When Two Worlds Collide—Immigration & Tax Law


When businesses first go international, whether it’s a foreign company opening their first business in the United States, or a United States business opening their first foreign subsidiary, they are often surprised to learn about the American system of worldwide taxation. Alone amongst major industrialized nations, the United States taxes the worldwide income of United States citizens, and residents. Non-resident individuals & corporations are subject to U.S. federal tax for income "effectively connected with the conduct of a trade or business within the United States” ("ECI"). Gains or losses from disposition of U.S. real property (including shares of a U.S. real property holding company) are ECI even if the nonresident is not considered to be engaged in a U.S. trade or business.

As part of this often-complex system are strict reporting requirements with severe penalties for failures to file. Note that there are reporting requirements that are independent of whether or not a business or individual has any taxable income. The threshold for reporting is quite low, and a United States person must file a FINCEN 114 if they have authority over any financial account(s) in a foreign country, and the AGGREGATE VALUE of these account(s) exceeds $10,000.00 at any time during the calendar year. This amount is not indexed for inflation.

The intersection between immigration law, and tax law starts at the very question of what is a US person. It continues when one has to make determinations as to whether or not a person’s status makes them subject to the full range of United States tax and reporting.

A person’s status, in addition to analyzing the substantial presence test, is necessary for determining a person’s tax residency. Moreover, one has to analyze as to what impact tax reporting has on a person’s status, and businesses and individuals must plan accordingly.

When discussing and determining how the two worlds of immigration law, and tax law collide & affect one another, it is essential to note that the IRS reviews the reporting and recording of all payments, including but are not limited to: scholarships and fellowships; wages or compensation; independent contractor payments; royalties and commissions; dividends; and interest, etc. With this said, the IRS can, and does share this information with the USCIS, and vice versa.

Therefore, when determining the residency status of foreign nationals for U.S. tax withholding and reporting purposes, and in turn determining the tax reporting requirements for all required individuals, the four categories of individuals are broken down as: (i) U.S. citizen, (ii) permanent resident alien or immigrant alien, (iii) resident alien for tax purposes, and (iv) nonresident alien for tax purposes. In general, nonresident aliens generally are subject to income tax only on U.S. source income, and U.S. citizens and resident aliens generally are taxed on their worldwide income.

When determining whether, or not a foreign national is a resident alien for tax purposes, then the substantial-presence test must be followed. Essentially, it functions as the following two parts: the "31-day" test, and the "183-day" test. First, if the individual has not been or will not be present in the United States for at least 31 days, he or she will be treated as a nonresident alien for tax purposes. For the 183-day test, all of the days present in the United States during the current calendar year must be counted along with one-third of the days during the previous calendar year, and including one-sixth of the days during the second-preceding calendar year. If the total number is equal to or greater than 183 days, the foreign national is a resident alien for tax purposes, but if the total is less than 183 days, then the foreign national is a nonresident alien for tax purposes.

While in "exempt individual" status, a foreign national’s residency status in the US will be that of a nonresident alien, and thereby no days are counted toward the “183 day”/substantial presence test. The four categories of "exempt individuals" are: 1) foreign government-related individuals--“A” or “G” visa holders, other than individuals holding “A-3” or “G-5” class visas; 2) professional athletes--temporarily in the U.S. to compete in a charitable sports event; 3) students & their dependents--"F," "J," "M," or "Q" visa holders; and 4) teachers and trainees & their dependents--"J" or "Q" visa holders.

Failure to properly take into account the interwoven tax, and immigration issues can cause a business to be unable to bring in their key employees, or worse subject them to often draconian penalties, both from the IRS and from the USCIS.
Despite the Republican victories and the thoughts of less regulations, there is no current evidence that international tax or immigration will become easier. In fact, the IRS in routine audits has carefully inquired about and traced any foreign money transfers that show up in any account statements, and have then assessed large penalties for any failures to file reporting forms. As for immigration, there are no signs that immigration will become anything but more difficult, requiring the attorney to become very familiar with rapidly changing policies and procedures.

In addition to income tax issues, there is a separate tax domicile test for estate taxation. This area must be carefully analyzed as well, since improper planning can result in a large tax at death, since nonresidents are subject to taxation after only $60,000.00.

As was stated previously, if a person has authority over any financial account(s) in a foreign country and the AGGREGATE VALUE of these account(s) exceeds $10,000.00 at any time during the calendar year, then that person must file a FINCEN 114. Note that this filing is electronic and directly with the Treasury Department, and is therefore not part of the tax return (although there is a separate box that must be checked on the tax return), and as such it is irrelevant as to whether there is any taxable income.

