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Classification of Taxpayers for U.S. Tax Purposes

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U.S. law treats U.S. persons and foreign persons differently for tax purposes. Therefore, it is important to be able to distinguish between these two types of individual taxpayers.  This area of the tax law can be quite confusing.

For an individual to be classified as ”United States person” for tax purposes means he or she is one of the following:

  • A citizen of the United States
  • A resident of the United States who holds a Green Card or “H1B” Visa
  • A resident of the United States who meets the “Substantial Presence Test” for the calendar year

The following individuals if NOT residents or citizens of the U.S. should be treated as foreign persons:

  • An individual temporarily present in the United States as a foreign government-related individual under an “A” or “G” visa.
  • A teacher or trainee temporarily present in the United States under a “J” or “Q” visa, who substantially complies with the requirements of the visa.
  • A student temporarily present in the United States under an “F”, “J”, “M”, or “Q” visa, who substantially complies with the requirements of the visa.
  • A professional athlete temporarily in the United States to compete in a charitable sports event.

Under the “Substantial Presence Test” you will be considered a U.S. resident for tax purposes if you meet the substantial presence test for calendar year 2013. To meet this test, you must be physically present in the United States on at least:

  1. 31 days during 2013, and
  2. 183 days during the 3-year period that includes 2013, 2012, and 2011, counting:
    1. All the days you were present in 2013, and
    2. 1/3 of the days you were present in 2012, and
    3. 1/6 of the days you were present in 2011.

Example.

You were physically present in the United States on 120 days in each of the years 2011, 2012, and 2013. To determine if you meet the substantial presence test for 2013, count the full 120 days of presence in 2013, 40 days in 2012 (1/3 of 120), and 20 days in 2011 (1/6 of 120). Because the total for the 3-year period is 180 days, you are not considered a resident under the substantial presence test for 2013.

If you are determined to be a U.S. person, you are required to report your world-wide income on your U.S. income tax returns and annually disclose all foreign bank accounts to the U.S. Treasury where the aggregate value of those accounts exceed $10,000.00.

For those U.S. persons who have not satisfied these requirements in any of the last six calendar years, in addition to the back taxes, interest and penalties, the government may impose include a fine of not more than $500,000.00 and imprisonment of not more than five years, for failure to file a report, supply information, and for filing a false or fraudulent report.

The IRS has established the Offshore Voluntary Disclosure Initiative (OVDI) which allows U.S. persons to come forward to avoid criminal prosecution and not have to bear the full amount of penalties normally imposed by IRS.  U.S. persons who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

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