- Resident aliens must meet one of these two tests:
- Green card test: You have a green card (Permanent Resident Card, Form I-551)
- Substantial presence test: You have been in the U.S. for at least 31 days of the last year and 183 days of the last three years. The latter includes the current year when you count all days present in the current year, a third of the days present last year, and a sixth of the days present the year before that
- Resident aliens are treated just like U.S. citizens for tax purposes
- Resident aliens must report all worldwide income to the IRS, including foreign assets and investment income
- Seven steps to report offshore assets properly:
- Determine your residency status
- List all your offshore assets
- Use Form 1040 for reporting
- File FBAR, if applicable
- Meet FATCA reporting requirements, if applicable
- Ensure accuracy
- Meet all applicable deadlines
- The potential consequences of failing to report offshore assets include significant penalties and fines, criminal charges, deportation, and credit impacts
Your tax obligations extend beyond U.S. borders as a resident alien or U.S. citizen. This can be a confusing and overwhelming prospect, but it is crucial to take offshore asset reporting seriously. Failure to do so can result in severe legal and financial consequences.
Resident aliens are required to report all assets held outside of the U.S. in excess of certain thresholds, according to tax law. This includes foreign bank accounts, securities, and financial instruments. Failure to comply with these regulations can result in significant fines and potentially even criminal charges.
The IRS takes offshore asset reporting very seriously and has implemented a number of programs to monitor for noncompliant taxpayers. The IRS has also recently expanded its efforts to locate and prosecute those who fail to report offshore assets by implementing the Streamlined Filing Compliance Procedures and the Offshore Voluntary Disclosure Program.
You may be wondering, do I have to report foreign property to the IRS? This guide is here to help. It walks through the difference between a resident alien and nonresident alien for tax purposes, how to ensure you report everything properly, and the consequences of not reporting offshore assets.
What Is a Resident Alien?
A resident alien is a foreign-born person who is not a U.S. citizen but meets the criteria to be classified as a U.S. resident for tax purposes. This means they are legally allowed to live and work in the country on a permanent basis and they are required to pay taxes on their worldwide income.
Resident aliens must meet one of two tests. They must either have a green card or have spent a certain amount of time in the country, meeting specific criteria to be considered a resident:
- Green card test: Green card holders are considered lawful, permanent residents of the U.S. and have been issued a Permanent Resident Card, Form I-551, by U.S. Citizenship and Immigration Services.
- Substantial presence test: To pass this test, residents need to have been physically in the U.S. for at least 31 days during the current year and 183 days in the last three-year period, which includes the current year. For the latter requirement (183 days), you count all days present in the current year, a third of the days present last year, and a sixth of the days present the year before that.
Meeting one of these two tests means you are a resident of the U.S. for tax purposes. Learning the difference between a resident alien and nonresident alien is important. Resident aliens are taxed on worldwide income, whereas nonresident aliens are only taxed on income received from within the U.S.
There are a few other cases when you may be able to get around these requirements. Some people are allowed to make elections, such as being treated as a resident in the first year, a nonresident spouse being treated as a resident, having a close foreign country connection, or being under a tax treaty in some cases.
The IRS states that Americans can be considered both a nonresident and a resident for tax purposes in the same year, which typically applies to the year you enter or leave the U.S. This requires filing a dual-status income tax return.
Types of Income Resident Aliens Must Report
Resident aliens are taxed on all income, just like U.S. citizens. This includes all domestic and foreign income. The worldwide income resident aliens must report includes any type of earned compensation or compensation paid for services, including:
- Rental property royalties
- Pension payments
- Offshore assets and investment income
The IRS also states that resident aliens can’t exclude income based on tax treaties unless you are a foreign student or scholar. Tax treaties are in place between the U.S. and several other countries that aim to allow foreign-country residents to be exempt from U.S. taxes or at least pay them at a lower rate.
Seven Steps to Reporting Offshore Assets Properly
Having offshore assets as a resident alien means you’ll have to report them and any foreign income when doing your taxes. Follow these steps to ensure you report everything properly to avoid complications or penalties:
1. Determine Your Residency Status
Your first step is to figure out if you’re a nonresident or resident alien of the U.S. As mentioned, meeting either the green card test or the substantial presence test means you’re a resident alien. Resident aliens are generally treated as U.S. citizens for tax purposes, so you’ll have to report all worldwide income. You could be considered a dual-status alien in some cases, and you would still have to report all of your worldwide income for the part of the year that you’re a resident alien and report just the income that was U.S.-sourced.
2. List All Offshore Assets
Gather all information about any and all foreign accounts. You will need to know the exact numbers and the number of assets you have, both domestic and foreign. The IRS pays close attention to information reported from third parties, like banks, so it’s crucial not to leave anything out of your tax return.
