by Vu Le and John Ting
When a foreign national becomes a U.S. resident and then leaves the U.S. to work abroad, he may not be aware that he still has a filing obligation for both income tax and immigration purposes. Failure to file U.S. tax returns of Foreign Bank Account Reports (FBARs), live in the U.S. for at least six months, or remove conditional resident status can result in penalties and revocation of resident status.
Tax Return Disclosure
For tax purposes, a non-citizen resident is treated very similarly to a citizen even if he lives abroad. This means the resident is subjected to U.S. taxation on his worldwide income, from whatever source derived. Hence, even if he is not a citizen and does not live in the U.S., he is still required to file the annual tax return, unless one of three exceptions apply:
1. Final administrative or judicial determination. Even if the resident surrendered his green card, this does not mean that he is no longer a permanent resident. Until he receives an official notice from the United States Citizenship and Immigration Service (USCIS) that there has been a final determination, he is still required to file his annual tax return. A common situation is when the green card expired or the resident has been living abroad for a long time. Unfortunately, living abroad and having an expired green card will not change the requirement, and the resident must continue to file every year.
2. Gross income is less than the amounts require to file tax return. The 2019 amount requiring a tax return filing is income above $1,050 of unearned income or $12,000 of earned income. For those making above these amounts, a tax return is required. In most cases, the Foreign Earned Income Exclusion or foreign tax credit can be used to reduce any U.S. tax owed. However, the resident must file a tax return for the exemption and credit to apply.
3. Tax treaty. First, the resident must find out if there is a tax treaty between the U.S. and his current residence country. If there is no treaty, the resident will be subject to both the U.S. and the residence country governments. Luckily, and if applicable, a foreign tax credit will help to offset some of the taxes owed.
If there is a tax treaty between the U.S. and his residence country and the resident
meets the “tie-breaker” rules, the resident can make an election to excuse the tax filing requirement. To make the election, the resident must file a U.S. nonresident alien income tax return in the year of the election and attach Form 8833 (Treaty-based return position disclosure). Treaty analysis should be handled by an international tax professional.
The resident must also disclose his foreign financial accounts above the FBAR limit or be subject to heavy penalties. Even if the resident does not need to file a tax return, if he owns assets above the yearly limit, he is still required to file an FBAR.
Failure to file either the income tax return or the FBAR affects monetary penalties and the resident’s immigration status when he applies for naturalization. Remember, one must show that he is in good tax status.
A resident living abroad may run into issues of forgetting to maintain status in one of several scenarios. If a resident wants to naturalize to become a U.S. citizen, he must prove that his absence did not demonstrate abandonment of lawful permanent resident status or break the statutory period for continuous residence. Specifically, he must have continuously resided for 30 months in the U.S. if status was not obtained through marriage or 18 years of age if through marriage. The trigger is whether a trip lasts six months or longer.
If your client shares that he may be outside of the U.S. for an extended period, then he will need to apply for a reentry permit. This requires planning ahead as USCIS takes on average three to five months to process the applications. Even though the resident card may generally suffice for reentry, a reentry permit is proof that he did not abandon his status. It is not unusual for immigrant clients to return to their previous country for a significant time to maintain their foreign business.
A second scenario is that a conditional resident often forgets to file an application to remove those conditions for USCIS to eventually approve and grant permanent resident status when he is living abroad. Failure to file such application will result in a removal proceeding with the Executive Office of Immigration Review because he failed to maintain his status. If a person became a conditional resident through marriage to a U.S. citizen, then he needs to show proof of a bona fide marriage, which may be difficult if one spouse has been living abroad and did not plan ahead.