FAQs

Expat Tax and OVDP FAQ

Amending Tax Return and Green Card Application

Question on amending tax return during green card application process: How do we amend from single to married if I don’t have a social security number?do I fill out a form for a tax Id number and then my wife amends through the 1040x and then we submit it to the IRS while at the same time submitting my files for my green card process.do I have to wait for the IRS to amend the tax returns before I can file for a green card?

You should amend the return by filing a 1040X and apply for an ITIN, preferably using a certified acceptance agent. Note, that it can take a while for it to be processed. Normal processing is 2-3 months. Adding an ITIN application will likely prolong the process.

I highly recommend that you consult an immigration attorney about the timing, and whether it would be advisable to submit both the amended return and green card application at the same time. There could be potential complications as to whether you meet the “good moral character” requirement, due to falsifying your filing status on your tax return. You might be asked to provide proof that the 1040X has been filed and processed.

Law Office of Kunal Patel, LLC

As a non-resident alien, owning a company overseas, am I subject to U.S income tax?

I have an L-2 non-immigrant visa, leave in is the US and own a small Limited Company located in Hong Kong. 

Am I subject to US income tax if I make profits? What if I take a Director remuneration?

If you’re the only member of the LLC, then all gross income or net profits (depending on whether you made an S-corp election) flow to your personal return. Since you are a US resident, then it’s likely that income will be subject to US income tax. If there are more than one members in the LLC and some of the members are not US persons, then their pro rata share of the profits might not be subject to US tax, assuming the income earned by the LLC is not effectively connected to US trade or business. If the income is taxable in the US, you would be able to claim a foreign tax credit if you also paid tax in the foreign jurisdiction. You should contact an attorney specializing in this area for advice.

-Law Office of Kunal Patel, LLC

Can I claim foreign earned income exclusion for nonresident alien spouse?

My wife was in US on a J-1 with 2 year home stay rule and has been in Vietnam since 2015. We elected to treat her as a U.S. resident for 2015 tax purposes – this is a rolling election so it will continue for our 2016 taxes. 

According to IRS Publication 54 (https://www.irs.gov/publications/p54/ch01.html#…) we cannot claim that she is not a U.S. resident under any tax treaty: 
“Nonresident Alien Spouse Treated as a Resident 
 
This means that neither of you can claim under any tax treaty not to be a U.S. resident for a tax year for which the choice is in effect.” 

However, (A) can we still claim a Foreign Earned Income Exclusion for her using the physical presence test? (B) If so, and she ends up with no taxable income for 2016, can I still contribute $5,500 to her 2016 Roth IRA as long as we meet all other criteria (joint income limits, my income being >$11,000 per year, etc.)? 

Thank you!

It sounds like you made a 6013(g) election for your spouse. If so then she is a resident for tax purposes. Short answer is yes to (A). Not sure about (B) without additional facts.

-Law Office of Kunal Patel, LLC

 

Capital Gain on Sale of Foreign Asset

Question on capital gain on sale of foreign asset: I am currently US citizen and recently sold my house in India. I am considering reinvesting profit earned on this house. With reinvesting the profit for 3 years in Indian Govt. bonds, I don’t have to pay any capital gain tax in India. However, I probably have to pay the tax in US. I have 2 questions:
1. When do I need to pay tax in US? The year when deal is closed or at the time of Repatriation? I am keeping money in a bank in India and will be happy to keep if taxes could be deferred.
2. Is there any reinvestment option in US to save capital gain now?
Thanks,

It is reported in the year sold. If it was a rental property, you might be able to avoid paying taxes on any capital gain through a IRC 1031 like-kind exchange. The qualifying property for the 1031 exchange must be another foreign property. Note, that there are very specific timelines within which you need to purchase a new property, as well what you do with the money in the meantime. If you don’t qualify for a 1031 exchange, you may also be able to exclude some or all of the property gain through IRC 121.

– Law Office of Kunal Patel, LLC

Capital gains tax on sale of primary residence before entering USA on immigrant visa

Hello, 

I am sponsoring my parents in India for their green cards. 

