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Substantial Presence Test Exceptions | Minneapolis Minnesota International Tax Lawyer

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In a previous article, I discussed in detail the Substantial Presence Test and I mentioned that there are a number of exceptions to the Test. This means that, even though a person met the requirements of the substantial presence test, he can still avoid the resident alien status for US income tax purposes based on a specific exception.  In this brief essay, I will summarize these Substantial Present Test exceptions.

Substantial Presence Test Exceptions: Closer Connection

The first set of exceptions includes the Closer Connection Exception and the Tax Treaty Exception.  Let’s deal with each one separately.

Under the Closer Connection Exception, an individual who meets the requirements of the Substantial Presence Test is able to escape being a US tax resident for income tax purposes if he can demonstrate a “closer connection” to a foreign country.

In another article, I detail all of the requirements of the Closer Connection Exception.  Here I would like to restate the main requirements under IRC § 7701(b)(3)(B) and Treas. Reg. § 301.7701(b)-2(a):

1.The individual must be present in the United States for fewer than 183 days in the current calendar year;

2.The individual must maintain a tax home in a foreign country during the year;

3.The individual must have a closer connection to that foreign country than to the United States; and

4. An individual must be an eligible individual.

Substantial Presence Test Exceptions: Tax Treaty Exception

The Tax Treaty Exception is very similar to the Closer Connection Exception, but it is based on a completely different concept – the tie-breaker rules of a tax treaty.

 IRC §7701(b)(6) and Treas. Reg. §301.7701(b)-7 provide that an individual who meets the substantial presence test but is a resident of a treaty country under a tie-breaker provision of an income tax treaty may elect to be treated as a nonresident alien for US income tax purposes. This individual will need to make an election on Form 8833, Treaty-Based Return Position Disclosure.

Substantial Presence Test Exceptions: Eight Categories of Exempt Individuals

While the Closer Connection and the Tax Treaty Exceptions deal with someone who actually met the Substantial Presence Test and is trying to escape the its consequences, the second set of exceptions exempts the days spent in the United States from the consideration of the Substantial Presence Test so that the exempt individual never meets the Substantial Presence Test.  This is a very important distinction, because it may greatly affect one’s obligations concerning US international information returns.

Here is a list of categories of exempt persons:

Foreign government-related individuals and their immediate family (26 USC §7701(b)(5)(B))

Teachers and trainees and their immediate family (26 USC §7701(b)(5)(C))

Foreign students on F-, J-, M- or Q-visas (26 USC §7701(b)(5)(D))

Professional athletes temporarily in the US for charitable sporting events (26 USC §7701(b)(5)(A)(iv))

Individuals unable to leave the US due to medical conditions (26 USC §7701(b)(3)(D)(ii))

commuters from Canada and Mexico 26 USC §§7701(b)(7)(B)

foreign vessel crew members 7701(b)(7)(D) and

and persons who travel between two foreign countries with a less than a 24-hour layover in the United States 7701(b)(7)(C)

Substantial Presence Test Exceptions: Note on the Professional Athletes Exception

The “professional athletes who are temporarily present in the United States to compete in a charitable sporting event” category  has very specific requirements for the sport events in order for exemption to apply.  First, the sports event must be organized primarily to benefit §503(c)(3) tax-exempt organization. Second, the net proceeds from the event must be contributed to the benefitted tax-exempt organization. Finally, the event must be carried out substantially by volunteers.

Substantial Presence Test Exceptions: Note on the Medical Condition Exception

Concerning the last category “foreign aliens who are unable to leave the United States because of a medical condition”, Rev. Proc. 2020-20 expanded this medical condition exception to include “COVID-19 Medical Condition Travel Exception” for eligible individuals unable to leave United States during “COVID-19 Emergency Period”. The term COVID-19 Emergency Period is a single period of up to 60 consecutive calendar days selected by an individual starting on or after February 1, 2020 and on or before April 1, 2020 during which the individual is physically present in the United States on each day. An Eligible Individual may claim the COVID-19 Medical Condition Travel Exception in addition to, or instead of, claiming other exceptions from the substantial presence test for which the individual is eligible.

Substantial Presence Test Exceptions: Eligibility is on Day-by-Day Basis

The eligibility for any particular exception is determined on a day-by-day basis. If an alien ceases to qualify for any of these exceptions because of a change in circumstances but remains in the United States, he must count the days present in the United States for the purposes of the substantial presence.  The count must start from the very day that he no longer qualifies for the exception.

Substantial Presence Test Exceptions: Immediate Family

Immediate family can be derivatively eligible for a substantial present test exception only for the following categories: foreign government-related individual, a teacher or trainee (J-visa or Q-visa holder) and a student (F-visa or M-visa holder).  The family of the individuals in the other five categories may only claim an exception based on their own particular facts and circumstances.

