How Many Days Can Foreigners Stay in U.S. and Avoid Taxes?

Can Foreigners Stay in America Without Taxes?

Can Foreigners Stay in America Without Taxes?

When it comes to becoming a U.S. Person for tax purposes, the two primary categories of individuals are U.S. Citizens and Lawful Permanent Residents. Unfortunately, for many unsuspecting taxpayers, there is a third category of U.S. Person individual. It is a catchall category for Non-Resident Aliens (aka a person who does not currently have permanent U.S. person status) who remain in the United States for too many days over a three-year period. As a result of overstaying in the United States,  they too may become subject to United States tax on worldwide income similar to a permanent resident or U.S. citizen. The question then becomes that if the foreigner spends too many days in the United States, are they able to avoid having to pay US tax on their worldwide income?

Worldwide Income vs Non-Worldwide Income

There are two main types of income tax: worldwide income (for U.S. Persons) and Non-Worldwide Income sourced income (for non-U.S. Persons with certain U.S. assets and income)

Worldwide Income (aka CBT)

The primary concern for taxpayers who are not considered lawful permanent residents or U.S. citizens is that they are unaware that if they remain in the United States for too long, they may become subject to U.S. tax on their worldwide income. Unlike most other countries — where taxpayers must live in the country for a majority of the time before becoming subject to U.S. tax on worldwide income — the U.S. taxes individuals based on their U.S. Person status and not residence.  This could result in a major (unforeseen) tax implication for non-resident aliens.

Non-Worldwide Income for NRAs

Even if a person does not qualify as a U.S. person for tax purposes, they may still be subject to U.S. tax on their U.S. source income. For example, if a foreign national who is not a US person for tax purposes invests in certain income in the United States and the assets generate dividends, then this dividend income would still be taxable whether or not they met the Substantial Presence Test.  If they do reside in the treaty country then they may make a treaty election to reduce or eliminate certain withholding if applicable.

Counting Days Example

If a non-resident alient is in the United States for at least 31 days in the present year and at least 183 days over the past three years using the different annual ratio tests (they vary per year), then the taxpayer may become subject to U.S. tax on their worldwide income.

Let’s look at an example provided by the Internal Revenue Service:

• • “You will be considered a United States resident for tax purposes if you meet the substantial presence test for the calendar year. To meet this test, you must be physically present in the United States (U.S.) on at least:

1. 1. 1. 1. 31 days during the current year, and

         2. 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:

• • • • • All the days you were present in the current year, and

        • 1/3 of the days you were present in the first year before the current year, and

        • 1/6 of the days you were present in the second year before the current year.

Example:

• • • You were physically present in the U.S. on 120 days in each of the years 2021, 2022 and 2023. To determine if you meet the substantial presence test for 2023, count the full 120 days of presence in 2023, 40 days in 2022 (1/3 of 120), and 20 days in 2021 (1/6 of 120). Since the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test: for 2023.”

Exceptions to Being Taxed on Worldwide Income

Even if a person qualifies as a US person for tax purposes because they met the substantial presence there are various exceptions, exclusions, and limitations that may eliminate the worldwide income tax requirement for that person.

Let’s look at a few common exceptions:

F-1 for Under 5 Years  

An F-1 visa is considered a student visa. And, for the first time that a person is on F-1, as long as they do not remain in the United States for more than five years and have not lived in the U.S. prior, they are not considered a US person for tax purposes. It is important to note, that if a person is on a different type of visa and then becomes an F-1 visa holder these rules may not apply. Likewise, if a person comes to the United States on an F-1 visa and then remains for more than five years then they too no longer apply for this exception. Finally, if a person comes on an F-1 visa for a few years leaves, and then comes back on a new F-1 visa the clock does not restart.

Closer Connection Exception

If a Taxpayer can show that they have a closer connection to a foreign country or multiple countries then they too may qualify for an exception to the substantial presence test. This is referred to as having a closer connection with a foreign country or multiple countries. There are various pitfalls and tax traps to be aware of, specifically if the taxpayer already applied to be a permanent resident then generally the closer connection exception does not apply– even if they have not obtained their permanent residency just yet.

• • • Note: You are not eligible for the closer connection exception if any of the following apply.

      • You were present in the United States 183 days or more in calendar year 2023.

      • You are a lawful permanent resident of the United States (that is, you are a green card holder).

      • You have applied for, or taken other affirmative steps to apply for, a green card; or have an application pending to change your status to that of a lawful permanent resident of the United States.

Other Exceptions (8843)

There are various other exceptions that a taxpayer may qualify for using Form 8843, such as medical and certain teachers/researchers.

Treaty Election

if the taxpayer will become subject to substantial presence resides in a treaty country and depending on the categories of income and where they are considered a resident, they may qualify to use the treaty if they have to show that they should be treated as a foreign person for tax purposes. Typically, this is going to apply to permanent residents who may reside full-time in a foreign country but taxpayers who are considered residents because they need substantial presence may qualify as well such as foreigners working in research or faculty positions in the U.S.

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. 

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.