(1)Do new immigrants become liable for US taxes on being granted an immigrant visa OR do they become liable after they enter the country on an immigrant visa and acquire a green card 
(2)If they sell their primary residence in India prior to entering the US on the IV do they owe an US capital gains tax 

Thanks 

The would not be taxed in the US on foreign sourced income unless they are considered to be US residents. A person becomes a US resident for tax purposes by meeting one of the following tests: 1.) lawful permanent resident test or 2.) substantial presence test. 

A person becomes a lawful permanent resident when they are issued a green card by USCIS (Form I-551) and enter the country. After this point, they are taxed on worldwide income as US residents. 

There are other variables that makes it impossible to give you any specific advice in this type of forum, but that is the general rule. Even if they do sell the home after establishing US residency, there may be exclusions on capital gains available.

-Law Office of Kunal Patel, LLC

Do I have to pay tax on inherited cash from parent overseas?

I am a US citizen who inherited cash asset of $300K from my father this year. My father is a citizen of Bangladesh and his money is not related to US or US law in any way or manner. According to IRS law, do I have to pay any tax on this cash asset?

There’s no tax on a foreign cash inheritance, but there are definitely some reporting requirements. FBAR, Form 3520, and FATCA are just some of the reporting requirements you may have.

-Law Office of Kunal Patel, LLC

Do I pay taxes on the sale of an inherited property?

In short, yes. You pay taxes on any gain resulting from the sale. With an inherited property, you subtract the fair market value at the time of inheritance against the sale price to determine gain/loss.

You didn’t mention how long you’ve owned it, if you lived in the house after inheriting it, or if it was rented after you inherited it. All of these things would have a big impact on the tax consequences of the sale. If you lived in the house for at least two years after inheriting it, you might be able to exclude a portion of the gain under IRC 121. Otherwise, the property can be treated as an investment, and you might be able to deduct a capital loss on the sale (if there’s a loss). The stepped up basis would apply in either situation.

How to Find an OVDP Attorney

What is an OVDP Lawyer?

While there’s really no such thing as an “OVDP attorney” or “OVDP lawyer“, a client with unreported foreign income and assets might search for “OVDP Lawyer”, so many tax attorneys who specialize in this field will call themselves OVDP lawyers. So basically, an OVDP lawyer is one who has specialized skill and knowledge in bringing clients with unreported foreign income and assets into compliance with U.S. laws.

What are the Typical Fees for an OVDP Attorney?

While I can only speak from my experience and my discussions with other attorneys I know that practice in this field, I would say that 95% of cases are streamlined cases vs. OVDP. An OVDP client is a rarity. Very few offshore non-compliance cases rise to the level of willfulness and need the protection of the OVDP program. I cannot provide an accurate range for OVDP cases because they vary so much in complexity.

Streamlined cases, on the other hand, are often the same fact pattern. Client, a native of country X, moves to the U.S. and leaves behind some foreign accounts in country X. They might open a few more foreign accounts while in the U.S. Sometimes they have family they are supporting through funds in the foreign accounts. These are almost always streamlined cases because the behavior is not willful, or at least not demonstrably willful. If your situation is similar and your attorney wants you to file under the OVDP, get a second opinion! I have had dozens of clients with this exact same scenario, including some with assets in the millions, and all have been successfully resolved through streamlined procedures.

Fixed fees. For attorneys that charge fixed fees, I would expect the total fees in most streamlined cases to be between $2,000 to $5,000, including the tax returns. Like most tax attorneys, I do not prepare tax returns, but I contract the tax return preparation to tax preparers who have experience in foreign account reporting. I’ve had to exceed $5,000 where the client had dozens of accounts, significant mutual fund investments, or owned foreign companies. If you own foreign mutual funds or demat accounts, you can expect to pay higher fees. The attorney you choose should be able to explain how they arrived at the fees they are quoting you. Be careful hiring an attorney who just throws a figure out there without first reviewing your account. If the attorney provides you with a quote at the end of your 15 minute phone evaluation, that should be a warning sign. After a 15-20 minute initial phone call, I send out a FBAR/FATCA organizer for the client to fill out. I carefully review the tax returns and organizer and determine the work that needs to be done; only then am I able to provide a fee estimate.

