Advocating for

Immigrant Taxpayers

By the end of this training, you will: – Recognize your client’s residency status for tax purposes – Understand issues affected by residency and immigration – Know the types of information you need from your

clients to proactively assist with tax compliance – Discover ways to advocate for your clients who have

existing residency and immigration related tax issues

Learning Objectives

Residency

• U.S. immigration law refers to those not holding U.S. citizenship (aliens) as immigrants, nonimmigrants, and undocumented aliens

• U.S. tax law has only two categories for aliens: – Resident alien – Nonresident alien

Aliens are considered nonresident aliens unless they meet one of the following tests:

– Green Card Test: has Lawful Permanent Resident status – Substantial Presence Test

Residency Rules IRC § 7701(b)

•

• Present ≥ 183 days for the current and two preceding years calculated: – Current year: each day = one day – Preceding year: each day = 1/3 day – Second preceding year: each day = 1/6 day

Present ≥ 31 days during tax year, and

Substantial Presence Test

• Taxpayer comes to U.S. on June 1, 2018 and returns to home country on December 31, 2018 (214 days)

• Taxpayer returns to U.S. on September 1, 2019 and remains for the rest of 2019 (122 days)

• What is taxpayer’s residency status for 2018 and 2019?

Substantial Presence Test Example

• First-Year Choice IRC § 7701(b)(4) • File joint with resident alien or U.S. citizen spouse

IRC § 6013(g) & (h) • Closer Connection to foreign country Treas. Reg. §

301.7701(b)-2(d) • Tax treaty provision

Elections Overriding Green Card Test and Substantial Presence Test

• Refugees are taxed as U.S. citizens • Foreign agricultural workers on H-2A visas receive

Social Security numbers • Dual residents must file an additional statement when

filing their Form 1040 or Form 1040-NR

Unique Situations

U.S. Tax Treatment U.S. Citizens & Nonresident Aliens Dual Status Resident Aliens

Tax Form Used 1040 1040NR Status at end of year

Income taxed Worldwide income U.S. sourced income Nonresident portion – US sourced income Resident portion – worldwide income

Filing threshold Income > standard deduction Income ≥ $5 Income ≥ $5

Filing status permitted All statuses available Single, married filing separately, or qualifying widower*

Single, married filing separately, or qualifying widower*

U.S. Taxation of Resident Alien versus Nonresident Alien

U.S. Tax Treatment U.S. Citizens & Nonresident Aliens Dual Status Resident Aliens

Standard deduction Yes No No

Itemized deductions Yes Only for expenses related to Nonresident portion – ECI Effectively Connected Income related expenses only

(ECI) Resident portion – yes

Earned Income Tax Credit Yes* No No

American Opportunity Tax Yes* No No Credit

Child Tax Credit & Yes* Yes* Yes* Additional Child Tax Credit

Other Dependent Credit Yes* Yes* Yes*

*If certain conditions are met

U.S. Taxation of Resident Alien

versus Nonresident Alien (Continued)

• Nonresident aliens (NRA) are generally subject to U.S. income tax only on their U.S. source income

• All U.S. sourced income to NRAs is either: – Effectively Connected Income (ECI) IRC § 871(b)

or – Fixed or Determinable, Annual, or Periodic

(FDAP) Income IRC § 871(a )

U.S. Sourced Income

• Income earned from U.S. trade or business by an NRA or foreign corporation is ECI – ECI is subject to U.S. income tax IRC §§871(b)

and 882 – ECI is taxed on a net basis (after allowable

deductions), and – ECI is taxed at the graduated rates

Effectively Connected Income (ECI)

• – Fixed = paid in amounts known ahead of time – Determinable = there is a basis for figuring the amount

to be paid – Annual/Periodical = paid annually or from time to time

(does not have to be paid at regular intervals)

• FDAP income is taxed on gross income and at a flat rate of 30% (or lower treaty rate)

FDAP income is:

Fixed, Determinable, Annual or Periodical (FDAP) Income

• Employees with an SSN – file W-4 with employer to calculate withholding

• Independent contractors – no withholding requirement, estimated tax payments may be required

• Employees who do not provide a correct taxpayer identification number (ITIN or SSN) to employer may be subject to 24% back-up withholding rate

Wage Withholding for U.S. Citizens and Resident Aliens

• Payers of U.S. sourced FDAP income to NRAs and foreign entities must withhold 30% at point of payment

• Compensation for personal services (i.e. employment income) is generally exempt from 30% withholding under IRC §1441 but is subject to wage withholding

Withholding Tax on Payments to NRAs and Foreign Entities

• IRC § 6109 and Treas. Reg. 301-6109-1 require taxpayer identification numbers on returns, documents, and statements

• ITINs must be used by anyone who is not eligible for a Social Security Number, but has a tax filing requirement

• Dependents and spouses need ITINs to be claimed on a return

• An ITIN does not authorize a person to work and should not be used on Form W-2

Individual Taxpayer Identification Numbers (ITINs)

• Generally, new applicants must apply during the filing season with a return

• Submit Form W-7 with original documents or documents certified by the issuing agency

