All United States tax laws apply to every U.S. person, whether you are working in the United States or in a foreign country. To ensure compliance with these tax laws, it is important to understand the definition of a U.S. person, in the eyes of the IRS and government. Failure to understand your tax responsibilities as a U.S. person can result in large fines and non-compliance penalties.
What Is a U.S. Person?
First and foremost, every United States citizen is a U.S person. This makes you liable, as a U.S. citizen, for U.S. income taxes whether you are living and working in the United States or living and working abroad. A U.S. citizen is anyone who was born within the U.S. or born outside of the U.S. provided you have at least one parent who is a U.S. citizen. If you are a naturalized citizen, you are considered a U.S. person.
Every United States tax resident is also considered a U.S. person. There are two different types of tax residents: someone who has either been in the United States for at least 31 days out of 1 year or 183 days out of the 3 year period prior to the current tax year, which is referred to as someone who has met the substantial presence test, or someone who has obtained a U.S. green card.
Difference Between U.S. Citizen & U.S. Person
A U.S. citizen is someone who is either born in the U.S., born outside the U.S. to one or more parents with U.S. citizenship or someone who has naturalized and earned U.S. citizenship. A U.S. citizen is always a U.S. person, but a U.S. person also includes tax residents, who are not necessarily U.S. citizens.
Tax Obligations as a U.S. Person
Depending on a variety of requirements including source of income, your classification as a dependent or not and filing status, technically speaking any U.S. person who has earned $6,000 – $10,000 in a calendar year is required to file a tax return with the IRS. If you are living and working abroad as a U.S. person, you are still required to file a tax return, even if you end up owing no money in tax payments to the IRS.
In addition to filing a U.S. tax return, there are other reporting requirements that U.S. persons must file annually in order to comply with tax obligations. This includes the filing of the Foreign Bank Account Report, FBAR, which must be filed by any U.S. person who holds a combined $10,000 or more in any foreign bank account at any time throughout the calendar year. If you have a financial interest in any foreign companies, trusts, corporations or partnerships, this is also required to be reported. Any interest or foreign income earned on capital gains also must be reported.
Consequences for Ignoring Tax & Reporting Obligations as a U.S. Person
If your foreign income exceeds the required filing amount and you ignore the tax and reporting obligations as a U.S. person, you will face a large amount of fines. If you file these requirements and end up having to owe taxes to the U.S., you will be subject to a Failure to Pay late fee and a Late Payment Fee. You will also be charged daily interest on the amount owed until your tax obligations have been met.
If you hold foreign bank accounts that meet the FBAR filing requirements and you fail to report these accounts to the Department of Treasury, you may be subject to fines up to $100,000 or 50% of your account balance, whichever is greater. You may also face criminal tax evasion charges, which could result in up to a year in prison. It is important to understand the tax and reporting obligations as a U.S. person, and stay in compliance in order to avoid expensive penalties.
How To Become a U.S. Person
As mentioned above, under citizenship-based taxation, all U.S. citizens are considered U.S. persons for tax purposes. There are other classifications that will allow you to become a U.S. person, which means you will be required to comply with tax and reporting obligations. These classifications can be:
Hold a Green Card
Any lawful non-citizen who is a Legal Permanent Resident, or a green card holder, is considered a U.S person for tax purposes.
Qualify Under the Substantial Presence Test
The substantial presence test is a test the IRS uses to determine whether a non-citizen is considered a U.S. person for tax purposes. This test uses the amount of time you have spent within the U.S. to determine your classification. This test counts the days you’ve been in the U.S., and essentially if you’ve been in the U.S. for 183 days you are classified as a U.S. person. The substantial presence test is unique because it uses a formula that does not just count days during the current year that you have been in the U.S. It also includes 1/3 of the days you spent in the U.S. during the previous year and 1/6 of the days that you spent two years ago to determine whether you are a U.S. person.
Corporations & Trusts
Certain corporations and trusts may be classified as U.S. persons. If you are a U.S. person, your status may extend to your trust or corporation. Under other circumstances, your corporation or trust can still be taxed by the IRS even if you are not a U.S. person. There are a number of complicated factors that go into the classification of a corporation or trust as a U.S. person, and it is worth speaking to an expert to ensure compliance.
Need Tax Help as a U.S. Person? Contact Evolution Tax and Legal
Whether you are a U.S. person living and working in the U.S. or living and working abroad, the Orange County expat tax lawyers at Evolution Tax and Legal can provide expertise to guide you through your tax filing and reporting obligations. Now is the time to prepare for tax season, contact our team today.