Hourly. Hourly billing may make sense for OVDP cases. In streamlined cases, most of the work falls upon the tax preparer, whereas an OVDP case will involve significantly more of the attorney’s time. Attorneys who practice in this field charge anywhere between $200 to $500/hr, although I’ve seen upwards of $750/hr. Usually the tax preparation work will be fixed and the attorney’s time will be billed hourly. The hourly fee is not so much as important as what the total fees will be (a lesser experienced attorney might bill at $200/hr and spend 2 hours, where as an experienced one billing at $400/hr might spend 1 hour). You should try to get your attorney to pin down a range of what he expects your total costs to be.

The total cost will also depend on factors such as firm size and location. You could expect fees to be higher in high cost of living areas such as NY or California. Large firms may also have higher overhead.

Do I Need a Tax Lawyer, or can I use a CPA?

Read more about the differences between JDs and CPAs. Your communications with attorneys are privileged but not with CPAs (they have limited privilege). If you have a simple case that has no evidence of willfulness, you may not need that protection.

Then there’s also the matter of competence. As an attorney, I do not have training or experience in preparing tax returns. Therefore, I leave such work to an accountant. A CPA is not trained to handle legal issues. Therefore, a CPA should not be consulted in a legal matter where you could be facing civil or criminal penalties for a tax violation.

How do I Choose an OVDP Attorney?

Here are a few tips that might help you choose:

  • Does that person have experience in handling offshore compliance matters? Before you contact an attorney, do your research first. Spend a few hours researching OVDP blogs and the IRS website about the various offshore compliance programs. Understand the process and various international forms required for your situation (e.g., FBAR, 8938, 8621, 3520, 5471, 1116, 2555). When you talk to an attorney, test them. Ask them to explain the process and what forms they think will be required for your matter. If that is in line with your research, you can be a little more assured.
  • Ask about the person who will be preparing your tax return. In streamlined cases, the tax preparer plays a bigger role in the case than in an OVDP case. The attorney’s job in a streamlined case is to make the initial determination of willfulness vs. non-willfulness, coordinate with the tax preparer, and draft the certification of non-willfulness. The quality of the tax returns will depend upon the person preparing the tax returns. That person should have several years of experience in “expat tax.” The preparers we use have many years of experience working at Big 4 accounting firms in expat tax.

Tips and Etiquette for Clients

  1. Be Respectful of your Attorney’s Time. There is nothing wrong with price shopping, but you should be mindful of the attorneys’ time. While you should not be pressured into signing an engagement letter, you should not expect multiple consultations without signing an engagement letter. And even after signing the engagement letter, try to consolidate your questions and phone calls to prevent multiple contacts. Attorneys would much rather be working on your case than fielding phone calls and emails. A flat fee does includes reasonable but not unlimited contact with your attorney.
  2. Be Upfront During your Initial Consultation. This means truthfully and completely answering all of the attorney’s questions. It is important to identify any weak links in your case so that they may be addressed early on.
  3. Be Organized. If you’re paying hourly, then obviously good organization on your part will save you money. If your attorney is charging a fixed fee and does not sense that you are organized, you can expect that your fees might be higher to reflect the additional time commitment on the attorney’s part.
I am an international student on an F1 visa. Do I also pay taxes in the US?

I rely entirely on my parents for my upkeep, so I don’t have a job. I’m currently working towards graduating next year. I don’t want to owe taxes to your government, my government owes my dad a lot of money which makes it much harder for me to pursue my education here. I don’t want to owe taxes in addition to school fees and medical bills.

As long as you were on an F-1 visa the entire time in the US, you’re exempt from counting your US presence days for purposes of the substantial presence test for up to 5 years. No taxes unless you have US sourced income.

-Law Office of Kunal Patel, LLC

Reporting Immigrant Spouse on Tax Return

I married an immigrant last year always file my taxes as head of household even when I was married years before. our interview is next month would Imy New wife get rejected from becoming an American if I don’t file her on my taxes

If your wife is applying for citizenship then USCIS will request 3 years of her tax returns, assuming that you are a US citizen; if not then 5 years of tax returns. You should not attend the interview without correcting the filing status because it will most likely cause issues for you in the interview.

-Law Office of Kunal Patel LLC

Should I file W-8BEN form if I am an L2 visa holder and work?

