance. Then, our professional tax team, under the supervision of Mr. Sherayzen, will prepare all of the required tax documents while Mr. Sherayzen implements the overall legal plan.

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Employment Income Sourcing | International Tax Lawyer & Attorney

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Employment income sourcing is a very important tax issue for employees of US corporations sent overseas, employees of foreign corporations stationed in the United States and employees who work in different countries during a tax year. For employees who are tax residents of a foreign country, this issue will determine whether their income will be taxed in the United States; whereas for US tax residents, the source of income rules will determine the amount of the allowable foreign tax credit. In this article, I will focus on the employment income sourcing rules concerning monetary compensation of employees.

Employment Income Sourcing: General Rules

The source of income rules concerning employees are very similar to the rules that apply to self-employment income, but there are some differences. The main rule is that the location where the services are rendered determines whether this is US-source income or foreign-source income. If an employee works in the United States, then his salary would be considered US-source income; if he works in a foreign country, his salary would be sourced to that country. See §§861(a)(3) and 862(a)(3).

If the employer pays for work partly performed in the United States and partly outside of the United States, then the salary needs to be allocated between the countries. Treas. Reg. §1.861-4(b)(2)(ii)(A). The key issue arises here – how does an employee allocate this income between the countries?

Employment Income Sourcing: Time Basis Allocation

The first methodology for allocation of income between the countries is stated directly within the regulations – time basis. Id. Here, the IRS offers two choices to the employees: allocation based on specific number of days working in the United States versus separate time periods.

Under the “number of days” variation, the employee adds together the number of days worked in the United States and the number of days worked in a foreign country, figures out the percentages for each country and sources the income according to the percentage allocation. Treas. Reg. §1.861-4(b)(2)(ii)(F).

Under the “time periods” variation, a tax year is split into distinct time periods: one where employee spends all of his time in the United States and one where employee spends all of his time in a foreign country. The compensation paid in the first period is allocated entirely to the United States, whereas the salary paid in the second time period is considered to be foreign-source income. Id.

Employment Income Sourcing: Multi-Year Compensation

An interesting situation occurs with respect to employees with multi-year compensation contracts. A multi-year contract in this context means a situation where the “compensation that is included in the income of an individual in one taxable year but that is attributable to a period that includes two or more taxable years.” Reg. §1.861-4(b)(2)(ii)(F).

Generally, the employment income sourcing in this case occurs in the following manner: (1) employee first aggregates his total contract compensation for the entire year; (2) then, the employee sums up all of the days worked in the United States and all of the days worked in a foreign country for the period covered by the multi-year contract; and (3) the employee sources the income to the United States based on the number of days worked in the United States vis-a-vis the total number of days worked under the contract; the rest of the income is considered foreign-source income. Id. While this approach is specifically described in the regulations, the regulations also generally refer to the “time basis” allocation. Hence, it appears that an employee may have a choice between the “number of days” approach that was just described and the “time periods” variation.

Employment Income Sourcing: Alternative Basis Sourcing

Employees have the right to disregard completely the time basis approach to employment income sourcing and adopt an alternative basis approach. Treas. Reg. §1.861-4(b)(2)(ii)(C)(1)(i).  An employee can do so as long as he is able to establish that “under the facts and circumstances of the particular case, the alternative basis more properly determines the source of the compensation than a basis described in paragraph (b)(2)(ii)(A) or (B), whichever is applicable, of this section.” Id.

An employee is not the only person who has this right; the IRS also has the right to utilize an alternative basis for employment income sourcing “if such compensation either is not for a specific time period or constitutes in substance a fringe benefit.” Treas. Reg. §1.861-4(b)(2)(ii)(C)(1)(ii). The IRS can do so as long as the “alternative basis determines the source of compensation in a more reasonable manner than the basis used by the individual pursuant to paragraph (b)(2)(ii)(A) or (B) of this section.” Id.

A taxpayer does not need to obtain the IRS consent in order to use the alternative basis for employment income sourcing. He should, however, keep the records in order to be able to show how his method is better than the time basis approach. TD 9212, 70 FR 40663, 40665 (07/14/2005).