Giving employees signature authority over a foreign bank account, giving a power of attorney to an agent over someone with a foreign bank account, having an employee temporarily in a foreign country set up a bank account, etc. can mean that each of these agents, and employees has their own reporting requirement. Too often immigration attorneys fail to properly advise their clients of these reporting requirements, and oftentimes clients are reluctant to disclose their worldwide accounts. However, the penalties for failure to report are severe: if non-willful up to $10,000.00 per year. If willful, up to the greater of $100,000.00 or 50% of account balances as well as criminal penalties.

The United States has executed many Foreign Account Tax Compliance Act agreements with foreign countries, which causes those countries to have to report to the United States any accounts that they suspect are owned by US persons. Banks also have reporting requirements. The main point of these programs is to make it very difficult to avoid the reporting requirements.

In addition, there is a tax form, an 8938, that must be filed with the tax return if certain reporting thresholds are met, and that is fairly duplicative of the FINCEN 114. Penalties for non-filing of 8938: Up to $10,000.00 for failure to disclose per year. After IRS notice: additional $10,000.00 per each 30 days of non-filing. Maximum penalty is $60,000.00, but criminal penalties may also apply.

For clients that have failed to disclose there are currently programs that a client may be able to obtain reduced penalties in, but they cannot be under current audit to enter them, and the IRS has been discussing closing these programs down, so it’s important to be diligent regarding the reporting.

Here is a small list of some of the reporting forms:

‣ Form 1040: U.S. Individual Income Tax Return/1040NR:U.S. Nonresident Alien Income Tax Return

‣ Form 2555: Foreign Earned Income

‣ Form 5471: Information Return of US person with respect to Certain Foreign Corporations

‣ Form 8865: Return of US persons with respect to Certain Foreign Corporations

‣ Form 8858: Information Return of US Persons with Respect to Certain Foreign Disregarded Entities

‣ Form 926: Return of a US Transferor of Property to a Foreign Corporation

‣ Form 1116: Foreign Tax Credit

‣ W-7 ITIN

‣ Form 8840 - Closer Connection Exception Statement for Aliens - claiming tax home and closer connection to a foreign country.

‣ Form 8843: Statement for Exempt Individuals and Individuals with a Medical Condition - Regards individuals exempt from substantial presence test.

‣ Form 1120-F, U.S. Income Tax Return of a Foreign Corporation (filed to disclose U.S. source income)

‣ Form 8833 Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) (claim relief under the treaty from U.S. federal taxation on income from U.S. activities.

‣ SS-4

‣ Form 5471: Information Return of U.S. Persons with Respect To Certain Foreign Corporations.

‣ Beware of foreign mutual funds: Form 8621 - Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

The good news is that most of these reporting forms are not usually too difficult (aside from the Form 8621) if they are properly and timely filed. As such, immigration attorneys should encourage their clients to seek competent international tax advice. By the same token, tax professionals should not ignore the immigration issues involved, and should make sure competent immigration counsel is actively informed and involved.

Overall, tax professionals and immigration attorneys do not communicate with each other enough in order to determine how the legal pathways to be followed can and often do conflict, and thereby lead to drastic consequences such as tax penalties, and loss of legal status. With the fact that CBP officers at ports of entry have access to defaults on tax payments, and with the fact that IRS agents conduct audits to determine if B-1 nonimmigrants have been paid by US corporations, it is so essential & necessary for both tax professionals & immigration attorneys to work together at the beginning of a matter—rather than hastily contacting one another when the government enters the matter by either issuing a denial notice, or issuing tax penalties.

Reprinted with permission.

About The Author

Terrence L. Olsen is the partner of Olsen Law Firm. He founded Olsen Law Firm in September 2003, and practices Immigration & Nationality Law exclusively. Terry has served, and continues to serve, the international community and his clients’ interests in the United States and internationally. By actively participating in government discussions of immigration law and policy, Terry is an active participant with the agencies governing immigration law, rather than being an observer on the sidelines. Michael Goode is an international Tax, Estate Planning and Business Law attorney who assists individuals, businesses and governmental agencies. He assists both foreign and domestic businesses. For more than a decade, he have helped these individuals, businesses and governmental agencies focus on the necessary steps to create legal, compliant, and efficient long term solutions.

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.