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

US international tax law is incredibly complex.  This is why you need to contact Sherayzen Law Office for professional help.  Sherayzen Law Office is a highly-experienced leader in US international tax compliance that stands out for its ability to navigate complex international tax issues with creativity, precision and depth.

Contact Us Today to Schedule Your Confidential Consultation!

Substantial Presence Test United States Definition | International Tax Lawyer Minneapolis

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Foreigners who satisfy the Substantial Presence Test constitute a an important and very large category of resident aliens for US tax purposes. Substantial Presence Test is based on the number of days that an individual is physically present in the country. The definition of “United States” varies depending on a particular Internal Revenue Code (IRC) provision.  This brief essay explores the Substantial Presence Test United States definition.

Substantial Presence Test United States Definition: Background Information

In a previous article, I explored in detail the Substantial Presence Test. I will only provide a summary of the test in this essay.

In reality, there are two substantial presence tests; if an individual meets either test, he is a US tax resident unless an exception applies.

The first substantial presence test is met if a person is physically present in the United States for at least 183 days during the calendar year. 26 USC §7701(b)(3).  

The second test (the so-called “lookback test”) is satisfied if two conditions are met: (1) the person is present in the United States for at least 31 days during the calendar year; and (2) the sum of the days on which this person was present in the country during the current and the two preceding calendar years (multiplied by the fractions found in §7701(b)(3)(A)(ii)) equals to or exceeds 183 days. 26 USC 7701(b)(3)(A).  

Let’s discuss how exactly the lookback test works.  The way to determine to determine whether the 183-day test is met is to add: (a) all days present in the United States during the current calendar year (i.e. the year for which you are trying to determine whether the Substantial Presence Test is met) + (b) one-third of the days spent in the United States in the year immediately preceding the current year + (c) one-sixth of the days spent in the United States in the second year preceding the current calendar year. See 26 USC §7701(b)(3).

Substantial Presence Test United States Definition: Definition of United States

Treas. Regs. §301.7701(b)-1(c)(2)(ii) define “United States” for the purposes of the Substantial Presence Test.  In particular, the regulations state that “United States” includes all fifty states of the United States and the District of Columbia.  Moreover, the definition of “United States” also includes: “the territorial waters of the United States and the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the United States and over which the United States has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources”.  Id.

Moreover, the regulations specifically exclude all possessions and territories of the United States as well as the air space over the United States. Id.  For example, time spent in Puerto Rico will not count toward the substantial presence test. Similarly, if an alien flies over the United States on a plane and never lands, then the IRS will exclude this day from the count.

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

The Substantial Presence Test United States Definition is just one of a huge array of complications in US international tax law.  This is why you need to secure the help of Sherayzen Law Office for professional help with US international tax issues, including tax compliance, tax planning and offshore voluntary disclosures.  We have helped hundreds of taxpayers around the world.  We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Saving Clause | International Tax Lawyer & Attorney Minneapolis

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The Saving Clause is a provision that all US income tax treaties contain. In this brief essay, I will introduce the readers to the Saving Clause, its purpose and its effect.

Saving Clause vs. Savings Clause

The first thing to note is that the proper way to refer to this important tax treaty provision is “saving clause” and not “savings clause” (see, for example, 2016 US Model Income Tax Treaty, article 1(4)).  You will still see sometimes various articles and even tax provisions (for example, §7852(d)(2)) incorrectly use “savings clause”.

Saving Clause: Effect on US Citizens

The Saving Clause provides that the United States may tax its citizens as if the tax treaty were not in effect. Here is a common example of the clause from the US-Spain tax treaty: “Notwithstanding any provision of the Convention except paragraph 4, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if the Convention had not come into effect” (italics added).

In other words, the Saving Clause prevents US citizens who are classified as income tax residents of the treaty country from claiming a different tax treatment that would otherwise be available under the treaty to noncitizens who are residents of the treaty country. For example, a US citizen cannot claim an exemption from certain income otherwise exempt for a noncitizen who is a resident of a treaty country.

Saving Clause: Effect on US Residents

The impact of the Saving Clause on US residents is more complicated.  The Clause usually provides that the United States may tax its residents as determined by a treaty (usually in an Article 4) as if the treaty were not in effect.  Usually, these resident provisions would contain tie-breaker rules. This would mean that an individual who is a resident alien under §7701(b) but a resident of the treaty country under the treaty, then the saving clause cannot deny the individual any of the exemptions from US tax law or reductions in US tax that are provided by the treaty to residents of the treaty country. In such cases, the saving clause would have limited impact on residents.