I have been in the U.S. for the last two years on L2 visa and started working half a year ago. I have recently opened a savings account at a bank and received W-8BEN form from them shortly afterwards with a request to confirm my non-resident alien status. I must be a non-resident alien for INS but what about IRS? I have SSN and pay taxes in the U.S. which probably makes me a resident alien for tax purposes. Should I decline to file W-8BEN? If yes, what kind of information should I provide to the bank?

You do not need to fill out a W-8BEN since you are a US resident for tax purposes also. You need to fill out a W-9.

 -Law Office of Kunal Patel, LLC
Taxes for Dual Citizens

Question about taxes for dual citizens: I am a native Italian citizen, who will also get the American passport soon.
As of now i do not pay taxes in Italy because i am not living there and i am registered as a citizen living abroad.
What happens if i decide to go live in Italy again (holding an American passport?). I know i have to file for taxes every year… but in details where would i pay my taxes, how would that work?

Thanks,

As a US passport holder, you are a US citizen. US citizens are taxed on worldwide income. If you moved to Italy, you would be potentially subject to double taxation. There are three primary forms of tax relief for US nationals living abroad:
1. Tax treaties
2. Foreign tax credits
3. Foreign earned income exclusion (incl. foreign housing exclusion)

You would need to continue filing and paying your US taxes provided that you are a US citizen or permanent resident. Expat tax is a specialized area of tax and you should seek an attorney knowledgeable regarding these issues, especially foreign investment reporting.

– Law Office of Kunal Patel LLC

Taxes on Foreign Bank Account

My parents (non USA residents) and I (USA resident) opened a foreign bank account for them to use when they decide to purchase a home in the USA. Would they get taxed 30% from the earnings annual yield or 30% from the total amount deposited in the account.?

Possibly. You may owe taxes on interest income and foreign currency exchange gain, as well as have FinCEN 114 (FBAR) and Form 8938 (FATCA) filing requirements. You should seek a tax attorney experienced in foreign investment issues.

– Law Office of Kunal Patel LLC

Transferring Money Abroad

Question on transferring money abroad: I’m a US permanent resident. I have some money left in my Indian Bank. Can I accept dollars from my US friends and transfer the Indian currency equivalent to their Indian family or friends from my Indian Bank account? Is there a legal problem?

When you convert foreign currency to USD, or vice versa, you can have reportable currency transaction gains. Gains from personal transactions under $200 are not taxable.

What you are doing could be construed as an indirect foreign currency transaction. Expat tax is a complicated area of taxation and you should seek an attorney experienced in this specific area.

Law Office of Kunal Patel LLC

US Tax on Sale of Foreign Asset

I am a US national but Indian citizen. I have a question regarding US tax on sale of foreign asset. I have an apartment which was bought before I moved to USA. I am working here and paying taxes. I want to use some of it towards buying my primary home here in USA.

Since you are a US national/permanent resident you are taxed on worldwide income. Regardless of when you purchased the house, if you sell the house while you are a US resident for tax purposes, then any gain is taxable in the US.

Additionally, if the home had an existing mortgage, you may also have a currency gain/loss resulting on the repayment of the loan. A currency gain would be taxable as either ordinary income or capital gain depending on how long you held the property. A currency loss would be considered personal and non-deductible.

However, you maybe be able to exclude part or all of the gain from the sale under IRC 121 Exclusion of gain from sale of principal residence.

– Law Office of Kunal Patel LLC

What are the implications on estate tax for property acquired from a foreign parent (who is not a US resident)

Parent in India, if the children living in the US as citizens or permanent residents inherit the parents’ property in India, do they need to pay estate taxes in the US.

No but you may be required to file Form 3520 and other information reporting forms. The penalties can be severe for not reporting on these forms so be sure to conduct your due diligence or hire a tax attorney or a CPA that specializes in expat/inpat tax.

-Law Office of Kunal Patel, LLC

What are the tax implications of expatriation (giving up green card)?

H1B holder, have just started the green card application process via my employer, so that my wife can work on her H4, but only intend to stay in the US for a few more years. I am concerned that this may affect my tax bill after I leave the US in ~3 years time. 

