IN THIS ISSUE

	Ten Common Tax Return Errors Foreign Nationals Should Avoid
	Register Now for Windstar’s Spring Nonresident Alien Tax Training
	File Your 1042-S forms Confidently with Windstar Publishing’s A Guide for Filing IRS Forms 1042 and 1042-S
	Learn About Tax Navigator During a Free Web Demonstration
	New Articles by Paula N. Singer, Esq.
	Upcoming Trade Show Appearance

Ten Common Tax Return Errors
Foreign Nationals Should Avoid

by Paula N. Singer, Esq. 

Many foreign nationals submit incorrect tax returns (or do not submit at all) because of lack of awareness of the different rules that can apply to foreign nationals’ returns.  This is the case whether the returns are prepared by paid preparers or by the foreign nationals themselves.  Because of the new IRS focus on international tax compliance and the new paid preparer penalties, foreign nationals and their tax return preparers should expect the IRS to scrutinize their returns.  They should also expect the immigration service to review their returns more closely when they are requesting future immigration benefits.

Ten Common Mistakes to Avoid

The following are ten common tax return mistakes that foreign nationals need to avoid:

1. Filing the wrong tax return

Foreign nationals can be nonresident aliens (Form 1040NR or 1040NR-EZ), resident aliens (Form 1040 or 1040EZ), or dual-status taxpayers (Form 1040 with a Form 1040NR statement for those arriving, or Form 1040NR with a Form 1040 statement for those departing, who elect dual-status treatment.)  Many foreign nationals, particularly foreign students and exchange visitors, who remain nonresident aliens for a period of years under the 183-day residency formula, and arriving foreign workers not in the United States a full calendar year, submit a Form 1040 claiming deductions such as the standard deduction, which are not available to nonresident aliens or dual-status taxpayers.

Currently e-filing is not available for Forms 1040NR, 1040NR-EZ, or dual-status tax returns.  Those foreign nationals who use e-filing, therefore, frequently submit the wrong return.

2. Filing using married filing jointly status incorrectly

A nonresident married to a U.S. citizen or resident alien as of December 31st may elect to file as a resident jointly with his or her spouse.  Residents include a spouse who made a first-year choice election to be a part-year resident.  However, two married nonresident aliens may not make the election to file jointly as residents.  They must file as nonresident aliens using married filing separately rates, which are the highest rates.

3. Failing to include all income in the return

Foreign nationals who are resident aliens are subject to U.S. income tax on worldwide income in the same manner as U.S. citizens (though in limited circumstances they may still be entitled to tax treaty benefits).  Foreign nationals who elect to file as a resident with a U.S. citizen or resident spouse must include their worldwide income in their U.S. return.

Resident aliens frequently fail to include foreign income in their U.S. return for a variety of reasons:

• Foreign investment income is taxed at source so they think they have no obligation to include it in their U.S. tax return
• They know that their foreign investment income should be included in their U.S. return, but rules such as foreign tax credits are too complicated for them to deal with
• Their capital transactions are not taxed in their home country and they expect that the transactions are not taxable in the U.S. either
• Their tax preparer never asked them about income from abroad so they did not know that it was income for U.S. tax purposes

4. Claiming incorrect personal exemptions

In order to claim more than one personal exemption amount, nonresident alien taxpayers must be U.S. nationals or residents of Canada, Mexico, or Korea (South).  Nonresident alien students and business apprentices from India may claim a spousal exemption (if the spouse meets certain restrictions) and exemptions for children who are U.S. citizens or resident aliens.

In order for a dependent to be claimed for a personal exemption by a resident alien taxpayer, the dependent must be a U.S. citizen, resident alien, or U.S. national, or a resident of Canada or Mexico at some point during the tax year in question.

5. Incorrectly claiming a tax treaty benefit

The United States has income tax treaties with over 60 countries.  Many foreign nationals, particularly foreign students and scholars, may be eligible for treaty exemptions from tax.  Eligibility for treaty benefits is based on tax residency (not citizenship) in the treaty country as described by the treaty article under which a benefit is claimed.

Treaty benefits for income such as dividends, interest, rents, and royalties require the taxpayer to be a resident of the treaty country and not a resident of the United States when the income is paid. Generally, tax treaty provisions for students, trainees, teachers, and researchers allow the taxpayer to keep the treaty benefits even if they are no longer tax residents of the treaty country and/or have become tax resident in the United States.

6. Claiming improper temporarily-away-from-home expense deductions

Taxpayers who have been providing services who are temporarily away from their tax home may claim deductions for their travel, meals, and lodging.  (Expenses related to their family members are generally not deductible.)  To be temporarily away, taxpayers must be at their temporary work location for a period anticipated to be a year or less.  Their tax home is their principal place of business.  A short absence of a few months between visits is not sufficient to restart the clock for purposes of these deductions.  If travel, food, and lodging have been paid or reimbursed by their employer, deductions may only be claimed if the amounts are included as compensation in gross income on Form W-2, 1042-S or 1099-MISC.

