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Stay aware of US tax resident boundaries

This is the final article of a three-part series discussing when a foreign national, such as a Bermudian or Bermuda resident, can be classified as a US tax resident under US tax regulations. This week is focused on what happens when a Bermudian inadvertently becomes a US tax resident by breaching the substantial presence test.

Where are you considered a tax resident? By now, Bermuda residents with any local bank, investment, trust, corporate or other financial accounts should be very familiar with this question. This exercise of filling out more paperwork is now required under the OECD Common Reporting Standards and under Bermuda International Co-operation (Tax Information Exchange Agreements) Common Reporting Standard Regulations 2017.

Tax residency (not to be confused with domicile) is one of the foremost criteria that country revenue agencies use to ascertain where an individual or company is subject to taxation. While Bermuda does not have a conventional income tax regime, unlike most countries, even so, if you are a bona-fide resident of Bermuda, this jurisdiction is your tax residence.

Honestly, at this point you think, who cares about this? Do you travel to the US, Canada, UK, other countries? Then, have the patience to read on — because while we focus today on US tax residency law, many other countries have similar positions.

Last week, we focused on the US substantial presence test, or SBT, determinant for tax resident status by a foreign person. https://goo.gl/vz1HSY.

The regulations demonstrate that if in:

• category 1 — you never spend more than 120 days in a calendar year, you win — you are not a tax resident;

• category 2 — you spend 183 days or more in a calendar year, you lose. You have no recourse, you are subject to US taxation for that year;

• category 3 — you calculate your US IRS rolling math average for the last three years (2017-2015) and you are 183 days or more, you are deemed a tax resident (even though you never breached the actual calendar year 183 days).

However, in category 3, the United States tax law provides a closer connection exception where you will not be treated as a US resident even though you meet the SBT if:

• you were present in the US for fewer than 183 days during 2017;

• you establish that during 2017 you had a tax home in a foreign country, and

• you establish that during 2017 you had a closer connection to one foreign country in which you had a tax home than to the United States, unless you had a closer connection to two foreign countries.

Closer connection criteria should provide clear and convincing evidence of your foreign tax resident status, such as where your regular permanent (tax) home is and has been for more than a year. The evidence can also include where your family is located, your vehicle(s) are registered, and where your personal belongings are located.

Also taken into consideration is where the banks are that you use to conduct routine personal business, where you are registered to vote, where you keep personal, financial and legal documents, where you derive the majority of your income, where you would ordinarily work, where you are a citizen and have a passport, a primary driver's licence, and where you qualify for some type of national health plan.

If you are a foreign individual and you meet the closer connection exception, you must timely file a US IRS form 8840 called the Closer Connections Exception Statement for Aliens for the current year (in this case 2017, filed and mailed to US IRS by the due date required, including extensions) in 2018. Be sure to send your form with delivery return receipt, as well as keeping copies of forms and your travel dates for every year you file.

There are numerous other exceptions, among them incurring a medical emergency or condition while visiting the United States — not before you plan to travel to the US. Naturally, this requires a different form — 8843 2017 Statement for Exempt Individuals and Individuals With a Medical Condition, for use by alien (foreign) individuals only.

What are the consequences if the foreign individual passes the SBT and does not timely file the Closer Connection Form 8840?

You will be deemed a US tax resident subject to taxation on your worldwide income, extensive reporting requirements, and penalties for failure to report your foreign bank accounts and financial interests and other related items.

How will they know? Not an easy answer. Very little compliance vigilance methods are disclosed by US revenue or immigration authorities. It is common knowledge that millions of US records are held in publicly accessible databases: car registrations, licence plate tracking, property purchases, and sales, deed recordings, entry and possible exit tracking of foreign persons' border crossings, air flight and sea travel logs.

The foreign visitor to the US should plan on staying on the cautious side rather than erring in unintentional overstays, or any country for that matter. Read these regulations regarding the substantial presence test and how to actually fill out form 8840 very, very carefully. Get help if you need it with an internationally experienced US CPA.

US IRS tax law is never as easy as it seems. It is not like following a cookbook recipe. Get it right and file it on time, every year if needed.

US IRS tax references 301.7701(b)-1 resident alien. Here is a link: https://goo.gl/VchTdb

Section 301.7701(b)-1(c) provides rules for determining if an alien individual satisfies the substantial presence test.

Section 301.7701(b)-2 provides rules for determining when an alien individual will be considered to maintain a tax home in a foreign country and to have a closer connection to that foreign country.

Section 301.7701(b)-3 also provides rules for determining whether an individual may exclude days of presence in the US because the individual was unable to leave the US because of a medical condition.

Links to US forms:

8840: https://www.irs.gov/pub/irs-pdf/f8840.pdf

8843: https://www.irs.gov/pub/irs-pdf/f8843.pdf


The tax and immigration policy initiatives of the Trump Administration are ever-evolving at date of this publication.

I am not your tax, financial or legal adviser. This information is general in nature and is not intended to be, nor can it be, relied upon as your personal legal, financial, immigration, or tax matters.

Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Pondstraddler Life, financial perspectives for Bermuda islanders with multinational families and international connections on the Great Atlantic Pond. Contact: martha@pondstraddler.com

Know the regulations: Bermudians should be aware of the thresholds that would lead to them being considered a US tax resident

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Published February 17, 2018 at 8:00 am (Updated February 16, 2018 at 11:46 pm)

Stay aware of US tax resident boundaries

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