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Green Card US Tax Residency Relationship | International Tax Lawyers Miami

The definition of a US tax resident consists of various categories.  Among them are US Permanent Residents or “green card” holders.  This article explores Green Card US tax residency relationship.

General Rule: Green Card Holders are US Tax Residents

A lawful permanent resident of the United States is a US tax resident. IRC §7701(b)(1)(A)(i). IRC §7701(b)(6) defines the lawful permanent resident as: (1) the individual who has been “lawfully accorded the privilege of residing permanently in the United States as an immigrant in according with the immigrations laws” at any time during the calendar year, and (2) “such status has not been revoked (and has not been administratively or judicially determined to have been abandoned).”

Green Card US Tax Residency: Physical Presence in the United States Does Not Matter

As you can see from the definition above, the green card test does not depend on where the US permanent resident actually resides.  In other words, even if a green card holder spent very little time (just enough to maintain his green card) in the United States, he is still a US tax resident.

Green Card US Tax Residency: Entry into the United States is Critical

Contrary to the actual physical presence after becoming a US tax resident, the entry into the United States with a green card is a highly important event.  As the regulations explain, a green card holder is not a “resident alien” for US tax purposes until he actually enters the United States while holding his green card.  “The residency starting date for an alien who meets the lawful permanent resident test (green card test), described in paragraph (b)(1) of § 301.7701(b)-1, is the first day during the calendar year in which the individual is physically present in the United States as a lawful permanent resident.” §301.7701(b)-4(a).

This means that, if an alien receives a green card but never enters the United States, he will never be a “resident alien” for US tax purposes. Of course, presumably, the green card will eventually lose its validity for failure to maintain it.

However, once the alien enters the United States with his green card, he becomes a resident alien for US tax purposes exactly on that day.  His US tax residency will last until the green card is revoked or he is considered to have abandoned his US permanent residency either judicially or administratively.

Green Card US Tax Residency: US International Tax Implications

Since obtaining a green card is pretty much equivalent to becoming a US tax resident, we must explore the implications of becoming a US tax resident especially from the US international tax perspective.  In a previous article, I already explored in detail the differences between US tax obligations of a resident alien (for US tax purposes) versus nonresident alien. Here, I will highlight the most important of these obligations from the US international tax perspective.

The first obvious US tax consequence of getting a green card and becoming a US tax resident is worldwide income taxation.  The United States government taxes its tax residents on their worldwide income, irrespective of where they earn this income. It also does not matter whether the green card holder’s foreign income is subject to taxation in a foreign country, whether it has been repatriated to the United States, whether it comes from pre-US funds, et cetera.  The obligation to report foreign income on US tax returns is absolute (of course there may be some treaty-based specific exceptions).

Second, a US tax resident may have to report deemed income based on the various anti-deferral tax regimes, such as Subpart F rules, GILTI, et cetera.

Finally, a US tax resident must also comply with all of his US information returns obligations, such as FBAR (officially FinCEN Form 114, the Report of Foreign Bank and Financial Accounts), Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, Form 8938, Form 926, et cetera

Contact Sherayzen Law Office to Understand Your US International Tax Obligations as a Green Card Holder

If you have a green card and you wish to understand your US international tax obligations, you should contact the international tax law firm of Sherayzen Law Office.  We have extensive experience in advising green card holders concerning their US tax obligations, including compliance with US international information returns.  If you have not compliant with your US tax obligations, then we can help bring your US tax affairs into full compliance with US tax laws.

Contact Us Today to Schedule Your Confidential Consultation!

Reasonable Cause Written Advice Standard | International Tax Lawyer

Reliance on a written advice of a tax practitioner (attorney, CPA, etc.) may provide the basis for a reasonable cause exception to imposition of IRS noncompliance or late filing penalties with respect to pretty much every single US international tax compliance requirement. In this short article, I will describe the reasonable cause written advice standard concerning how the written advice should be written in order to satisfy and strengthen your legal case before the IRS.

Reasonable Cause Written Advice Standard: What A Practitioner May Advise On

First of all, it is important to understand that a practitioner may provide a written advice pretty much on any US tax matter.  In other words, a taxpayer may obtain a written advice from a practitioner on any matter concerning the application and/or interpretation of any provision of the Internal Revenue Code, any provision of law impacting the taxpayer’s US tax obligations, any Treasury regulations and any other law or regulation that the IRS administers.