• Domestic applicants can apply by mail, in-person at a Taxpayer Assistance Center, or through a Certifying Acceptance Agent (CAA)

• Foreign applicants can apply by mail at a U.S. Embassy or Consulate or through a CAA

How to Apply for an ITIN

Expiration of ITINs

• ITINs will be deactivated if: – Issued before 2013 (on staggered schedule) – Non-use on a tax return for three consecutive

taxable years

• Taxpayers whose ITINs are expiring (and their family members wanting to renew at the same time) may apply for renewal year-round

SSNs and/or ITINs must be issued by the tax return due date (including extensions) to claim many refundable credits

– Date ITIN application and tax return (if attached) are received is deemed to be ITIN issuance date

– Issuance date for renewed ITINs is considered the date the original ITIN was assigned

Timing Matters

If your client: – Meets the substantial presence test but claims an

exception, file appropriate form: • Form 8840, Closer Connection Exception Statement

for Aliens • Form 8843, Statement for Exempt Individual and

Individual with a Medical Condition

Proactive Steps – Substantial Presence

If your client: – Is an H-2A worker, advise him/her to apply for an

SSN at the beginning of the employment – Is an H-2A worker who meets the substantial

presence test but is considered a NRA per the tiebreaker rules in a tax treaty, file Form 8833

– Is an H-2A worker who receives a W-2 reflecting social security and Medicare taxes were withheld, consider filing a claim on Form 843

Proactive Steps – H-2A Visa Holders

If your client: – Is a U.S. citizen or resident alien married to an

NRA or dual resident, consider the most advantageous filing status • Head of Household • Married Filing Joint • Married filing Separate

Proactive Steps – Filing Status

– Is applying for an ITIN and needs documents certified, understand CAA and TAC limitations and plan accordingly

– Has an ITIN (similarly, spouse and dependents), verify the ITIN hasn’t expired before filing any document using the ITIN and timely renew all ITINs

If your client:

Proactive Steps - ITINs

If your client: – Is an NRA who receives income for personal

services, determine if a withholding exemption is available through a tax treaty

– Had amounts withheld from FDAP income, obtain copies of Forms 1042-S

– Is a foreign partner in a partnership with ECI, obtain copies of Forms 8805

– Is an NRA selling U.S. real property, obtain a copy of Form 8288-A

Proactive Steps - Withholdings

If your client: – Has ties to a foreign country, ask lots of questions about

foreign assets and/or funds coming from foreign countries to determine if your client is required to file any International Information Returns

– Is required to file an International Information Return because he/she owned, contributed to, or received a distribution from a foreign trust, use the IRS assigned EIN

Proactive Steps – International Information Returns

Proactive Steps – Submitting Documents

If your client: – Needs to submit documents to the IRS, advise your

client not to mail in original documents unless specifically required to do so

If your client says the IRS didn’t allow their withholding credit, ask:

• Did you receive correct Forms 1042-S, 8805, or 8288-A? • Did you attach the Form(s) 1042-S, 8805,

and/or 8288-A to your timely filed tax return? • Did you receive a letter from the IRS indicating

what the problem might be?

Correcting Problems - Withholdings

If your client: – Used another person’s SSN for employment, submit

documentation supporting income – Is an H-2A worker who received Form 1099-MISC (or

1099-NEC) instead of Form W-2 and the IRS imposed self-employment (SE) tax, file Form 1040X to recover SE tax

– Has a rejected ITIN application, reapply with documents that comply with the W-7 instructions

Correcting Problems – Taxpayer Identification Numbers

If your client is assessed penalties for failing to timely file one or more international information return(s), – File the delinquent return immediately – Ask your client to provide a statement outlining the

reason for the failure – Ask if the foreign trust is a tax-favored retirement trust

or tax-favored nonretirement savings trust – Request IRS to reverse the penalty if the return was

timely filed

Correcting Problems – International Information Return Penalties

Challenges facing immigrants, guest workers and refugees – Complex and frequently changing tax law – May be distrustful of government – Language barriers – Unique cultural norms

Advocating for Immigrant Taxpayers

• We help taxpayers resolve problems with the IRS • We recommend changes to prevent or solve systemic

problems • Contact us at: – (877) 777-4778 or find your local TAS office on our

website: www.TaxpayerAdvocate.irs.gov • Know of a systemic issue? Report it on our Systemic

Advocacy Management System: http://www.irs.gov/Advocate/Systemic-Advocacy-Management-System-SAMS

Taxpayer Advocate Service (TAS)

• Codified at IRC § 7803(a )(3) • TBOR provides 10 fundamental rights to all taxpayers • See Publication 1, Your Rights as a Taxpayer, for a full

list of these rights

Taxpayer Bill of Rights (TBOR)

• IRS.gov • Publication 519, US Tax Guide for Aliens • Instructions for Form W-7, Application for IRS

Individual Taxpayer Identification Number • Taxpayer Bill of Rights Crosswalk:

https://taxpayeradvocate.irs.gov/about-tas/taxpayer-rights

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