Foreign account reporting for green card holders
Many foreign persons who get a Legal Permanent Residence Status (green card) fail to understand that the United States taxes you on your worldwide income. This goes for those who are U.S. citizens, legal permanent residents and those who meet the Substantial Presence test.
The fact that the U.S. taxes you on worldwide income can be particularly difficult to note if you have income in a country that doesn’t tax that kind of income. Such is the case with many Asian countries that do not tax passive income, such as interest income. However, even if you have investments in an Asian country and earn passive income, the U.S. requires you to report that income and will tax you on it.
In case that you have foreign earned income and you paid income tax in the country you earned the money in, you could get foreign tax credits to avoid double taxation. Under some circumstances, the income could be exempt from the U.S. taxation (up to a certain amount). However, even if you are eligible for foreign tax credits or foreign earned income exclusion, you still must report that foreign income to the IRS.
Relinquishing your green card may not be the best idea to resolve your foreign income tax issues
If you have unreported foreign income and you are a green card holder, you could be tempted to relinquish your green card to avoid the penalties stipulated under the OVDP. However, there are multiple reasons why that may not be such a good idea. Instead, it would be prudent to get help from an experienced and knowledgeable tax lawyer and advice on how to proceed.
Besides FATCA (Foreign Account Tax Compliance Act) which has been implemented in many countries across the world, there is a strong agreement across governments globally that there should be GATCA (Global Foreign Account Tax Compliance Act) or CRS (Common Reporting Standard) between nations to exchanged information on their citizens and residents. FATCA is an agreement between the IRS of the United States and other countries to obtain information about U.S. taxpayers’ foreign financial assets. However, with the Common Reporting Standard implemented by the OECD brings other countries into play and other requirements, which means giving up your green card may not solve your non-compliance problems.
You should also take into account that relinquishing your green card means giving up some benefits, such as travel to many countries of the world without needing a visa. Without a green card, it could be difficult to visit your friends and family in the U.S. Moreover, it may become more difficult to obtain legal permanent resident status in the future.
OVDP vs. Streamlined foreign program for green card holders
Legal permanent residents generally pay the same tax like U.S. citizens, even though some may not realize that. Many green card holders have returned to their home countries or are living somewhere else, but they are still obligated to report their worldwide income to the IRS. If they decide to disclose their foreign accounts and they were not willful, they can apply for the Streamlined Filing Compliance Procedures, which imposes a 5% penalty compared to a 27.5% taxpayers face under the OVDP. In order to qualify for the Streamlined program the taxpayer must certify that his conduct was non-willful. Determining willfulness is a legal practice that only an expert international tax attorney can assist you with.
Moreover, if a US person is living outside of the US, they could apply to the Streamlined Foreign Offshore Procedure, which waives the 5% penalty. Here, the taxpayer must show not only that his conduct was non-willful but that he satisfies the non-residency requirement. This means that for the most three recent years that a tax return was due, the US person did not have a US abode and he was physically outside of the US for at least 330 full days.
The main problem a green card holder would face in applying for the Streamlined Foreign Offshore Program is that as a lawful permanent resident if you stay outside of the US for 1 year or more, you must reapply for a re-entry permit with the US Citizenship and Immigration Services (USCIS) prior to leaving the US. IF you are a conditional green card holder, then in order to keep your green card, you must live at least 6 months per year in the U.S. Otherwise, it becomes difficult to remove the conditions when applying to your permanent green card.
In any case, when you’re in doubt about what course to take regarding your tax issues, it’s best to consult an experienced tax attorney who can present you all the options and their implications.
Can you transition from one to another, e.g. OVDP to Streamlined?
Once you submit under the OVDP you cannot participate in Streamlined Foreign Offshore Procedures (or Domestic) and vice versa. But, since the requirements for Streamlined were expanded in 2014, the IRS gave qualifying taxpayers who had submitted to the OVDP an opportunity to be treated under the much more lenient penalty framework of the Streamlined programs. This was not a full transition from the OVDP to Streamlined, because this opportunity only reduced the penalty from 27.5 – 50% to 5% or no penalties (for those that have a foreign residence). Other terms of the OVDP program still applied, e.g. 8-year disclosure period, accuracy-related penalties, etc. These applicants were not required to opt out, but had to provide proof that their non-compliance was not willful. However, this so-called “transition” opportunity applied only to qualifying taxpayers who submitted their disclosure letter before July 1, 2014.
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