Reasonable Cause Written Advice Standard: What Written Advice Should Include

When he writes a tax advice, the practitioner should make sure that he complies with some important rules:

  1. The practitioner should consider all relevant facts and circumstances that the practitioner knows or would reasonably know. This means that two things must happen: (a) practitioner should conduct a reasonable investigation, including an interview with the taxpayer, to secure the necessary facts; and (b) the taxpayer must disclose all facts that he believes to be relevant and/or the practitioner asked him about. The disclosure of relevant facts by the taxpayer is absolutely crucial to the strength of the reasonable cause exception argument.
    At the same time, a failure by the practitioner to do a reasonable investigation of relevant facts may in of itself constitute a reasonable cause. He also should not rely on what he believes unreasonable, incorrect, incomplete and/or inconsistent representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) of the taxpayer or any other person.
  2. The practitioner should base his written advice on reasonable factual and legal assumptions (including assumptions of future events).
  3. The practitioner should apply the relevant law to the facts of the case. In other words, a written advice cannot simply state the law and assume that it should apply to the taxpayer’s case without the analysis of whether the facts of this particular case fit the relevant legal standard.

A failure to comply with all of these three rules may not necessarily be lethal to your legal case, but it may greatly affect its strength.

Reasonable Cause Written Advice Standard: Reliance on Advice from Third Parties

Sometimes, a practitioner may incorporate an advice from a third person into his own written advice.  He can do it only if the advice was reasonable in light of all facts and circumstances of the case.

The IRS is clear that such reliance on a third-party advice cannot be reasonable in three circumstances. First, the practitioner knows or reasonably should know that the opinion of the other person is not reliable. Second, the practitioner knows or reasonably should know that the other person does not have the necessary competence and necessary qualifications to provide the advice.  Finally, the practitioner knows or reasonably should know that the other person has a conflict of interest in violation of the IRS Circular 230.

Contact Sherayzen Law Office to Help With the Voluntary Disclosure of Your Prior US Tax Noncompliance

If you have not disclosed your foreign income and/or foreign assets to the IRS in violation of your US tax obligations, contact Sherayzen Law Office as soon as possible for professional help.  We have helped hundreds of US taxpayers to bring their tax affairs into compliance with US tax laws, including through a voluntary disclosure such as SDOP (Streamlined Domestic Offshore Procedures)SFOP (Streamlined Foreign Offshore Procedures)DFSP (Delinquent FBAR Submission Procedures), DIIRSP (Delinquent International Information Return Submission Procedures), IRS VDP (IRS Voluntary Disclosure Practice) and Reasonable Cause disclosures. Mr. Eugene Sherayzen, an international tax attorney, can help you evaluate the strength of your legal case, including whether it meets the reasonable cause standard.  We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Establishing Cost-Basis in Foreign Real Estate | IRS Audit Tax Lawyer & Attorney

One of the most challenging issues during an IRS audit is establishing cost-basis in foreign real estate.  This issue most frequently comes up in the context of real estate that was obtained through inheritance or gift many years ago.  In this article, based on my IRS audit experiences, I would like to discuss the main challenges and case strategies associated with establishing the cost-basis in foreign real estate in a manner that would satisfy the IRS during an audit.

An important note: I will not be discussing this issue in the context of an IRS audit of an offshore voluntary disclosure and how it would affect the calculation of an Offshore Penalty.  This essay is strictly limited to an IRS audit that involves US international tax issues without the taxpayer ever going through a voluntary disclosure.

Another important note: this article is written more for the benefit of other international tax lawyers, not the general public.

Establishing Cost-Basis in Foreign Real Estate: Importance

Before we discuss the problems associated with establishing the cost-basis in foreign real estate, we need to first understand why this issue is so important.  There are three main consequences to establishing cost-basis in the context of an IRS audit. 

First, the income tax impact of failure to establish cost-basis in a foreign property on the audited taxpayer may be truly disastrous.  Obviously, if you cannot prove any cost-basis in a property (or you can only convince the IRS that there was minimal cost-basis), you will have to recognize all proceeds from the sale of this property as capital gains (or potentially subpart F income if you owned a property though a foreign corporation).