7. Excluding certain taxable capital gains on stock sales on Form 1040NR

Capital gains on property other than real estate are fixed or determinable annual or periodic income subject to 30 percent tax on the net gain (reportable on page 4 of Form 1040NR) unless an exception applies.  Nonresident aliens can exclude their capital gains on property such as stock if:

• The capital gain is foreign source or
• The capital gain is U.S. source, but the recipient is in the United States for less than 183 days in the tax year.

Foreign nationals in nonimmigrant categories such as A (diplomats), G (employees of international organizations), F, J, and M (students) and J and Q (nonstudents) typically remain nonresidents for a number of calendar years under the 183-day residency formula, but are physically present for purposes of the 183-day capital gain.

8. Failing to file disclosure forms

Foreign nationals who become resident aliens who maintain income-producing assets overseas; transfer assets to foreign entities; are grantors of, or recipients of income from, foreign trusts; or are recipients of certain gifts or bequests from abroad may be required to submit disclosure forms such as:

• Form TD F 90-22.1 to report a financial interest in or signatory authority over a financial account(s) in a foreign country
• Form 3520 to report transactions to or from, and/or ownership of, foreign trusts, and/or gifts from foreign donors or bequests from foreign decedents
• Form 3520-A required to report on foreign trusts with a U.S. owner
• Form 5471 to report U.S. shareholders of foreign corporations (and to determine deemed dividend income subject to current taxation)
• Form 5472 to report foreign shareholders of certain U.S. corporations
• Form 8833 to report certain income tax treaty claims
• Form 8891 to report income being deferred on certain Canadian Registered Retirement Plans
• Form 8898 to report the beginning or ending of bona fide residence in a U.S. possession

Foreign nationals who are nonresident aliens may be required to submit one of the following disclosure forms:

• Form 8840 to report facts supporting a claim of nonresidency status based on a closer connection to a foreign country or countries
• Form 8843 to report U.S. days that do not count for residency determination purposes
• Form 8854 to report information required annually for certain U.S. citizens and long-term U.S. lawful permanent residents

9. Failing to file a federal tax return

Foreign nationals fail to file U.S. tax returns for a variety of reasons:

• Their income was exempt from withholding taxes under a tax treaty and they are unaware of the requirement to file a return for the treaty claim
• Their U.S. income has not been subject to U.S. withholding taxes, as is typical with rents paid to nonresident alien landlords, and the taxpayers are unaware of the obligation to file a tax return to claim offsetting deductions
• All of their income was paid abroad and they are unaware of the sourcing rules that can cause income such as compensation for services in the United States to be U.S.-source income (regardless of the currency or location of the payment)
• Payers neglect to send them required income statements so they are unaware of their tax return filing obligations

Nonresident aliens who fail to timely file their nonresident tax return can lose deductions and credits to which they would otherwise be entitled.

10. Failing to file a state income tax return

Whether foreign nationals have a state income tax filing obligation depends upon whether they are state residents (under the state’s rules) or whether, as nonresidents, they earn income from certain sources in a state that imposes income taxes on individuals, and whether their income meets the state’s filing threshold.  Foreign nationals who prepare their own tax returns frequently fail to submit a required state income tax return.  In fact, a number of internet sites and special tax preparation software that prepare nonresident federal returns do not prepare state income tax returns.

This article is excerpted and updated from articles by the author previously published in 2006 and 2007 as follows:

"Ten Common Tax Return Errors Foreign Nationals Should Avoid," Massachusetts Bar Association's Section Review, Vol. 9 No. 2, 2007

"Foreign Nationals Beware: Easy Steps to Avoid Tax Returns Errors," Immigration Law Today, American Immigration Lawyers Association, May/June 2007

"Top 10 U.S. Tax Return Errors by Foreign Nationals Tax Notes International," Tax Notes International, Tax Analysts, March 5, 2007

"Ten Common Tax Return Errors and the Foreign Nationals Who Make Them," TAXPRO Journal, National Association of Tax Professionals, Fall 2006

Paula Singer, Esq., Co-founder and Chairman of Windstar Technologies, Inc. and partner in the tax law firm, Vacovec, Mayotte & Singer LLP, Newton, MA, has over 25 years of experience providing advice and compliance services to individuals and their employers, and payers on cross-border matters.

Watch for Volume 6, Number 2, for a discussion on “Scholarship and Fellowship Tax Exemptions.”