Special requirements apply to employees who received $250,000 or more in compensation and use the alternative basis for employment income sourcing. Not only must such employees answer the relevant questions on Form 1040, but they should also attach a detailed statement to their tax returns. Id. The statement must contain the following information: “(1) The specific compensation income, or the specific fringe benefit, for which an alternative method is used; (2) for each such item, the alternative method of allocation of source used; (3) for each such item, a computation showing how the alternative allocation was computed; and (4) a comparison of the dollar amount of the compensation sourced within and without the United States under both the individual’s alternative basis and the basis for determining source of compensation described in § 1.861-4(b)(2)(ii)(A) or (B).” Id.

Contact Sherayzen Law Office for Professional Help With US International Tax Law

If you are a US taxpayer who receives foreign-source income and/or has foreign assets, contact Sherayzen Law Office for professional help. Our professional tax team, headed by international tax attorney, Mr. Eugene Sherayzen, has helped hundreds of US taxpayers around the world with their US international tax issues. We can help You!

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FinCEN Form 114 and FBAR Are the Same Form | FBAR Tax Lawyers

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In my practice, I often receive phone calls from prospective clients who treat FinCEN Form 114 and FBAR as two different forms. Of course, these are the same forms, but I have asked myself: why do so many taxpayers believe that FinCEN Form 114 and FBAR are two different forms?

The simplest answer, of course, would be that taxpayers are simply so unfamiliar with US international tax law that they do not know the form with which both titles, FinCEN Form 114 and FBAR, should be associated. There is definitely a lot of truth to this conclusion, but it does not tell the whole story.

Upon more profound exploration, I found that a significant amount of potential clients believed that either FBAR or FinCEN Form 114 was a tax form while the other form was something else. In other words, some of the taxpayers think that FinCEN Form 114 is a tax form while FBAR is not a tax form while other taxpayers believe that FBAR is a tax form while FinCEN Form 114 is something else.

After making this discovery, I realized that the very nature of FBAR is at the heart of the problem, because FBAR is not a tax form and has nothing to do with Title 26 (i.e. the Internal Revenue Code) of the United States Code. Rather, the Report of Foreign Bank and Financial Accounts, FinCEN Form 114, commonly known as FBAR, was created by the Bank Secrecy Act of 1970. The Bank Secrecy Act forms part of Title 31 of the United States Code. In fact, prior to September 11, 2001, the IRS had almost nothing to do with FBAR.

It was only after the 9/11 terrorist attacks in the United States when the Congress decided to turn over the enforcement of FBAR to the IRS. Initially, the official purpose was to facilitate the Treasury Department’s fight against terrorism. Within a year, though, it became clear that the IRS would use FBAR in its fight against offshore tax evasion and other noncompliance with US international tax laws.

Using the draconian FBAR penalty structure (at that time, the form was still called TD F 90-22.1) against noncompliant US taxpayers turned out to be a highly effective intimidation tool for the IRS – a tool which works very well even today. Once the Treasury Department mandated the e-filing of FBARs, the name of FBAR was changed from TD F 90-22.1 to FinCEN Form 114.

Thus, the confusion over the relationship between FinCEN Form 114 and FBAR stems from FBAR’s peculiar legal history. Most of US taxpayers do not know any of it; they are simply confused by the fact that the IRS is enforcing a form that has two names and which has nothing to do with the Internal Revenue Code.

Japanese Bank Accounts : Main US Tax Obligations | FATCA Tax Lawyer

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Despite the fact that FATCA has been implemented already in July of 2014, a lot of US taxpayers are still unaware of their obligation to disclose their Japanese bank accounts in the United States. In this essay, I will discuss the three most important US international tax requirements concerning Japanese bank accounts: worldwide income reporting, FBAR and FATCA Form 8938.

Japanese Bank Accounts: Japanese Income Must Be Disclosed on US Tax Returns

All US tax residents must disclose their worldwide income on their US tax returns. This requirement includes all income generated by the Japanese bank accounts. This obligation applies to all types of income: bank interest income, dividends, capital gains, et cetera.

In this context, it is important to reject two incorrect, but commonly-held beliefs concerning the reporting of Japanese-source income. First, a significant number of US taxpayers believe that Japanese income does not need to be reported if it never left Japan. This is completely false; it does not matter where the income is earned or held – as long as you are a US tax resident, you must disclose your Japanese income on your US tax returns whether or not it was ever transferred to the United States.