Second, there is a very important psychological impact on the entire audit if you have a large unreported gain from sale of foreign real estate.  The IRS agent in charge of an audit is likely to take a more aggressive position not only on this issue, but also on other issues irrespective of whether they are directly related to unreported gain.   The most frequent victims of this hardened attitude of an IRS agent are the legal arguments in support of a reasonable cause.

Finally, a large gain from a sale of foreign real estate is likely to encourage the IRS to dig deeper and even expand the audit to more years.  In one of my audit cases, an IRS agent initially believed that there was a large capital gain and expanded the audit to five prior years; however, he reversed this decision once I was able to show that the sold real property had a much higher cost-basis due to numerous improvements that were made by my client over a number of years.

In other words, establishing cost-basis in a sold real estate property may be one of the most crucial issues in an IRS audit.

Establishing Cost-Basis in Foreign Real Estate: Top 3 Challenges

The challenges to establishing cost-basis in foreign real estate are highly dependent on the facts of the case.  However, there are three main themes that usually appear in one form or another in every IRS audit case.

The first challenge is absence of documentation.  This is by far the most common and most important battleground between the IRS and the taxpayer during the vast majority of IRS audits in this area, especially if the direct documentation is absent due to passage of time.

The second challenge is the potential opposition from the IRS to proving cost-basis indirectly through usage of circumstantial evidence and third-parties.

The third challenge is establishing the credibility of evidence. For example, in one of my cases, the IRS initially refused to accept a valuation report prepared by a local professional valuation expert because the report lacked a proper explanation of how he arrived at the proposed values.

Establishing Cost-Basis in Foreign Real Estate: Top 4 Strategies for Overcoming Challenges

There are numerous strategies to deal with the cost-basis establishment challenges. Your choice among them should depend on the facts and circumstances of your case.  Sometimes, you will even come up with a brand-new strategy tailored specifically to the unique challenges of your case.

Nevertheless, there are four common themes to the strategies used in overcoming the aforementioned challenges.  First, you need to recreate the logical history of the property and capital improvements to the property in order to convince the IRS that the valuation your client supplied is logical and reasonable.

Second, demonstrate to the IRS agent in charge of your client’s audit that you are a reliable source of information.  The more objective you appear (and you actually are), the more the IRS sees that you will not allow false facts or statements to enter the record, the more the IRS sees that your client shares both of these traits, the more likely the IRS agent will accept your position or be willing to achieve a compromise with you (see below).

Third, utilize indirect and circumstantial evidence as well as third-party affidavits/testimony to support the valuation of the property.  In other words, if you have no ability to directly establish the cost-basis of a property, then you need to find creative ways to build the necessary records and establish their credibility through usage of supporting documents and/or testimony. 

For example, in one of my previous audits, the client had no documentation whatsoever except one isolated receipt to prove the substantial improvements made to her foreign real estate over the past almost forty (!) years.  My solution to this problem was to first get an affidavit from my client fully stating all improvements made with approximate cost based purely on her memory.  Then, I obtained additional signed statements from neighbors largely supporting the estimates as well as the fact that these improvements were indeed made. Finally, I obtained a statement from a local construction company owner who stated that he recalled these improvements and confirmed the estimated amounts.  Additionally, all of the improvements were properly explained by the history of how the property was obtained, for what purpose and why so many improvements were needed.  All of these facts and circumstances were explained in a letter to the IRS agent together with the legal basis (i.e., case law) showing how courts have accepted similar evidence in the past. Under the weight of this substantial record (and some other circumstances of this case), the IRS finally agreed to accept all improvements as part of an overall compromise.

Finally, use creative legal strategies to convince the IRS to accept a different cost-basis in a property through operation of tax rules.  This is a very complex strategy, but it is more commonly employed than one may believe.  For example, in one of my prior audit cases, the IRS agreed to disregard the foreign corporation that owned the foreign property allowing the stepped-up basis for this inherited property.