3. Use Form 1040 for Reporting
Next is reporting everything to the IRS so you can pay appropriate income taxes. Resident aliens use Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors. These are the same tax forms U.S. residents use when filing their tax returns.
4. File a Report of Foreign Bank and Financial Accounts if Applicable
You may need to file a Report of Foreign Bank and Financial Accounts (FBAR) if your foreign assets are more than $10,000 in aggregate during the applicable calendar year. You will need to file Form 114 with the Financial Crimes Enforcement Network to meet these FBAR requirements.
5. Meet FATCA Reporting Requirements if Applicable
The Foreign Account Tax Compliance Act (FATCA) outlines additional reporting requirements for U.S. taxpayers in an effort to prevent tax evasion. Your offshore assets may meet reporting thresholds as a resident alien. You need to disclose all of your foreign financial assets to meet reporting requirements if the value is more than $50,000 on the last day of the year or $75,000 at any time during the year for single filers. Those thresholds double for joint filers. Use Form 8938, State of Specified Foreign Financial Assets, to meet your FATCA reporting requirements.
6. Ensure Accuracy
It’s common to make mistakes on tax returns. Some mistakes, however, can lead to issues with the IRS and delays on getting everything filed or your tax refund deposited. You never want to unnecessarily hold up the process.
7. Meet All Applicable Deadlines
Resident aliens still need to meet all tax deadlines, just like U.S. citizens. Important dates are the same for these taxpayers. You will need to file your annual tax return by the tax deadline each year (usually April 15), and all applicable estimated tax deadlines (usually April 15, June 15, Sept. 15, and Jan. 15). Failing to meet these deadlines will result in fines and penalties you don’t want to have to deal with.
Ensure you’re doing everything the right way when reporting offshore assets with these simple steps. Remember that as long as you’re open and honest with the IRS, you can typically avoid potential issues and stay in good standing. Talk to a tax expert if you have questions about your obligations as a resident alien.
Consequences of Not Reporting Offshore Assets Properly
What happens if you fail to report offshore assets as a resident alien? The IRS will take significant steps to correct mistakes, charge you fines and penalties, and may even charge you with a crime. Here are the potential consequences of failing to report your offshore assets:
- Penalties: Failure to report offshore assets can result in substantial monetary penalties. The IRS can impose penalties of up to $10,000 just related to FBAR requirements. You could face hundreds of thousands in fines if the issue continues after you receive a notice or your actions were found to be willful. Remember that underpayment of tax penalties could also be added on top of that, which are between 5% and 25%.
- Criminal charges: Failure to report offshore assets can result in criminal charges in some cases, including if tax evasion or fraud was involved. The penalties for conviction can include fines, prison time, or both, depending on the severity of the violation.
- Revocation of visa or deportation: In some severe cases, resident aliens who fail to comply with foreign asset reporting requirements risk having their visa revoked or being deported from the United States.
- Asset forfeiture: Individuals who fail to report offshore assets can face asset forfeiture in some cases. This means the government can seize assets that were not reported, including bank accounts, real estate, and other types of property.
- Loss of financial privacy: As far as privacy, you never want to fail to report your foreign assets as a resident alien. The IRS may conduct an investigation and obtain information about financial transactions and holdings, causing a loss of financial privacy.
- Poor credit: Failure to report offshore assets can also impact your ability to obtain loans or credit, as potential lenders may view you as a high-risk borrower due to the failure to report assets accurately.
It is clearly essential for resident aliens to comply with the reporting requirements for their offshore assets to avoid these significant potential consequences. It’s best to discuss your situation with a seasoned tax professional anytime you are worried about your standing with the IRS.
Contact the Tax Experts at Silver Tax Group for Assistance
Resident aliens may not always be aware of their obligation to report offshore assets. It is a legal requirement that can’t be ignored, however. Failure to comply could result in severe consequences, including large fines, even criminal charges, and other costs. The IRS increased its focus on offshore tax compliance, so it is more important than ever for resident aliens to take this matter seriously and ensure they are fully compliant.
You can also avoid the stress and anxiety that comes with the constant fear of being caught by the IRS when you do everything properly. You can maintain good standing with the government and avoid any potential damage to your reputation. It can be overwhelming to navigate the complexities of offshore asset reporting, but seeking out professional help and remaining vigilant can ultimately save resident aliens a considerable amount of trouble and money in the long run.
The team at Silver Tax Group is ready to help you navigate these confusing requirements. Our attorneys can help guide you forward and prepare your tax strategy. We also help with emergency tax services, debt resolution, tax audits, defense, and more. Reach out to Silver Tax Group to speak to a tax expert about foreign asset reporting as a resident alien.