Section 887A (“exit tax”) applies to covered expatriates. Covered expatriates are US citizens and long-term residents. Long-term resident is defined under the code as an individual who has held a green card in at least 8 of the 15 years ending with the year of expatriation. So it does not appear that you would be affected by Section 877A.

– Law Office of Kunal Patel, LLC

What is the tax implications of selling a home in india and moving the proceeds to the US?

My mom a greencard holder and myself a US Citizen jointly own a home in india estimated around 300,000usd we bought the home 15 years ago for 100,000usd. My mom has lived in the home for the most recent 15 years but now is moving to the US permanently. What is the tax implications if we transfer $300000 to a US bank account. Do we pay taxes on the gain in the US?

It’s not the transferring of the money that causes it to be a taxable event; it’s the underlying transaction. You pay capital gains tax when the property is sold. In addition, if the transaction causes a foreign currency gain, then you would have that gain to report also. For example, if the house was under mortgage, you may have currency gain on the foreign repayment of the mortgage when you sell it. You can bring the $300000 to the US whenever you want as long as you report the sale on your US tax return as well as any interest you earn if you deposit the funds in an Indian bank.

-Law Office of Kunal Patel, LLC

IRS Audits

How Far Back can the IRS Audit you?

The Internal Revenue Code (IRC) contains time periods within which the IRS must assess and collect tax. These limitations are known as “statute of limitations.” Section 6501(a) of the IRC states that an assessment of any income tax must be made “within 3 years after the return is filed.” This applies even if a return is filed late.

However, there are exceptions to the 3 year statute of limitations:

  1. False, fraudulent, and unfiled tax returns. There is no statute of limitations where a taxpayer files a false return, engages in a willful attempt to evade tax, or does not file a tax return.
  2. A return is filed with a substantial omission of income. The IRS may assess taxes within 6 years of a tax return filing where the taxpayer omitted more than 25% of the reported income for the year under examination.

Example 1: Bob files his 2014 tax return on 4/15/2015. The IRS has until 4/15/2018 to audit and assess any additional taxes on the return, absent fraud or more than a 25% omission of income.

Example 2: Bob files his 2011 tax return on 4/15/2012. Bob’s 2014 tax return is audited by the IRS and after reviewing his bank statements, the IRS discovers that he underreported his income by more than 25% in 2014. The IRS now has until 4/15/2018 to audit his 2011 tax return.

Sources:

26 U.S. Code § 6501 – Limitations on assessment and collection

 

misc

Amending Tax Returns for Filing Status

In Jan. 2013 I married, but I filed my 2013 & 2014 returns as single, In 2015 I filed a joint return (married ) with my husband who only has a ITIN #. (Our 2015 return was accepted and received a refund based on Married-filing jointly return) Can I amend my 2013 & 2014 as Married-filing jointly and receive the additional refund?

Thank you

Yes, you should be able to. A 1040X filed for a refund is considered a “claim for refund.” A claim for refund must be filed within 3 years from the time the return was filed or 2 years from the date tax was paid, whichever is later. It seems like you would have enough time to file a claim for refund. You should seek a tax attorney to help you with this matter.

– Law Office of Kunal Patel LLC

Do I claim mileage reimbursement on my taxes?

I work as a merchandiser for a company and receive mileage reimbursement. The company takes taxes out of my paycheck which I get every two weeks, but not for mileage. Mileage is direct deposited weekly. Will I have to claim mileage on my taxes and how do I do so?

It depends on whether your mileage is reimbursed under an accountable or nonaccountable plan.

Accountable – An accountable plan would be one where you submit your actual mileage to the company and the company reimburses you for the mileage you actually incurred. Under an accountable plan, the employer does not include the income on your W-2 and you cannot deduct the mileage on your tax return. So it’s a wash, no action required on your part.

Nonaccountable – If the employer gives you a mileage allowance (e.g., $60 every month), then likely the employer will need to report the mileage reimbursement on your W-2. You should then be able to deduct your actual mileage expense (non-commuting only) as an employee business expense on Schedule A.

