International Tax Law & Immigration: Oftentimes, foreign individuals who are considered US Persons randomly stumble upon the fact that they are subject to IRS tax and offshore reporting requirements. This news can come as a big (and unwelcome) surprise to foreigners, especially those that are considered Accidental Americans. Making matters worse is the fact that the foreign national may not have even been researching tax implications in the first place — but rather they were researching immigration issues such as how to become an LPR or US Citizen. This is especially true for Foreign Nationals (non-Lawful Permanent Residents & US Citizens) who are solely subject to US tax and reporting based on the fact that they meet the Substantial Presence Test but do not qualify for one of the exceptions or exclusions.
Let’s take a look at three (3) ways international tax law and immigration commonly intersect.
But First, A Brief Introduction to How the US Tax System Works
One common term that gets thrown around a lot in international tax is “Citizen-Based Taxation,” which is a misnomer since US Tax is not limited to US Citizens. In fact, the US also taxes Legal Permanent Residents and Foreign Nationals who meet the Substantial Presence Test. Also, unlike other countries that only tax their citizens (and others) on worldwide income if they are a resident of that country as well, the United states taxes all of its citizens and others who are considered US persons under the worldwide income scheme. This means that the United States taxes US Persons on worldwide income, whether or not the income is sourced from the United States and whether or not the person resides in the United States. In addition, US Persons are required to disclose their global assets on various IRS and/or FinCEN international information reporting forms.
1. Visa Holders Can Be US Persons Too
“US Person” is an all encompassing tax term. In addition to US Citizens being taxed on worldwide income — Legal Permanent Residents and Foreign Nationals who meet the Substantial Presence Test are also roped into the US worldwide taxation and reporting model. Thus, many non-citizen/non-lawful permanent residents are surprised to learn that simply because they hold a visa or otherwise meet the substantial presence test, that they are subject to US tax and reporting on their worldwide income or assets.
A few important facts to keep in mind:
- A Foreign National does not have to be a Visa Holder to meet the Substantial Presence Test.
- Even non-work visa holders such as EB-5 and B1/B2 may qualify for substantial presence.
2. Mistakes on Taxes and I-485/I-400 Are Not Crimes
USCIS Form I-485 is an important part of the Lawful Permanent Resident application process. One question on the form asks if the applicant has ever committed a crime — even if they have not been arrested or charged for the crime. Simply making a mistake on the tax return is not a crime. This is especially common for resident aliens (non-LPR) because they were unaware that they were considered a US person and/or that they are required to report their worldwide income and disclose their global assets. These are not crimes.
Due to unnecessary fear mongering found online, vulnerable taxpayers may consider their tax mistakes as crimes, but that is not the case.
3. Voluntary Disclosure (VDP) Is Not a Plea Nor a Criminal Resolution
Another concern that many taxpayers have is that they believe submitting to OVDP or VDP means they are acknowledging that they committed a crime — that is also not the case.
The key distinction is criminal willfulness vs civil willfulness.
Some taxpayers are simply not comfortable submitting to the Streamline Procedures because they are not comfortable certifying under penalty of perjury that they are non-willful. This does not mean that the taxpayer committed any sort of crime. The level of willfulness required for civil violations are much different than the level of willfulness required for the government to bring a criminal charge against the taxpayer for tax evasion.
With nebulous concepts such as reckless disregard and willful blindness floating around as well, it is completely understandable that some taxpayers are simply not comfortable entering the Streamlined Program or Reasonable Cause and prefer to go the voluntary disclosure route and working to negotiate the 50% penalty.
By submitting to VDP, the taxpayer has not per se acknowledged that they have committed any crime that would prevent them from obtaining citizenship or permanent residence. Conversely, submitting to the Streamlined Procedures when they were willful is a crime.
Obviously, if the person did actually commit a crime, that is different — but by simply entering one of these programs, the taxpayer is not by default acknowledging that they committed a crime. Technically, it would just mean that they cannot certify under penalty of perjury that they are non-willful, and being willful in the civil arena does not equate to acknowledging that a crime has been committed.
International Tax Law Is Not an Isolated Practice
International tax law does not exist in a vacuum. The concepts involving offshore disclosure, worldwide income, and foreign account compliance touch upon many different aspects of law — including Immigration. Taxpayers who are considering pursuing various immigration routes may want to consider whether they are tax compliant before making any document submission to the US government – but simply submitting to an offshore disclosure program does not equate to acknowledging a crime was committed sufficient to prevent receiving a permanent residence or citizenship.