If you or your business qualifies as a U.S. tax person, you might have to file tax returns and you might have to pay taxes. Or you might not.
In a previous post, we focused on the 3 ways an individual business can qualify as a “U.S. person” for tax purposes. Once someone crosses that threshold, there are 3 important questions to answer:
- Am I required to file anything in the U.S. and if so, what?
- Am I required to pay anything to the U.S. and if so, how much?
- If I’m not required to file and pay in the U.S., is there any reason I would still choose to do so?
Filing Obligations in the U.S.
Once you show up on the Internal Revenue Service’s radar as a “person” for U.S. tax purposes, what do you have to file? That can vary based on individual circumstances and is best determined by consulting with a tax professional familiar with your specific situation. Here are a few possibilities, but this list is by no means exhaustive.
- An application for some type of tax i.d. number. The U.S. system cannot function on names alone. Anybody who needs to file tax forms in the States will need to have some type of identifying number registered with the IRS in order to track filings and payments accurately.
- An income tax return. Keep in mind that there is a difference between filing an income tax return and paying income tax. That will be discussed in the next section. For now, understand that your main interaction with the U.S. tax system is likely to be through the filing of income tax forms, regardless of whether income tax is owed or not.
- Information reports. If you’re required to file a tax return in the U.S., you may very well be subject to information reporting requirements regarding non-U.S. bank accounts. This report goes through the “Financial Crimes Enforcement Network” (“FinCEN”) on the network’s form 114, “Report of Foreign Bank and Financial Accounts” (FBAR). The general rule states that U.S. persons, including individuals and businesses, must file an FBAR if:
- The U.S. person has a financial interest or signature authority over at least one financial account located outside the U.S., and
- The aggregate value of all financial accounts in number 1 above exceeded $10,000 at any time during the calendar year reported.
Payment Obligations in the U.S.
Not everybody who is required to file forms in the U.S. incurs an obligation to pay taxes there. You might meet the requirements for filing a U.S. income tax return but not have the necessary income to owe taxes. This list describes some (but not all) of the common types of taxes owed once you meet the thresholds:
- Income taxes. The U.S. system allows a credit for taxes paid in foreign countries. It’s not unusual for a business or individual to meet the requirements to be a U.S. tax “person” and to report income in the states, but to wind up owing nothing in the U.S. due to tax obligations in another country.
- Payroll Taxes. If you hire U.S. employees and withhold federal income, social security and Medicare taxes from their wages, the government expects the money withheld to be paid to the Treasury in relatively short order. Depending on the number of employees or the amounts withheld, an employer may be required to pay as frequently as every 2 weeks.
- Penalties. This area is perhaps the biggest “trap for the unwary.” A failure to file any tax form required by the government can lead to the assessment of a penalty. Often the penalty is calculated based on a percentage of the amount owed, so those who don’t have a balance due may not accrue significant obligations in this area. Failure to file an FBAR, however, can lead to penalties up to $10,000 for non-willful violations or $100,000 or more in the case of willful failures to file.
Filing When Not Required
In most cases, people don’t want to file any tax form that they don’t have to. In the U.S. tax system, there is a situation that might make the filing of an income tax return worthwhile even if it’s not required. Non-U.S. taxpayers who invest in U.S. businesses, particularly partnerships, might get an information report back that says the partnership lost money. The taxpayer might not meet any requirement for filing a U.S. income tax return under those circumstances, but the U.S. system allows for losses that cannot be deducted in a particular year to be carried forward. So even though the only entry on the tax form is a report of the loss from the partnership, that loss can serve to reduce taxable income in future years if and when the investment starts to make money.
In addition, we often advise businesses that have sales in the U.S. but no other significant presence to begin filing returns proactively even before required. It’s important to establish a track record of compliance from the earliest days of your presence in the U.S.
The key to effective tax compliance for non-U.S. businesses and individuals is solid advice and planning from the start. If you’re contemplating starting operations in the U.S., it’s never too early to contact a tax professional who is familiar with the intricacies of the tax obligations facing non-U.S. taxpayers.