– Law Office of Kunal Patel LLC

Error on tax return

My sponsor has to send the transcript of the IRS and also the Federal income tax return. The IRS made a correction due to an error on tax return and lower the refund so I want to know if I need to send the original tax return as my husband sent it or if it can be the new one with the right amount.
He completed the tax return as married filling jointly but I had no income. The only form we have to send to the NVC is the I-864EZ, is this correct?
There are two questions.
Thank you in advance.

Was it a correction or an adjustment? If it’s just a correction (e.g., math error), then there’s nothing further you need to do unless you want to dispute it. If it’s an adjustment (for example, disallowance of a credit), then you need to determine whether you agree with it or not. If you don’t agree, you’ll need to respond to the notice that the IRS should have sent. If any doubts, have a tax attorney take a look at the notice.

– Law Office of Kunal Patel, LLC

How to Respond to a Tax Audit?

I got a IRS letter about 2013 tax audit. No issues here and in fact I had missed one deduction previously and so I will get more money in my pocket. I spoke to the IRS person before the deadline and he gave me 30 days time for provide following documents

(1) Copy of filed Tax returns from 2010 till 2015 – Does n’t IRS already have them? Why is IRS Officer asking me to provide all 6 years when the audit is only for 2013? Is there any trick involved? I have no problem in providing all 6 years and I can add one deduction which I missed by mistake in last 6 years. It is just time consuming to collect information for 6 year.

(2) bank statements from Dec 2012 till Jan 2014 – No issues. I can provide them

A:  There are a couple of scenarios where the IRS would pick up so many additional years for audit:

1. There is evidence of tax fraud. In such cases the statute of limitations allows the IRS to go back 6 years.

2. You filed your tax returns late and there is time on the statute of limitations for 2010 -2012. Normally, the 3 year statute would have expired for 2010-2012, unless you file the tax returns late.

3. You have carryovers such as NOL or capital losses. If you have a large capital loss, for example, in 2012 that was carried forward from 2010, the auditor may want to look at your 2010 return. If the statute for 2010 has expired, the auditor can still request a copy of the return to verify the carryover but cannot make adjustments to the 2010 return.

The fact that your bank statements were also requested leads me to believe that you are being audited for financial status – the IRS believes you may be underreporting your income.

I highly recommend that you retain an attorney to protect your rights before you submit any further documents to the IRS. You should do so before the 30 day time period lapses.

– Law Office of Kunal Patel, LLC

I just sold my rental home. Do I have to save 20 percent for taxes?

I just sold my very small modest rental home and received 130000.00. Do I have to save 20 percent of the above for taxes next year. I purchased the home many years ago for only 34000.00 Please advise.

If it was a rental home, then yes, any gain from the sale of your home will be taxed at the capital gain rate of 20%. To the extent you claimed depreciation, part of that gain may be taxed at your ordinary income tax rates, which may be higher than 20%. However, your basis will not just include the purchase price, but also the costs of any improvements you’ve made to your home. In addition, some of the closing costs, such as realtor fees, would increase your basis further.

– Law Office of Kunal Patel, LLC

Settle My Tax Liens

How do I settle my tax liens when irs will not work with me? I tried a compromise with irs but they say I do not qualify and can pay the amount owed or make payments of x amount. The payment is to high and I am ready to get this over with not take years to pay. It’s over $30,000 worth.

You didn’t mention whether you tried to appeal the denial of the OIC or tried to resubmit it. These might be some options for you. Otherwise, you can try for penalty abatement, or you can file an OIC doubt as to liability if you think the taxes were not properly assessed.

Two LLCs = two Schedule C?

For liability reasons and to separate activities, I want to start Two Separate Single-Member LLCs. One in TX and one in Oklahoma. I understand SMLLCs are disregarded for tax purposes. Does this mean I can use the same EIN for both SMLLCs? For tax purposes, can I combine all income and deductions/expenses into one basket. Can I file one schedule C? If so, would I list both SMLLCs on the same schedule C? Thank you very much

Yes, you should probably file two separate Schedule Cs. One advantage of doing so would be that in the event that one of the LLCs has 3 years or more of losses and the other shows profits, you’ll be able to show intent to make a profit for at least one of them. That way both your LLCs wouldn’t be subject to the Section 183 hobby loss provision. I don’t really see any benefits (other than convenience) of combining them anyway.

– Law Office of Kunal Patel, LLC