What’s the Substantial Presence Test, Calculation Examples

Substantial Presence Test

Substantial Presence Test 

When it comes to determining who is considered a U.S. person for tax purposes, the two main categories of individuals include U.S. Citizens and Lawful Permanent Residents — unless the Lawful Permanent Resident makes a Form 8833 treaty election to be treated as a non-resident alien (NRA) for U.S. tax purposes. Additionally, there is a third category of individuals who may also be subject to US tax on their worldwide income. it includes Taxpayers who are in the United States on a visa or otherwise and meet the Substantial Presence Test are also required to file annual tax returns on IRS Form 1040 and not IRS Form 1040-NR. Even if a taxpayer qualifies as a U.S. person for tax purposes under the Substantial Presence Test, they may qualify for an exception, exclusion, or limitation such as the closer connection exception to substantial presence. Boiled down to its barest, the Substantial Presence Test is little more than a counting days test with some nuances and exceptions mixed in for good measure. Let’s work through some of the more common examples.

Visa Holder (Employment or Otherwise)

If a taxpayer is in the United States on a visa, they may be subject to the Substantial Presence Test. It is important to note that it does not have to be an employment-based visa and that taxpayers who are on a visa for travel or tourism — even an investor visa — may still be subject to the Substantial Presence Test even though they are not employed in the United States.

• • • Example: Harry is a non-resident alien who was transferred by his employer to work in the United States on an L1 visa and he spends 300 days a year in the United States. Harry qualifies under the Substantial Presence Test as a U.S. person for tax purposes.

    • Example: Helen is a non-resident alien who has family members in the United States. She travels to the U.S. on a B1/B2 visa six months each year. Helen qualifies under the Substantial Presence Test as a U.S. person for tax purposes.

    • Example: Hank is a non-resident alien who relocated to the United States on an E-2 visa an invested in a U.S. company which has been working add for 200 days a year in each of the past four years. Hank qualifies under the Substantial Presence Test as a U.S. person for tax purposes.

    • Example: Harriet is a nonresident alien who travels to the United States on a B1/B2 visa but in the current year she only traveled to the U.S. for 24 days. Even though Harriet was in the United States for 300 days a year in each of the past four years and the current year she does not meet the 31 day rule for meeting the Substantial Presence Test and therefore she is not taxed as a U.S. person for tax purposes.

Non-Visa Holder (Expired, Overstayed)

A person does not have to have a valid visa to be subject to the Substantial Presence Test. If a taxpayer is in the United States illegally and/or if they are in between visas or pending a visa application being accepted, they may still be subject to the Substantial Presence Test.

• • • Example: Isabelle is a nonresident alien who was in the United States on an H1B visa, but the visa expired and she remained in the United States pending the outcome of her immigration matter. Even though Isabella’s visa is technically expired, she may still be subject to the Substantial Presence Test.

    • Example: Irene is a non-resident alien who travel to the United States on a visa which expired but she is waiting to receive her conditional green card as the spouse of a U.S. citizen. Even though her visa technically expired and she is still waiting for her green card to be issued she can still meet the Substantial Presence Test.

Closer Connection Exception and Green Card Landmine (Form 8840)

One of the most common exceptions to substantial presence is for a taxpayer to show that they have a closer connection with one or more foreign countries than they do with the United States. By doing so, the taxpayer may be able to avoid U.S. person status for tax purposes — but they must be very careful to not apply for a green card before making the closer connection exception request.

• • • Example: Chad is a nonresident alien who was in the United States for 125 days in each of the past three years. He travels to the United States for temporary work but then returns back to his home country where he owns a home, has a driver’s license, voter registration and significant contacts. Chad may qualify for the closer connection exception to substantial presence.

    • Example: Carly is a nonresident alien who was previously in the United States for several days but in the current year was only in the United states for 60 days. Based on the amount of time she was in the United States for the prior years, she would qualify for the Substantial Presence Test in the current year. But, since Carly can show that her entire life is basically in her home country including where she owned a home, works, and votes, she should be able to make a strong showing that she meets the closer connection exception to substantial presence in the current year.

    • Example: Craig is a nonresident alien who was also in the United States for several days in the past few years but only 70 days in the current year. Similar to Carly, craig wants to apply for the closer connection exception but because he already submitted his application for a green card he is no longer eligible for the closer connection exception.

As provided by the IRS:

• • • Note: You are not eligible for the closer connection exception if any of the following apply:

      • You have applied for, or taken other affirmative steps to apply for, a green card; or have an application pending to change your status to that of a lawful permanent resident of the United States.

Research Student (Treaty)

One common exception for non-resident aliens in the United States is if they are in the U.S. as a research assistant or similar, they may be able to avoid U.S. person status for the first two years under a treaty between the United States and the foreign country. This is not available for all treaties, and it requires a valid double taxation agreement between the United States and the foreign country where the taxpayer resides.

• • • Example: David is a U.S. citizen who is visiting from a foreign country. This is the first time that David is in the United States and he’s in the United States as a research assistant. Under the treaty of the United States entered into with the foreign country, David who qualifies a non-resident alien for the first two years he is in the United States.

F-1 Visa, Medical, and Form 8843/1040-NR

Taxpayers who are in the United States on an F-1 Student Visa, then for the first five years they are in the United States on an F-1 visa (or are only in the U.S. for medical purposes) may qualify for an exception to substantial presence, at least if not temporarily.

• • • Example: Michelle is a nonresident alien who is currently in the United States for school. This is the first time she was in the United States and she’s in the United states on an F-1 visa. Since she has never had an F-1 visa before and she’s still within the first five years of having the F1 visa, she should qualify as a non-resident alien.

    • Example: Michael is also a non-resident alien who is currently in the United states for school. He is on his seconf F-1 visa and is in the fourth year after having completed two years on a prior F-1 visa. The IRS would take the position that Michael has exceeded his five-year exception to F-1 visa and non-resident alien status because the combined amount of time he was in the United States on an F-1 visa is more than five years. In other words, it is not five years per F-1 visa, but five years in total.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.