The United States IRS defines a “US Person” as an individual to whom all US tax laws and regulations apply, regardless of whether they work within the United States or in another country. Understanding this designation is crucial for fulfilling international tax responsibilities. Failing to comprehend your role as a US Person can lead to substantial penalties related to your US expatriate tax liability
Who Qualifies as a US Person?
United States Citizens: This category includes individuals born in the United States or abroad, as long as they have at least one parent who is a US Citizen. Even naturalized citizens fall under this definition.
United States Tax Residents: You become a tax resident through two methods: the Substantial Presence Test, which involves being in the US for a specific duration, or the Green Card Test, which applies to Green Card holders.
US Citizens Born Outside of the United States:
If you possess dual citizenship with the US and another country and have never lived in the US, you are still considered a US Person for tax reporting purposes until you take action to terminate your US Citizenship voluntarily.
Inactive Green Card Holders:
Holding an expired US Green Card obligates you to file a US expat tax return annually until you either surrender your Green Card or it’s legally determined to be abandoned or revoked. If unsure of your tax liability, it’s advisable to clarify and address any outstanding tax obligations.
Tax Obligations as a US Person:
Your tax obligations are determined by various factors, including your filing status, income source, and whether you can be claimed as a dependent. Generally, any US Person earning more than a minimum threshold, typically around $6,000 to $10,000 in a calendar year, must file a US income tax return. This requirement applies even to those living and working abroad, even if no taxes are owed.
Furthermore, US Persons must report foreign banking or investment activity if their combined account balance exceeds $10,000. This includes all types of accounts, such as checking, savings, and investment accounts. Income from foreign investments or interest on foreign accounts should also be reported on the US expat tax return.
Consequences for Noncompliance:
Failure to file a US expat tax return when your foreign income exceeds the IRS threshold can result in fines, including a Failure to Pay Fee, Late Payment Fee, and daily interest charges until your tax obligations are met. Not filing for one or more years can be rectified with minimal fees by submitting back taxes to the IRS.
Neglecting to report foreign accounts with a balance of $10,000 or more can lead to a $10,000 fine and potentially up to 50% of your account balances. It may also involve criminal evasion charges and potential imprisonment. To avoid these severe penalties, consider the Offshore Voluntary Disclosure Initiative (OVDI) if you haven’t submitted Form TD F 90-22.1 for one or more years.
IRS Monitoring of Foreign Income and Accounts:
The IRS employs various methods to identify US taxpayers who haven’t met their US tax filing and reporting obligations. They are expanding their efforts, hiring international staff, and holding foreign institutions accountable for reporting the income and banking activity of US Persons. Moreover, the US has tax-related information-sharing agreements with more than 40 countries. Therefore, it’s not a question of “if” the IRS will catch up to you but “when.” Being proactive and compliant before the IRS discovers any issues offers the best chance of avoiding punitive charges.
Due to the complexities of US Persons living and working abroad, filing a US expat tax return can be intricate. At Taxes for Expats, we have expat tax professionals ready to answer your questions and handle your US expat tax return on your behalf.