Upcoming Tax Reporting Deadlines for Non-U.S. Persons by Andrew Leonard, CPA
With tax-filing season underway, foreign persons should be prepared to meet their unique U.S. tax-reporting and -payment responsibilities based on their tax residency status. Following are three important factors non-U.S. persons should keep in mind and act on sooner than later to avoid penalties for non-compliance.
Know Your Income Tax Status
Under U.S. tax laws, a foreign person is either 1) a non-resident alien (NRA), who is required to pay US taxes only on income derived from U.S. sources or 2) a resident alien (RAs), who holds a green card or meets a “substantial physical presence test” and, like U.S. citizens, are required to report and pay taxes on their worldwide income.
Knowing your income-tax status and whether your actions may have triggered treatment as an RA is critical to tax efficiency. It is highly recommended that non-U.S. persons meet with their professional advisors and experienced U.S.-based CPAs to plan ahead and implement appropriate tax strategies before they even step foot on U.S. soil.
Renew your ITIN, as Needed
The U.S. has two methods for identifying U.S. taxpayers: 1) Social Security Numbers (SSNs) and 2) Taxpayer Identification Numbers (ITINs) issued by the IRS to foreign nationals, undocumented immigrants and other non-U.S. persons who are not eligible for SSNs. Both forms of identification are critical for individuals to work in the U.S. and receive benefits, open a bank account, obtain a credit card and/or a driver’s license and pay taxes.
Requesting an ITIN is a fairly simple process that requires the filing of a completed IRS form W-7 along with supporting documentation verifying one’s identity and foreign status. Recipients must also renew their ITIN’s every five years and revalidate those that they do not use for three consecutive years. Working with a certified acceptance agent, such as Berkowitz Pollack Brant, can help taxpayers avoid mistakes and expedite these processes. To learn which ITIN’s expired at the end of 2021 and require renewal in 2022, please see Time is Running Out for Taxpayers to Renew ITINs.
Comply with FIRPTA
The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted in 1980 to ensure foreign investors and NRAs pay their share of U.S. tax on the sale or disposition of their U.S. real property interests (USRPI), which includes the following:
- real property
- certain personal property associated with the use of real property (such as farming machinery)
- Any interest, other than as a creditor, in a domestic corporation unless it is established that the corporation was at no time a U.S. real property holding corporation during the shorter of the period during which the interest was held, or the 5-year period ending on the date of disposition.
Under the Act, purchasers of USRPI (also referred to as transferees) from foreign persons are responsible for withholding 15 percent of the total purchase price and paying it directly to the IRS, unless the transaction qualifies for a withholding exemption. This intent of the withholding tax is to ensure the U.S. collects the taxes it is due and to encourage NRAs to file U.S. federal income tax returns using IRS Form 1040NR, U.S. Nonresident Alien Income Tax Return, to report the income they receive from such sales (or to request a tax refund when the amount withheld is more than the tax due.)
Transferees generally have 20 days from the date of property transfer to report and pay the withholding tax and file IRS Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests. Click here for more information about FIRPTA withholding.
About the Author: Andrew Leonard, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he provides tax structuring, pre-immigration planning and a wide array of international tax and consulting services to international companies, entrepreneurs, families and foreign trusts. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or info@bpbcpa.com.
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