Worldwide tax law, immigration and offshore disclosure

International Tax Law and Immigration: Foreign individuals who are considered US persons often come across the fact by chance that they are subject to IRS tax and offshore reporting requirements. This news can come as a great (and unwanted) surprise to foreigners, especially those who are considered casual Americans. To make matters worse, the foreigner may not even have investigated the tax implications, but rather immigration issues such as how to become a LPR or US citizen. This is especially true for foreigners (illegitimate permanent residents and U.S. citizens) who are solely subject to U.S. tax and due to the fact that they pass the Substantial Presence Test but do not qualify for any of the exceptions or exclusions that the U.S. Subject to tax.

Let’s look at three (3) ways in which international tax law and immigration often overlap.

But first, a brief introduction to how the US tax system works

A common term that is widely used in international taxation is “Citizen-Based Taxation,” a misnomer as US tax is not restricted to US citizens. In fact, the US also tax legal permanent residents and foreigners who pass the essential presence test. Unlike other countries, which only tax their citizens (and others) on worldwide income if they are also residents of that country, the United States tax all of its citizens and others who are considered US persons under the worldwide income system . This means that the United States will tax US persons on worldwide income whether or not the income is from the United States and whether or not the person resides in the United States. In addition, US persons are required to disclose their global assets on various international IRS and / or FinCEN forms for reporting information.

1. Visa holders can also be US citizens

“US Person” is a comprehensive tax term. In addition to taxing US citizens on worldwide income, legitimate permanent residents and foreigners who pass the Substantial Presence Test are also included in the US worldwide tax and reporting model. Therefore, many non-nationals / illegitimate permanent residents are surprised to learn that simply because they hold a visa or otherwise pass the essential attendance test, they are subject to US tax and reporting on their worldwide income or assets.

Some important facts to keep in mind:

  • A foreigner does not need to be a visa holder to pass the Substantial Presence Test.
  • Even non-work visa holders like EB-5 and B1 / B2 can qualify for significant presence.

2. Tax errors and I-485 / I-400 are not crimes

The USCIS Form I-485 is an important part of the application process for legal permanent residence. A question on the form asks if the applicant has ever committed a crime – even if they were not arrested or charged with the crime. Easy make a mistake on the tax return is not a crime. This is especially common with non-resident residents (non-LPR) as they did not know they were considered a US person and / or that they are required to report their worldwide income and disclose their global assets. These are not crimes.

Due to unnecessary scare tactics online, vulnerable taxpayers may view their tax errors as crimes, but they are not.

3. Voluntary Disclosure (VDP) is neither a cause of action nor a criminal solution

Another concern of many taxpayers is that they believe that submission to OVDP or VDP means they acknowledge that they have committed a crime – it is Not the case.

The main difference is criminal willpower vs. civil willpower.

Some taxpayers just don’t feel comfortable submitting to streamline procedures because they don’t like to certify under the penalty of perjury that they are not willful. This does not mean that the taxpayer committed any type of crime. The level of willpower required for civil violations differs significantly from the level of willpower required by the government to bring criminal charges against the taxpayer for tax evasion.

Given nebulous concepts like reckless disregard and willful blindness, it is perfectly understandable that some taxpayers just feel uncomfortable entering the optimized program or some reasonable cause, preferring to take the voluntary disclosure path and at the Negotiating the 50% penalty to work.

By filing with the VDP, the taxpayer has not recognized per se that he has committed a crime that would prevent him from obtaining citizenship or permanent residence. Conversely, it is a crime to submit to the streamlined procedures when they were willful.

Of course, if the person has actually committed a crime, that is different – but simply by participating in one of these programs does not make the taxpayer acknowledge by default that they have committed a crime. Technically, this would only mean that they cannot, under the penalty of perjury, certify that they are not willful, and being deliberately in the civilian sphere does not mean acknowledging that a crime has been committed.

International tax law is not an isolated practice

International tax law does not exist in a vacuum. The concepts of offshore disclosure, worldwide income, and overseas account compliance touch on many different aspects of the law – including immigration. Taxpayers considering various immigration routes may want to verify that they are tax compliant before submitting documents to the U.S. government. However, merely filing an offshore disclosure program does not mean that a criminal offense has been recognized sufficient to prevent obtaining a permanent criminal offense of residence or citizenship.