Contact Sherayzen Law office for Professional Help with IRS Audits Involving Foreign Real Estate

If you have foreign assets and you are audited by the IRS, contact Sherayzen Law Office for professional help.  We have helped hundreds of US taxpayers around the world to bring their tax affairs in full compliance with US tax laws, including during IRS audits.  We can help you!

Contact Us Today to Schedule a Confidential Consultation!

Factual Basis & Tax Planning | International Tax Lawyer & Attorney

In a previous article, I discussed the necessity of balancing international tax planning priorities in order to obtain an optimal tax result. In this article, I will explain why international tax planning should be based on a carefully-studied factual basis.

Factual Basis as the Foundation for International Tax Planning

Young inexperienced lawyers often come up with a particular tax strategy and then they try to implement it independent of the actual facts on the ground. Irrespective of how brilliant such a strategy would be in the abstract, it is almost always doomed to become a failure.

Why? The answer is very simple: these lawyers turn international tax planning on its head. They build the second level of a house without ever building a foundation for it. No matter how well they plan out a strategy, it will fall apart almost immediately when it comes in conflict with the facts – how the business is run, its capital structure, its needs, its goals, its cash flow source, its operating model, its E&P, its foreign tax credit and numerous other important considerations.

Hence, the starting point of any tax planning should be a careful factual study of the business.

Studying Factual Basis as a Way to Uncover Potential Opportunities

In my practice, I have found that a careful study of a business may generate a number of potential planning opportunities that may have otherwise been ignored. For example, during a study of a company’s loan structure, one can sometimes find opportunities to treat these loans as equity investments and utilize much better currency exchange rates to build up the client’s basis in the company (potentially even resulting in a reversal of an entire capital gain upon the sale of this company).

Factual Basis: Four Most Important Components

While an attorney should study all relevant facts, there are four main components that he must cover. The components are: (1) organizational chart and capital structure; (2) operating model; (3) tax status and characteristics; and (4) analysis of financial statements. Let’s analyze each component in more detail.

Factual Basis Components: Organizational Chart and Capital Structure

You should start your factual analysis by building the organizational chart of the business and understanding its capital structure. What you need to do is to understand each entity within the corporate structure and the place it occupies in the overall business structure, identify the tax status of each business, understand the sources of cash and where it is used, create a diagram of debt and equity instruments (including whether these are related or unrelated party instruments), study how the business operates across the entire corporate structure, uncover which currencies are used in business (as well as any currency hedging) and review the withholding tax exposure/compliance.

This first component is likely to help you to identify the tax inefficiencies of the existing corporate structure and seek structural alternatives. I recommend that at this stage you plan for creating a more tax-efficient financing of foreign affiliates to maximize foreign country deductions, minimize tax imposed on interest income, reduce withholding tax and assure sufficient cash flow throughout the structure.

Factual Basis Components: Operating Model

The second component of your factual analysis (though it will probably come at about the same time as you start working on the first component) is the operating model of the business. In other words, what type of a business is it: manufacturing, sales, services or IP (development, ownership and/or usage of IP)? How does the business operate: local country manufacturing, local distributing/franchising, global service contracts, et cetera?

I recommend that you especially focus here (as a goal of your tax planning strategy) on: tax-efficient structuring of current and anticipated foreign operations to maximize tax deferral, tax-efficient financing of capital needs and development of strategy concerning IP development and licensing.

Factual Basis Components: Tax Characteristics

The third component is the one that tax attorneys are likely to like the most, because it is very close to their training and professional interest – the study of the tax characteristics of the corporate structure: income/losses, NOL, AMT, foreign tax credit position (carryovers), E&P, transfer pricing, local tax position and PTI (previously taxed income through Subpart F, 965 tax, GILTI tax, et cetera).

The focus of your tax planning goals here are centered around foreign tax credit, repatriation of earnings, minimizing Subpart F income and transfer pricing (i.e. allocation of profits between the US head office and its foreign affiliate companies).

Factual Basis Components: Financial Statements

Finally, the fourth component of your factual basis study consists of the financial statement analysis. You need to carefully review the financial statement with the focus on: Effective Tax Rate (“ETR”) reconciliation, deferred tax analysis, reinvestment, valuation and foreign currency. The focus of your tax planning goals here should be on low-tax deferral structures (for example, through indefinite reinvestment outside of the United States at a lower tax rate) and the most optimal foreign tax credit utilization.

