Substantial Presence and Form 8938, Who Must File, Exceptions

Substantial Presence And Form 8938, Who Has to File?

Substantial Presence And Form 8938 

For U.S. Taxpayers who are considered to be U.S. persons for tax purposes, they may have to file a Form 1040 — along with various international information reporting forms if any year that they have foreign accounts, assets, or investments to disclose and meet the threshold filing requirements for reporting. When it comes to who is considered a U.S. person for tax purposes, there are four main categories of individuals that qualify as a specified individual and therefore required to file form 8938, including:

• • • United States citizens

    • Lawful Permanent Resident

    • Foreign Nationals who meet the Substantial Presence Test

    • Non-residents who make certain elections for tax filing purposes

The third category above is the most controversial because technically many of these taxpayers have no intent of becoming a citizen or permanent residents and are only in the United States temporarily. Nevertheless, they may still have a Form 8938 filing requirement if they are considered a U.S. person for tax purposes. Let’s take a brief look at who qualifies as a us person and what some of the common exceptions are.

First, Form 8938 is Required Only if Form 1040 is Required

It is important that taxpayers take note that Form 8938 is only required in a year that the taxpayer is required to file a tax return. Thus, when a taxpayer meets the substantial presence test along with the threshold requirements for filing Form 8938 they may be required to file Form 1040 along with Form 8938. But, if taxpayers can qualify for an exception or exemption to the substantial presence test then they would not be required to file Form 1040 — and thus would not be required to file Form 8938 (although some limitations may apply to the application of this rule).

Substantial Presence Test

For taxpayers who are in the United States on a visa (L-1, H1-B, B1/B2, EB-5, etc), and even those who are not in the United States on a visa but are neither U.S. citizens nor lawful permanent residents, they may qualify to have to file a tax return similar to citizens and permanent residents if they meet this substantial presence test. Taxpayers meet the substantial presence test if they have been in the United States for at least 183 days for the past three years using the 1:1, 3:1, and 6:1 ratio analysis. If the taxpayer qualifies as a US person for tax purposes under the substantial presence test, and they are required to file a tax return, then if they meet the threshold requirements for having to file Form 8938, they are required to file Form 8938 even though they are not a citizen or permanent resident.

Exceptions for Visa Holders

Let’s take a look at some of the more common exceptions that a taxpayer may qualify for to avoid filing form 8938.

31-Day Rule

For a taxpayer to meet the substantial presence task, they must be in the United States for at least 31 days in the current year. If the taxpayer is not in the United States in the current year for at least 31 days then they will not meet the substantial presence test.

Closer Connection Exception

Other taxpayers who may otherwise meet the substantial presence but can prove that they have a closer connection to a foreign country or multiple foreign countries that come with the name may qualify for this exception. As a result, even though they would otherwise meet the substantial presence test they are not required to file a Form 1040 or Form 8938.

Exempt Individuals and Medical Conditions

Some other taxpayers may qualify to be exempt from substantial presence for a certain number of years, such as some taxpayers who were in the United States on an F1 visa during the first five years of their visa (there are limitations to the application of this rule of the taxpayer should be aware of). Likewise, if some taxpayers are in the United States only because of a certain medical condition that doesn’t allow them to leave the United States they too may qualify for an exception to substantial presence — and not have to file Form 1040 or 8938.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.