4 Examples of Substantial Presence & Form 3520 Filing Rules

4 Examples of Substantial Presence & Form 3520 Filing Rules

Substantial Presence and Form 3520 

For taxpayers who are foreign nationals and living in the United States on a visa, oftentimes they are surprised to learn that they are considered U.S. persons for tax purposes and therefore must file the same tax Forms as a U.S. Citizen or Lawful Permanent Resident. This occurs when the foreign national meets the substantial presence test. Unbeknownst to many of these taxpayers, if they meet substantial presence then they are required to file a Form 3520 in any year that they receive a large gift or inheritance from a foreign person. This is true, even if there is no income and even if the gifts are from a family member — such as your sweet grandma who is proud of you for graduating from university in the United States. Unfortunately, the failure to file a Form 3520 can lead to significant fines and penalties, although they may be able to be abated under some of the IRS offshore amnesty programs such as SFCP or DIIRSP. Let’s look at a few examples of substantial presence and Form 3520.

First, What is Substantial Presence

The Substantial Presence Test requires nonresidents who are on visas such as H-1B, B1/B2, EB-5 — or possibly not even on a Visa at all — can become subject to US tax on worldwide income, along with the international information reporting on forms such as FBAR and FATCA. It is all based (primarily) on the number of days the resident remained in the United States during the past 3 years (current year and 2-years back), using a 1:1, 3:1, and 6:1 ratio model. The Substantial Presence Test can be complicated and there are exceptions to consider (see below).

F-1 Visa (Post-5 Years)

Jennifer is in the United States completing her studies and she has been F-1 for seven (7) years.

Many students who are in the United States for studies are aware that for the first five years they are on F1 they are generally not subject to U.S. tax on their worldwide income or international information reporting. But one common conception we find is that taxpayers are under the misimpression that as long as they remain on F-1 they are not subject to U.S. tax or international reporting and that is not the case.

Taxpayers typically receive five years on F1 where they are not considered a U.S. person for tax reporting purposes, but it is important to note that after the five years have expired, they become subject to US tax and reporting period likewise, even if a taxpayer receives a subsequent F-1 the clock does not restart.

H-1B or L-1 Work/Transfer Visa

David is in the United States because his employer transferred him temporarily to work in the United States and he has no intention of pursuing a green card.

Even though David is only residing in the United States temporarily and plans to go back to his home country after the assignment is complete, David spends the majority of his time in the United States and therefore he is required to file Form 3520 of the threshold requirements are met

B1/B2 Tourist Visa

Michelle is only visiting the United States, but she’s having a great time with her new friends and has decided to extend her visa. For each of the past few years, she has been in the United States for six months.

Even though Michelle goes back and forth between the United States and the foreign country she’s originally from, using this substantial presence test, Michelle meets the counting days test even though she was only visiting the United States and is not considered the United States or home country, technically she has met the substantial presence test and therefore she is required to file a Form 3520 if the threshold requirements are met.

EB-5 Investment Visa

Scott resided in the United States on a B1B2 visa for a few years until he decided to take the plunge and invest by way of an EB-5 visa. He received a large gift from his parents to reside in the United States while his EB-5 visa was processing.

Scott’s situation is becoming more common with the popularity of the EB-5 visa. That is because technically Scott is not earning any income in the United States and the gift that he received from his dad was transferred for EB-5 purposes. Nevertheless, in Scott’s situation, at the time he received the gift from his father, he had been a US person for tax purposes under the substantial presence test. Therefore, technically, Scott would have to file a Form 3520 to report the large gift he received.

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 may avoid filing Form 3520 (although the IRS may still challenge the Taxpayer).

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 3520.

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.