Common Tax Problems & Solutions for Citizens and Green Card Holders

Common Tax Problems & Solutions for Citizens and Green Card Holders

Common Tax Problems & Solutions for Citizens and Green Card Holders

One of the biggest complications for taxpayers who are U.S. persons for tax purposes is that the United States taxes individuals on their worldwide income, whether or not they reside in the United States or abroad. Most foreign countries only tax their residents on their worldwide income and not citizens of the country who live outside of that country’s borders (non-residents are usually taxed on their soured income). This can lead to many tax problems and complications for U.S. citizens and green card holders who are both taxed on worldwide income. Moreover, in addition to having to report their worldwide income, some taxpayers will also have to report their foreign accounts, assets, and investments on various international information reporting forms, such as the FBAR and Form 8938. The Internal Revenue Service has developed various offshore tax amnesty programs to assist citizens and residents in getting into compliance with previously undisclosed income and assets. While being a U.S. citizen or green card holder can lead to unanticipated tax problems, our international tax law specialist team wanted to briefly summarize four (4) solutions for common tax problems that some taxpayers will have as a U.S. citizen or green card holder.

Make a Treaty Election

For some taxpayers who are U.S. persons for tax purposes because they are Green Card Holders, if they reside in a treaty country they may be able to make certain treaty elections. One of the best treaty elections a taxpayer may be able to make is to be treated as a non-resident alien for tax purposes. When a person is treated as a non-U.S. Person for tax purposes, they are not taxed on their worldwide income but instead are only taxed on their U.S.-sourced income. Likewise, they may be able to challenge the requirement that they still have to report their international accounts and assets, especially when considering the recently proposed regulations for Form 3520 and a recent FBAR ruling in the case of Aroeste.

Plan Before Acquiring Foreign Assets

Oftentimes, what makes owning foreign assets complicated is that the income generated from some of the assets is treated differently than if the same assets were located in the United States. For example, a green card holder who owns foreign mutual funds and ETFs may be required to file form 8621 and report the income as PFIC. If instead, the taxpayer owned those same funds through a U.S. investment firm, then there would be no reporting requirement, so it is important to review and evaluate the assets before acquiring them and in conjunction with the tax rules and requirements for being a U.S. person.

Terminate Green Card Status and Become a Visa Holder

For some taxpayers, it may be better for them to terminate their green card status and instead become a visa holder. There are many twists and turns with this type of strategy, including determining whether the taxpayer is a covered expatriate before they terminate their green card and how long they will be spending in the United States after terminating their green card to determine whether or not they would meet the substantial presence test or not. Because even if a taxpayer gives up their green card, if they meet the substantial presence test then they are taxed on their worldwide income just as if they were a permanent resident or citizen.

Get Into Compliance for Prior Year Issues

One of the biggest headaches for taxpayers who are U.S. citizens or green card holders when it comes to taxes and reporting foreign accounts and assets is that they do not realize they are out of compliance until several years have passed. Some taxpayers may speak with non-attorneys or other purported specialists who advocate for less than legal solutions — when they would be much better off submitting to one of the offshore amnesty programs. And, many taxpayers who qualify for offshore amnesty will avoid any penalties being assessed against them for their undisclosed foreign money. Thus, before taking the plunge and engaging with self-purported experts and not attorneys, the taxpayer should understand their different options because sometimes it is as simple as filing a few years of missed returns and disclosing assets on various forms.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.