The second and most common myth is the belief that, if the income is subject to Japanese tax withholding, it does not need to be reported in the United States. Some taxpayers hold this belief because of their familiarity with the territorial system of taxation, while others assume that this is true due to the prohibition of double-taxation under the US-Japan tax treaty.

In either case, this myth is also completely false. All US tax residents must disclose their Japanese income on their US tax returns even if it is subject to Japanese tax withholding or reported on Japanese tax returns. However, you may be able to take advantage of the Foreign Tax Credit to reduce your US tax liability by the amount of taxes paid in Japan.

Japanese Bank Accounts: FBAR

The Report of Foreign Bank and Financial Accounts, FinCEN Form 114 (popularly known as “FBAR”) is one of the most important reporting requirements that applies to Japanese bank accounts. Generally, a US person is required to file FBAR if he has a financial interest in or signatory authority or any other authority over foreign bank and financial accounts which, in the aggregate, exceed $10,000 at any point during a calendar year.

FBAR has a severe penalty system for failure to file the form, failure to provide accurate information on the form and failure to maintain supporting documentation for the amounts reported on FBAR. The penalties range from criminal penalties (i.e. actual time in jail) to willful and non-willful civil penalties. The civil penalties are adjusted for inflation each year.

Given the fact that FBAR penalties may completely destroy one’s financial life, US taxpayers should strive to do everything in their power to make sure that they comply with this requirement.

Japanese Bank Accounts: FATCA Form 8938

In addition to FBAR, US tax residents with Japanese bank accounts may be required to file Form 8938. Form 8938 is the creation of the Foreign Account Tax Compliance Act (“FATCA”). US tax residents must disclose their Specified Foreign Financial Assets (“SFFA”) on Form 8938 in each year their SFFA exceed the form’s filing threshold.

Form 8938 has a higher filing threshold than FBAR, but it is still relatively low, especially if the owner of Japanese bank accounts resides in the United States. For example, if a taxpayer resides in the United States and his tax return filing status is “single”, then he would only need to have $50,000 or higher at the end of the year or $75,000 or higher at any point during the year in order to trigger the Form 8938 filing requirement.

Moreover, SFFA is defined very broadly to include a lot of more financial assets than what is required to be reported on FBAR; hence, it is easier for US taxpayers to meet the Form 8938 filing Threshold. SFFA includes foreign bank and financials accounts, bonds, swaps, ownership interest in a foreign business, beneficiary interest in a foreign trust and many other types of financial assets. A word of caution: even when FBAR and Form 8938 cover the same assets, both forms must be filed despite the duplication of the disclosure.

The readers should also remember that Form 8938 has it own distinct penalty structure for failure to file the form or failure to comply with all of its requirements.

Contact Sherayzen Law Office for Professional Help With Reporting of Your Japanese Bank Accounts in the United States

This essay broadly covered three most important and most common reporting requirements concerning Japanese bank accounts. There may be a lot more of these requirements depending on your particular fact pattern.

Sherayzen Law Office has extensive experience working with Japanese clients and their bank accounts. We can help you identify your US international tax requirements and prepare all of the tax documents necessary to comply with them. Moreover, if you did not comply with any of these US tax obligations in the past, we will help you with your offshore voluntary disclosure to minimize your IRS penalties and avoid IRS criminal prosecution.

We have successfully helped hundreds of US taxpayers to deal with their US international tax compliance, and We can help You!

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International Personal Services Sourcing Rules | International Tax Lawyer

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In a previous article, I explained that US tax law sources personal services to the place where these services are performed. What about a situation where such services are performed partially in the United States and partially outside of the United States (hereinafter, I will call such services “international personal services”)? In this article, I will address this situation and discuss the US international personal services sourcing rules.

I will specifically limit my discussion in this essay to international personal services sourcing rules concerning non-corporate independent contractors. In the future, I will discuss the income source rules for corporations and employees, including the source of income rules concerning fringe benefits and stock options.

International Personal Services Sourcing: Two Main Situations

The rules concerning the sourcing of international person services income depend on how a contracting agreement structures the payment for such services. In this context, there are two most common categories of contracts.

The first category of contracts specifically designates part of the payment to cover the services performed in the United States and part of the payment to compensate for services performed in a foreign country. In this situation, we can easily apply the general rule and source each part of the payment to the place where services are performed. In other words, the payment for US services will be US-source income and the payment for foreign services will be foreign-source income.

