The F-1 Visa Compliance Options For 5-Year U.S. Tax Residents

When a foreign person becomes either a U.S. citizen or a Lawful Permanent Resident, oftentimes they will be aware that as a U.S. person for tax purposes, there are various IRS tax consequences and implications to be aware of. Unfortunately for some other taxpayers, they only become subject to US tax on their worldwide income because they met the substantial presence test — which means they stayed in the United States for a certain number of days in the current year and the past two years sufficient to meet the 183-day standard. Nevertheless, even if a person meets the substantial presence test but is in the U.S. on an F-1 visa then they may avoid being considered a U.S. person for tax purposes for the first five years that they hold that status. This exception can get a bit confusing and complicated because there are various factors to consider. Let’s walk through an example and go through some of the basics by way of examples

F-1 Visa IRS Tax Law

As provided by the IRS:

- - “A student is any individual who is temporarily in the United States on an “F, ” “J, ” “M, ” or “Q ” visa for the primary purpose of studying at an academic institution or vocational school, and who substantially complies with the requirements of that visa. You are considered to have substantially complied with the visa requirements if you have not engaged in activities that are prohibited by U.S. immigration laws and could result in the loss of your nonimmigrant status.:

Also Included are Immediate Family Members of Exempt Students

- - “Members of the immediate family include the individual’s spouse and unmarried children (whether by blood or adoption), but only if the spouse’s or unmarried children’s nonimmigrant statuses are derived from, and dependent on, the exempt individual’s nonimmigrant status. Unmarried children are included only if they meet all the following:
    - - Are under 21 years of age.
      - Reside regularly in the exempt individual’s household.
      - Are not members of another household.
        
        The immediate family of an exempt individual does not include attendants, servants, or personal employees.”

When a Student is Not Exempt

- - You will not be an exempt individual as a student if you have been exempt as a teacher, trainee, student, Exchange Visitor, or Cultural Exchange Visitor on an “F, ” “J, ” “M, ” or “Q ” visa for any part of more than 5 calendar years, unless you establish to the satisfaction of the IRS that you do not intend to reside permanently in the United States, and you have substantially complied with the requirements of your nonimmigrant status.
  - The facts and circumstances to be considered in determining if you have demonstrated an intent to reside permanently in the United States include, but are not limited to:
    - Whether you have maintained a closer connection to a foreign country, and
    - Whether you have taken affirmative steps to change your status from nonimmigrant to lawful permanent resident as discussed under Closer Connection to a Foreign Country.
      - Please refer to The Closer Connection Exception to the Substantial Presence Test for Foreign Students.
  - If you qualify to exclude days of presence as a student, you must file a fully-completed Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition with the IRS. If you are already filing an income tax return, attach Form 8843 to your income tax return. If you are not required to file an income tax return, you should mail Form 8843 to the Internal Revenue Service at the address indicated in the instructions for Form 8843.

F-1 Example (Non-Tax Resident)

- - Scott is a foreign national nonresident alien who recently received his F-1 visa and will be traveling to the United States for school. This is the first time that Scott will have lived in the United States in his entire life. Scott lives in the U.S. and attends University while on the F-1 visa and he remains in the United States for four years.
    - - Result: During those four years, Scott would not be considered a US person for tax purposes because he is on an F1 visa for the first time and has lived in the US for less than five years

Staggered F-1 Example (Non-Tax Resident)

- - Peter is a foreign national nonresident who recently received his F-1 visa. This is the first time Peter will be residing in the United States and he moves to the United States for three years before moving back to his home country. For the next two years, Peter does not travel to the United States at all but then relocates back to the United States for another year and a half on F-1 visa.
    - Result: In total, Peter has resided in the United States on an F-1 visa for under five years, so peter can take the position that he is not a US person for tax purposes.

Two F-1 Visas (Tax Resident)

- - Michelle is a nonresident alien who relocates to the United States on an F-1 visa for three years and then moves back to her home country. Two years later, she obtains a new F1 visa and travels to the United States and lives there for four years.
    - Result: Michelle would be considered a U.S. person after two years of being on the 2nd F1 visa (unless another exception, exclusion, or limitation applies). That is because the clock does not restart each time, she obtains a new F1 visa. Rather, she gets a five years on F-1 status, even if it is staggered over different F-1 visas and the IRS does not generally take the position that it requires 5 complete years.

F-1 Example (Tax Resident)

- - Joanne first traveled to the United States two years ago on an F-1 visa and she too relocated to the United states for the first time in her life. After two years, she returns to her home country where she begins working. Thereafter, that company transfers her back to the United States to work on an L1 visa.
    - Result: even though Joanne did not use the F1 visa for the full five years, since she is now on an L-1visa and working in the United States and living their full-time, she would be considered a tax resident.

Other F-1 Visa Exceptions

Even after a person has obtained an F-1 visa and the five years have expired, they may still qualify for other exceptions or limitations for being taxed as a US person. Depending on the type of employment they have and whether they qualify under Form 8840 or Form 8843 can impact whether they are considered a US person for tax purposes or not even after spending more than five years on an F1 visa. Likewise, the taxpayer may qualify under certain treaties to be treated as a foreign person even though technically they would be considered a US person for tax purposes because the five years on F-1 have expired — even though they are still on an F11 visa many years later.

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.