If, however, a tax treaty does not contain the tie-breaker provisions in its definition of a tax resident (as some old treaties), then the impact of the Saving Clause may be tremendous and even dispositive. In this situation, the Saving Clause assures that an individual who is, at the same time, a resident alien under the Internal Revenue Code IRC) provisions and a resident of the treaty country under the treaty country’s laws will still be taxed as a US resident alien irrespective of the tax treaty.

Saving Clause: Worldwide Income Reporting and Foreign Asset Disclosure Requirements

The application of the Saving Clause may have tremendous impact on an individual’s US tax obligations.  First of all, I remind the readers that, absent treaty limitations, all US tax residents are taxed on their worldwide income. This is the rule irrespective of whether the income is earned, whether it is repatriated to the United States and whether it is subject to foreign tax withholding.

Moreover, US Persons may also be subject to multiple US information return reporting requirements, including FBAR, Form 8938, Form 5471, et cetera.  In this context, it is important to remember that the definition of a “US Person” is broader than the definition of a “resident” for income tax purposes. In other words, a person may be a nonresident for tax purposes due to a tax treaty provision, but he will still be a US Person for the purposes of filing an FBAR or another US information tax return.

Contact Sherayzen Law Office for Professional Help with Your US International Tax Compliance

If you are a US tax resident or a US person, you may be subject to highly complex US international tax requirements.  In order to ensure your full compliance with US international tax provisions, contact Sherayzen Law Office for professional help.

Since 2005, Sherayzen Law Office has helped hundreds of US taxpayers to resolve their prior US tax noncompliance and assure their continuous compliance with US international tax laws.  We have extensive experience with all major US tax compliance requirements such as: worldwide income tax compliance, FBAR, Form 926, Form 3520, Form 3520-A, Form 5471, Form 8621, Form 8865, FATCA Form 8938, et cetera. We can help you!

Contact Us Today to Schedule Your Confidential Consultation!

Foreign Inheritance Tax Attorney Minneapolis | International Tax Lawyer Minnesota

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Receiving a foreign inheritance may open a litany of US international tax compliance obligations. Therefore, one of the first things you should do is to seek the help of an international tax attorney who specializes in foreign inheritance reporting.  If you reside in Minneapolis, Minnesota, you need to look for a Foreign Inheritance Tax Attorney Minneapolis. You will find that Sherayzen Law Office Ltd. is very likely to be the perfect fit for you.

Foreign Inheritance Tax Attorney Minneapolis: Why Foreign Inheritance is So Important to Your US international Tax Compliance

There are two main reasons why receiving a foreign inheritance may be a critical event for your US international tax compliance. First, receiving a foreign inheritance means that you have additional assets, income and transactions to report to the IRS.  The way that US international tax law works, it means that it is usually more than just one requirement is triggered. Rather, it may be a set of issues and reporting obligations that require an experienced international tax attorney to resolve them correctly. 

The multitude and complexity of issues can be fairly large: from the reporting of the foreign inheritance itself, income recognition, transfer of cash/assets to the United States to additional reporting requirements concerning newly acquired foreign assets and offshore voluntary disclosures involving prior noncompliance. You should keep in mind that noncompliance with these requirements may result in the assessment of high IRS penalties.

The second reason why a foreign inheritance is so important and so dangerous is the relative complacency with respect to and even complete nonrecognition of the potential US tax consequences of receiving a foreign inheritance with all of the multitude of issues to which I alluded above.  The problem is not just that many US taxpayers are completely ignorant of the fact that a foreign inheritance may require extensive US tax compliance. Even worse, many taxpayers erroneously but ardently believe that a foreign inheritance is something completely unrelated to the United States and should not have any US tax consequences. At best, they may focus on Form 3520 reporting while overlooking the complexity of the rest of the issues involved in receiving a foreign inheritance.

This is precisely why I highly recommend consulting an international tax lawyer with extensive experience in foreign inheritance US tax reporting, such as Sherayzen Law Office, if you have received or about to receive a foreign inheritance.

Foreign Inheritance Tax Attorney Minneapolis: International Tax Lawyer

I just mentioned that you need to seek the help of an international tax attorney rather than just a foreign inheritance tax attorney.  Why is that?

The answer is simple: a foreign inheritance attorney is first and foremost an international tax lawyer – i.e. a lawyer with profound knowledge of and extensive experience in US international tax law, particularly in the area of US international tax compliance. This means that a lawyer must be familiar with such common US international tax forms as Form 3520 (critically important for foreign inheritance reporting) and Form 8938.  He must also understand and be able to identify related US international tax compliance forms such as Forms 3520-A, 5471, 8858, 8865 cetera.  Of course, every US international tax lawyer must be very familiar with FinCEN Form 114 commonly known as FBAR.