Contact Sherayzen Law Office for Professional Help With International Tax Planning

If your US company conducts business outside of the United States, contact Sherayzen Law Office for professional help with your international business tax planning. We have helped companies plan their inbound and outbound transactions for US and foreign companies, and we can help you!

Foreign Real Estate US Taxpayer Definition | International Tax Lawyer

This essay seeks to identify those considered to be a “US Taxpayer” with respect to reporting foreign real estate or income from it to the IRS. In other words, today, I will discuss the foreign real estate US Taxpayer definition.

Foreign Real Estate US Taxpayer Definition: IRC §7701(a)

The definition of “US taxpayer” for the purposes of foreign real estate is equivalent to the definition of US tax resident or “US Person” in IRC §7701(a). “US Persons” are equivalent to “US taxpayers” for the purposes of this article.

Note that, under §7701(a)(1), a person “shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation”. In other words, a “person” may mean not only an individual, but also a business entity, trust or estate.

Foreign Real Estate US Taxpayer Definition: General Definition

Under §7701(a)(30), a “US Person” means a US citizen, US resident alien, domestic partnership, domestic corporation, any estate that is not a foreign estate and a trust that satisfies both conditions of §7701(a)(30)(E). Let’s discuss each of these categories of US Persons in more detail.

Foreign Real Estate US Taxpayer Definition: Individuals Who Are US Persons

As I stated above, all US citizens and US resident aliens are considered US Persons. In the vast majority of cases, it is fairly easy to determine who a US citizen is; most complications occur with respect to “accidental Americans” and Americans with only one parent who is a US citizen.

A US resident alien is a more complex term. It includes US Permanent Residents (i.e. “green card” holders) as well as all persons who satisfied the Substantial Presence Test (unless an exception applies) and all persons who declared themselves as US tax residents. This means that a person may be a US resident for tax purposes, but not for immigration purposes. This situation creates a lot of confusion among people who marry US persons or who come to the United States to work; many of them believe themselves to be Non-US Persons, but in reality they are US tax residents.

Foreign Real Estate US Taxpayer Definition: Domestic Corporations & Partnerships

Under §7701(a)(4), corporations and partnerships are considered US Persons if they are created or organized in the United States or under the laws of the United States or any of its states. In the case of partnerships, the IRS may issue regulations that provide otherwise, but the IRS has not done so yet. Conversely, a corporation or a partnership is a Non-US Person if it is not organized in the United States.

Pursuant to §7701(a)(9), the definition of the United States for the purposes of §7701(a)(4) includes only the 50 States and the District of Columbia. In other words, §7701(a)(9) excludes all US territories and possessions from the definition of the United States. For example, a corporation formed in Guam is a Non-US Person!

The biggest complication that one would encounter in this area of law is with respect to common-law partnerships. The determination of their US tax residency may be a lot more complex, because they are not officially organized under the laws of any state.

Foreign Real Estate US Taxpayer Definition: Domestic Trust

A trust is a US Person if it satisfies both tests contained in §7701(a)(30)(E). The first test is a “court test”: a court within the United States must be able to exercise primary supervision administration. The second test is a “control test”: one or more US persons must have the authority to control all substantial decisions of the trust. Failure to meet either test will result in the trust being a Non-US Person with huge implications for US tax purposes.

Foreign Real Estate US Taxpayer Definition: Domestic Estate

While all other definitions described above define a domestic entity and state that a foreign entity is not a domestic one, it is exactly the opposite with estates. Under §7701(a)(30)(D), an estate is a US Person if it is not a foreign estate described in §7701(a)(31).

§7701(a)(31)(A) defines foreign estate as estate “the income of which, from sources without the United States which is not effectively connected with the conduct of a trade or business within the United States, is not includible in gross income under subtitle A”.

Contact Sherayzen Law Office for Professional Help with Your Foreign Real Estate Reporting Obligations in the United States

If you are a US person who owns foreign real estate and you have questions concerning your US tax compliance concerning owning foreign real estate, selling real estate or reporting income generated by foreign real estate, contact Sherayzen Law Office for professional help. We have helped US taxpayers around the world with their foreign real estate US tax obligations, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!