Know your US tax liability or pay the price
This article is part of the Pondstraddler Life continuing series on the last Saturday of each month.
We are using a hypothetical person to maintain reader confidentiality.
“I’m a Bermudian, an older student, heading to the US on a student visa (F-1) for enrolment in advanced skills classes for a graduate and doctorate programme.
“It is very possible that I can obtain a US green card in the not-so-distant future. If so, I will stay in the US after matriculation, permanently.
“My question? My father passed recently, bequeathing me the Bermuda family home. I’m the only heir. The property is now leased out on long-term contract; that income will help with my US student expenses.
“As a US green card holder (in the future), will I have to include income from my already owned real estate here in Bermuda when I pay my US income taxes to the IRS?”
Generally, if you are a US citizen, or resident alien (US green card holder) or US tax residents (foreign persons who overstay in the US), the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you reside in the US or abroad.
Your worldwide income is subject to US income tax, regardless of where you reside. For more information on this, visit the website, https://www.irs.gov/individuals/international-taxpayers/us-citizens-and-resident-aliens-abroad
Reporting and compliance
There are additional requirements besides filing a US tax return for the US citizen and US green card holder with links to another country.
Fatca is a 2010 United States federal law requiring all non-US financial institutions (FFIs) to search their records for customers with indicia (indicating in some form of proof) of “US-person” status, such as a US place of birth, US parent, US phone, US residence property, US PO Box or addresses, joint accounts with relatives, standing instructions to wire investments or cash from a foreign account to the US banking/investment system, a power of attorney to a person with a US address, etc, to report the assets and identities of such persons to the US Department of the Treasury.
Fatca also requires such US persons to self-report their non-US financial assets annually to the Internal Revenue Service on form 8938, which replaced the older and further redundant requirement to self-report them annually to the Financial Crimes Enforcement Network on form 114, also known as “FBAR”.
Like US income tax law, Fatca applies to US residents and also to US citizens and US green card holders residing abroad in other countries.
Compliance is mandatory within the prescribed IRS guidelines.
See the effect of Fatca, which refers to the Foreign Account Tax Compliance Act, https://www.taxintl.com/irs-criminal-division-now-seeking-non-compliant-us-citizens-and-green-card-holders.html
OECD Common Reporting Standard
The OECD Common Reporting Standard reporting will also apply to our Bermudian student for his/her local Bermuda accounts. The rest of the world, or the 90-plus countries including Bermuda, who signed Mutual Support Agreements under the OECD Common Reporting Standards mandate also requests significant information from you, including where you are considered tax resident.
The CRS form is issued to the Bermuda resident as required by our local banks.
We are not covering immigration law here, but generally:
• For a Bermudian foreign student in the US, his or her tax residence is still in Bermuda.
• A US green card holder — your tax residency is considered the US, even if you are travelling outside. Note there are restrictions on how often and how long you can be away from the US.
Failure to adhere to US tax law
US tax law is increasingly correlated with US immigration law. The current policy positions on immigration to allow far fewer foreign entrants into the US, as well as tighter controls on existing US green card holders (and other resident aliens). This means that individual compliance with US tax filing and reporting requirements must be rigorously adhered.
While US green card holders (and certain other persons) have the right to be in the US, such rights depend entirely on them following certain rules and avoiding certain types of legal violations.
The US Immigration and Nationality Act (at INA, section 237) sets forth numerous grounds upon which a non-citizen may be deported back to the person’s country of origin.
Recent cases of US tax non-compliance where the individual’s US tax liability, from fraud or tax evasion, exceeded $10,000 is classified legally since 2012 as an aggravated felony, with persons subject to deportation. See Kawashima versus Holder, Attorney-General, https://www.supremecourt.gov/opinions/11pdf/10-577.pdf
Part of the sentencing may not allow any recourse to even apply to return to the US for ten years, or ever. Further, the delinquent taxpayer may also be subject to the imposition of the US exit tax on the way out.
Note, also that US citizens with significant unpaid tax liabilities are not excepted. They may have their passports revoked.
Stepping up compliance enforcement, the US Internal Revenue Service Criminal Investigation Division formed a new international tax enforcement group in January 2018 charged with locating and prosecuting non-compliant US taxpayers. Readers, since the initiation of the first reporting requirements under the Qualified Intermediary Programme incepted by Bermuda in 2000, I’ve been spouting off about these situations and for years and was ignored. Time has run out.
Know what your tax and reporting responsibilities are. Get experienced qualified professional help when you opt to emigrate, change country residency, new citizenship, and the like. It won’t be cheap, but — do it right every time, or face the consequences. That won’t be cheap either!
You can’t say I didn’t warn you.
Next time: a reader is emigrating to the UK — following retirement. What are the major concerns.
Disclosure: this information provided to our hypothetical reader is general in nature, and as such cannot be relied upon for any personal tax, legal, financial, immigration, or other financial planning.
The information provided herein is believed to be current as of today and where possible, is linked to primary providers, such as the US Internal Revenue Service. Tax and related laws in all countries are subject to change without notice. The author is not responsible for incorrect, outdated or reliance upon said information. It is strongly recommended when crossing borders, physically or electronically into another country’s governmental regulations that any individual and family obtain personalised financial planning, first.
Martha Harris Myron, CPA, CFP, JSM: Masters of Law — international tax and financial services. Dual citizen: Bermudian/US. Pondstraddler Life, financial perspectives for Bermuda islanders and their globally mobile connections on the Great Atlantic Pond. Finance columnist to The Royal Gazette. All proceeds earned from this column go to The Reading Clinic. Contact: email@example.com
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