In addition to these information returns, an international tax lawyer must be familiar with all types of foreign income reporting.  This requirement includes the knowledge of foreign rental income, PFIC compliance, GILTI income, capital gains concerning foreign real estate, et cetera.

Sherayzen Law Office is a highly experienced international tax law firm with respect to all of these income tax and information return requirements, including specifically all of the aforementioned forms.

Foreign Inheritance Tax Attorney Minneapolis: Tax Planning

It is highly prudent to engage in tax planning concerning a foreign inheritance. This is important not only for the purpose of limiting future tax burdens, but also to control future US tax compliance costs.  

Sherayzen Law Office has extensive experience in foreign inheritance US tax planning for its clients in Minneapolis and all over the world.  We also have a highly valuable experience of combining income tax planning with offshore voluntary disclosures.

Foreign Inheritance Tax Attorney Minneapolis: Offshore Voluntary Disclosures

Perhaps you learned late about your US international tax compliance requirements concerning foreign inheritance. In fact, this is a very common situation. In this case, you will find yourself in a very uncomfortable position of facing potentially multiple high IRS penalties for multiple violations of US international tax law.

For this reason, your foreign inheritance tax attorney must also have a profound understanding of the IRS voluntary disclosure options. In fact, in my experience, a discussion of a foreign inheritance often leads to the identification of past US international tax noncompliance and the immediate discussion of IRS offshore voluntary disclosure to remedy past noncompliance.

Offshore Voluntary Disclosures is a core area of our international tax practice at Sherayzen Law Office. We have helped hundreds of US taxpayers worldwide, including in Minneapolis, to bring their tax affairs into full compliance with US tax laws. This work included the preparation and filing of all kinds of offshore voluntary disclosures including: SDOP (Streamlined Domestic Offshore Procedures), SFOP (Streamlined Foreign Offshore Procedures), DFSP (Delinquent FBAR Submission Procedures), DIIRSP (Delinquent International Information Return Submission Procedures), et cetera.

Contact Sherayzen Law Office for Professional Foreign Inheritance Tax Help

Sherayzen Law Office is an international tax law firm that specializes in US international tax compliance, including foreign inheritance reporting.  We have helped numerous clients around the world with their foreign inheritance US tax compliance. We can help you! Hence, if you are looking for a Foreign Inheritance Tax Attorney Minneapolis, contact us now to schedule Your Confidential Consultation!

Sherayzen Law Office Successfully Completes 2019 April 15 Tax Season

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Hundreds of filed complex tax forms and FBARs is the supreme evidence of the successful completion of the 2019 April 15 tax season by Sherayzen Law Office. Sherayzen Law Office is an international tax law firm that specializes in offshore voluntary disclosures and US international tax compliance.

Annual compliance occupies a special place in the firm’s practice. This part of our practice consists of almost entirely clients who were so satisfied with our services that they wanted us to handle their annual tax compliance. It is a proud testimony of the high quality, efficiency and professionalism of Sherayzen Law Office’s work.

Since there are more and more clients every year who wish to retain our services for annual compliance, this has been a very dynamic area of growth. It also means that, with each year, the deadline pressure is rising.

The 2019 April 15 tax season was no exception. A record number of clients placed their utmost confidence in our work and asked us to prepare their 2018 income tax returns, information returns and FBARs. Moreover, the tremendous complexity of the 2017 tax reform has further added to the difficulty of the 2019 April 15 tax season.

Mr. Eugene Sherayzen, the founder and owner of Sherayzen Law Office, recognized very early that this tax season is going to be the most difficult one yet in the firm’s existence. This why he expanded and trained additional workforce at the beginning of 2019, engaged in proper tax season planning, addressed ahead of time the needs of the ongoing audit and offshore voluntary disclosure clients and established aggressive deadlines for the firm.

Thanks to all of this work by Mr. Sherayzen and the firm’s employees, all of the annual compliance deadlines were successfully completed. Moreover, Sherayzen Law Office was also able to finalize the filings for all of the offshore voluntary disclosure clients according to the already-created (by Mr. Sherayzen) customized plans of offshore voluntary disclosure.

We are not planning, however, to simply enjoy the laurels of another success. We look forward to helping hundreds of new clients with their offshore voluntary disclosures, IRS audits and international tax planning. We also already started our preparation for June 15, September 15 and October 15 tax seasons.

If you are looking for an international tax firm to which you entrust your case, you should retain the services of Sherayzen Law Office! We are a team of highly-experienced US international tax specialists who have helped hundreds of US taxpayers with their US international tax compliance and offshore voluntary disclosures. We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!