Why a non-U.S. citizen may wish to be a U.S. income tax resident (“U.S. person”). Sound like a non-sequitur?

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Why a non-U.S. citizen may wish to be a U.S. income tax resident (“U.S. person”).  Sound like a non-sequitur?

Normally, anyone residing outside the U.S. is far better off if they are NOT a “U.S. income tax resident.”  This is for several reasons:

  • Plus, those who are married to a non-U.S. citizen have to review and understand in detail the laws of their country of residence, regarding property rights of spouses, whether a spouse is a manager or officer of a foreign company, general and special powers of attorney – such as health care powers of attorney, etc., to know if one has a “financial interest” in such foreign accounts, even if they actually have no signature authority over any foreign accounts.  The law  is obligatory in how these definitions broadly include many persons who are not aware of how they can apply.  See, FOREIGN BANK ACCOUNT REPORTS – 2011 REGULATIONS EXTEND RULES TO MANY UNAWARE PERSONS, published in the International Tax Journal.
  • Managers of companies and other legal entities that have an account around the world, may also fall into these unwary traps.

As someone who advises multiple clients before the IRS on FBAR penalties, I have seen many cases where the government will take an approach of levying significant FBAR civil penalties in particular cases, depending upon how the case is handled, the particular facts and who is the IRS revenue agent and their manager.

Now to the point of this post.  Notwithstanding all of the above considerations, some individuals may find it advantageous to be a “U.S. person” for U.S. federal income tax purposes.  See, Section 7701(a)(30) which uses the technical term “U.S. person” and not a U.S. income tax resident.

If a non-U.S. citizen lives predominantly overseas, they nevertheless can elect to be treated as a U.S. person if they spend at least 31 days in the U.S. during that particular calender year and meet other requirements.   Section 7701(b)(4).

Why would an individual prefer to be a U.S. person for U.S. federal income tax purposes, even if they spend little time in the U.S.?  There could be several reasons.

  • If the non-citizen has a U.S. citizen spouse, they may have a better overall U.S. income tax result (i.e., lower federal income taxes) by filing married filing jointly?
  • If the non-citizen has no significant overseas assets or accounts, they may be able to otherwise avoid the labyrinth of rules under the BSA.

One thought on “Why a non-U.S. citizen may wish to be a U.S. income tax resident (“U.S. person”). Sound like a non-sequitur?

    renounceuscitizenship said:
    February 4, 2015 at 12:48 am

    Reblogged this on U.S. Persons Abroad – Members of a Unique Tax, Form and Penalty Club and commented:
    Good post, although I don’t think many would willingly choose this option.

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