Unfortunately, contractors rarely structure their agreements in this way, because they often fail to retain an international tax lawyer to review their contracts for US international tax issues. Business lawyers also often make the same mistake, because they fail to see the need to involve a tax attorney.

Hence, most contracts fall within the second category of contracts, where a contract does not allocate the payment between services performed in the United States and those performed in a foreign country. The general rule is of little help for these contracts; hence, the IRS developed a supplementary legal process for income sourcing in this type of a situation.

International Personal Services Sourcing: the Two-Step Allocation Process

If the contract does not divide the payment between the countries where the services are performed, then the taxpayer will need to engage in a two-step process.

First, the taxpayer should determine if the terms of the contract allow to make an accurate allocation of payment between the United States and a foreign country. Sometimes, a contractor may perform services so specific to a country that the allocation of payment is obvious, even though the contract does not expressly allocate the payment to this country.

Second, if no such accurate allocation is possible, then the taxpayer should allocate the payment “on the basis that most correctly reflects the proper source of income on the facts and circumstances of the particular case.” Treas. Reg. §1.861-4(b)(1). This appears to be a very general rule that opens up possibilities for creative tax planning, but, once we look at the history of this rule, we will quickly realize that one method – the Time Rule (described below) – limits its flexibility.

The current flexible rule is in force only since 1976. Prior to that year, the IRS required the allocation of payment strictly based on the Time Rule. The impetus to changing to a more flexible rule was a 1973 case from the Tenth Circuit, Tipton & Kalmbach, Inc v US, 480 F2d 1118, 32 AFTR2d 73-5334 (10th Cir 1973). In that case, the IRS determined that a re-enlistment bonus was a compensation for services which the taxpayer performed on the day he re-enlisted. The paradoxical result was the fact that the location of the soldier on the day of his re-enlistment determined the sourcing of the entire re-enlistment bonus.

Hence, the IRS infused more flexibility into the Time Rule by adopting the language currently found in Treas. Reg. §1.861-4(b)(1). Nevertheless, given this history, there is no question that the Time Rule remains the most persuasive method of income allocation for non-corporate individual contractors.

It should be emphasized, however, that dominance of the Time Rule should not deter a taxpayer utilizing alternative methodology (for example, the value produced by specific services) if it is more accurate. In other words, the Time Rule is the default methodology which the IRS will use to allocate the payment between the countries, but a taxpayer may use other alternatives as long as he can persuade the IRS that his methodology represents a more accurate allocation of income.

International Personal Services Sourcing: the Time Rule

The time has come to define the Time Rule. According to Treas. Reg. §1.861-4(b)(2)(ii)(E), under the Time Rule, the amount of payment allocated to the United States “is the amount that bears the same relation to the individual’s total compensation as the number of days of performance of the labor or personal services by the individual within the United States bears to his or her total number of days of performance of labor or personal services.” Taxpayers should use fractions in determining the allocations.

Let’s use an example to demonstrate the application of the Time Rule. A US Corporation signs a contract with Mr. Hause, a tax resident of Germany, to provide professional advice concerning incorporation of German heavy machinery into a Chinese factory owned by the corporation. The total price paid is $900,000; the work is performed within 180 days. Out of these 180 days, Mr. Hause spends 60 days in the United States working on the implementation plans and 120 days in China overseeing the implementation process. Based on the Time Rule, Mr. Hause spent 1/3 of his time in the United States and 2/3 in China; hence, $300,000 will be considered US-source income and $600,000 will be sourced to China. Of course, if Mr. Hause can show that the value of his work in China was far more important to the contract than his work in the United states, he can use an alternative methodology (which may still have to survive the IRS scrutiny during an audit).

Based on this example, you can see why the IRS likes the Time Rule – it is a relatively straightforward, objective calculation that can be easily implemented in almost any case.

Contact Sherayzen Law Office for Professional Help With International Personal Services Sourcing Rules and Other US International Tax Issues

Sherayzen Law Office can help you with all of your US international tax needs, including the international personal services sourcing rules. Our highly experienced international tax team has successfully helped US taxpayers around the globe to deal with their US international tax issues. We can help You!

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