Q:  There is an F-1 student from South Korea at our organization.  His wife, also from South Korea, is at our school in F-1 status as well.  Both are NRAs and worked last year, but the wife earned only about $750 and no tax was withheld because she earned so little each pay period.  (She did not claim treaty benefits because she changed status from F-2 to F-1.)  Since she is not legally required to file a tax return because her only U.S.-source  income was wages that were less than the personal exemption amount, can her husband file a 1040NR and claim a spousal exemption for her?

A:  No.  In order for a spousal exemption to be claimed under Article 4(7) the treaty with South Korea, one of the requirements is that the spouse must have had no gross income.  Article 4 of the treaty refers to Sections 151-154 of the Internal Revenue Code as of the treaty effective date with regard to the rules for  claiming a spousal exemption amount.  Section 151(b) of the Code provides that, in addition to the personal exemption that may be claimed by the taxpayer, a spousal exemption amount may also be claimed 1) if a joint return is not made by the taxpayer and his spouse, and 2) if the spouse has no gross income and is not the dependent of another taxpayer for the tax year for which the exemption is being claimed.

Register Now for Windstar’s Spring Nonresident Alien Tax Training

Windstar’s next comprehensive Nonresident Alien Tax Training is April 29th to May 1st at the Doubletree Guest Suites in Boston, MA.  A half-day pre-conference is also available on April 28th. 

In addition to receiving high quality, useful instruction, all attendees receive:

• Comprehensive binder filled with hundreds of pages of helpful resources and presentation slides
• Laptop for all hands-on software sessions
• Breakfasts and lunches, along with morning and afternoon breaks
• Two Windstar Publishing® tax guides
• Continuing education credits (for individuals who apply)
• Certificate of completion

The Doubletree Guest Suites Boston is hosting all three 2009 NRA Tax Trainings. The Doubletree Guest Suites is an all suite hotel located on the banks of the Charles River, just minutes from downtown Boston and its major attractions.  Hotel features include:

• Shuttle service to major tourist destinations in Boston and Cambridge and nearby train stations
• Low cost transportation to and from Logan International Airport
• High-def flat screen televisions in each room
• Scullers Jazz Club

Click here to view a complete agenda and register for Windstar’s Spring Nonresident Alien Tax Training.

File Your 1042-S Forms Confidently with Windstar Publishing’s A Guide for Filing IRS Forms 1042 and 1042-S

Award-winning author Paula N. Singer and Windstar’s Gary Singer have completely revised Windstar Publishing Inc.’s industry leading tax guidebook A Guide for Filing IRS Forms 1042 and 1042-S.   

Revised for tax year 2008, A Guide for Filing IRS Forms 1042 and 1042-S provides the most comprehensive information available for submitting Form 1042-S information returns and the 1042 tax return in 2009.  

The guide describes:

• When to submit Forms 1042-S information returns to recipients and the IRS
• How to request extensions of time to file the Form 1042 tax return and Forms 1042-S
• What penalties you may incur for failure to file or for filing late
• How to submit records electronically using the IRS FIRE System
• What errors may cause the IRS to reject a submission

Included in the guide are all relevant IRS forms and instructions and IRS Publication 3609 “Filing Information Returns Electronically.” 

Learn About Tax Navigator During a Free Web Demonstration

Learn how International Tax Navigator® can help improve your nonresident alien tax processing by viewing a free web demonstration on March 4th.  The demonstration will educate you on the ease of use of Tax Navigator, the benefits of using this powerful software tool, and give you an overview on how to enter data into the system. 

Click here to register.

Recently Published Articles By Paula N. Singer, Esq.

Paula N. Singer, Esq. had the following articles published in January:

• “Common-Sense Tax Reform," Tax Year in Review Edition, Tax Analysts, January 5, 2009

• "U.S. Tax Returns for Foreign Nationals," Tax Notes International, Tax Analysts, January 26, 2009

Windstar Will Dock at the Following Trade Show

The Higher Education Users Group (HEUG) Alliance 2009
Anaheim Convention Center
Anaheim, CA
March 22 – 25, 2009

Check in future issues of Crow’s Nest or visit http://www.windstar.com/public/events.html for the latest in trade show information and speaking engagements.

©Copyright 2009 by Windstar Technologies, Inc. Windstar reserves all rights to this electronic material. Information contained in this publication is based on the best information available at the time of publication.  While believing the information in this publication to be accurate, Windstar accepts no legal responsibility for its accuracy.

Since 1995 educational institutions, hospitals, research institutions, and corporations have relied on Windstar Technologies, Inc. to deliver the expertise to comply with the U.S. tax residency rules, tax rates, and special tax exemption rules under the law and U.S. treaties.  When government agencies require information about foreign nationals in the workplace, Windstar provides straightforward analysis and reporting.  Comprehensive software for analysis and reporting, expert knowledge, and unparalleled customer service combine to make Windstar the first choice for nonresident alien tax compliance.

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