H-1B Visa FBAR & the IRS
H-1B Visa FBAR: Is it Mandatory to Report Offshore Accounts: The H-1B visa FBAR rules for disclosing overseas accounts are complex. That is because an H-1B visa Holder is not considered a U.S. Person in the same way that a U.S. Citizen or a Legal Permanent Resident is held out to be by default, a U.S. person. Therefore, many H1B visa holders are not even on notice that they have U.S. status, and an FBAR filing requirement. When this is compounded by the fact that the IRS has taken an aggressive approach to foreign accounts compliance and unreported foreign income – compliance is important to avoid offshore penalties.
Not every H-1B visa holder is required to report the FBAR.
Rather, only those H-1B Visa holders that meet the “substantial presence test” are required to file the FBAR.
That is because the FBAR is only required for us persons. And, an H-1B Visa holder is only considered a U.S. person in the year or years that the person meets the substantial presence test.
What is the Substantial Presence Test?
The Substantial Presence Test is used to determine if a person is considered a U.S. person.
Our Board-Certified Tax Law Specialist team explains how a foreign person (non-U.S. Citizen, non-U.S. Permanent Resident) who meets the IRS Substantial Presence Test, is taxed on their worldwide income — even through they are not U.S. Citizens or Legal Permanent Residents.
A person who is a U.S. Citizen or Legal Permanent Resident (Green Card Holder) is generally required to file a 1040 Tax Return.
When filing a 1040 Tax Return, if the person has foreign bank accounts and meets the minimum threshold requirement, then they are required to file an FBAR (Report of Foreign Bank and Financial Accounts).
Foreign Nationals (Non-U.S. Citizens)
What Foreign Nationals must understand is that the responsibility to file a 1040 (and report foreign bank accounts) is not just for U.S. Citizens or Legal Permanent Resident. If a Foreign National meets the Substantial Presence Test, they are also required to file a 1040 and FBAR (if they meet certain threshold requirements) even though they are not a US Citizen or Legal Permanent Resident.
U.S. Tax Rules
When a person first comes to the United States to live, if they earned income they are required to file a tax return. Until they become a Legal Permanent Resident or US citizen, they finally 1040-NR.
The problem for many people is that once they have lived in the United States for a certain amount of time, they become subject to regular taxation just as if they were a US citizen or Legal Permanent Resident. Not only does this mean that the United States will tax the person on the worldwide income, but they are also required to comply with all foreign account reporting requirements.
The failure to comply with foreign account reporting may result in significant fines, penalties, and even criminal investigation depending on the facts and circumstances of their case. In addition, if the person is found to be willful and their failure to report then their entire foreign accounts can be subject to a 100% penalty.
The following is a summary of the Substantial Presence Test followed by a summary of FBAR reporting requirements:
Example of How Substantial Presence Works
As a non-US citizen and non-US green card holder, you are generally only required to pay tax on your “US Effectively Connected Income” (money you earn while working in the United States). However, if you qualify for the Substantial Presence Test, then the IRS will tax you on your WORLDWIDE income.
IRS Substantial Presence Test generally means that you were present in the United States for at least 30 days in the current year and a minimum total of 183 days over 3 years, using the following equation:
- 1 day = 1 day in the current year
- 1 day = 1/3 day in the prior year
- 1 day = 1/6 day two years prior
Example A: If you were here 100 days in 2016, 30 days in 2015, and 120 days in 2014, the calculation is as follows:
- 2016 = 100 days
- 2015 = 30 days/3= 10 days
- 2014 = 120 days/6 = 20 days
- Total = 130 days, so you would not qualify under the substantial presence test and NOT be subject to U.S. Income tax on your worldwide income (and you will only pay tax on money earned while working in the US).
Example B: If you were here 180 days in 2016, 180 days in 2015, and 180 days in 2014, the calculation is as follows:
- 2016 = 180 days
- 2015 = 180 days/3= 60 days
- 2014 = 180 days/6 = 30 days
- Total = 270 days, so you would qualify under the substantial presence test and will be subject to U.S. Income tax on your worldwide income, unless another exception applies.
How do H-1B Visa Holders Report the FBAR?
While the actual reporting of foreign bank accounts on the FBAR is not all that complicated, knowing what accounts are required can get complex. Here is a link to our FBAR Reporting Guide.
In addition, what a person is already out of compliance for not filing the FBAR in prior years, they may become subject to significant fines and penalties.
What if it the FBAR Wasn’t Reported?
Luckily, many of these penalties can be avoided or minimize by submitting to one of the FBAR Amnesty programs.
Moreover, there are very specific rules and exceptions for non-willful foreign residents.
And, if the H-1B visa holder foreign resident is able to show that they do not meet the substantial presence test in at least one year during the compliance period for tax filings Comedy may be able to sidestep penalties altogether.
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