Cross-Border Tax

Cross-border tax is the set of rules that apply when a person or business is connected to more than one country: a U.S. citizen working abroad, a foreign national living in the United States, a company with an owner, a subsidiary or a customer on the other side of a border. Most of the risk is not in the tax itself but in the reporting that comes with it.

Who is a U.S. taxpayer

The United States taxes citizens and residents on worldwide income. Residence for tax purposes is not the same as immigration status: a green card holder is a resident wherever they live, and a foreign national who spends enough days in the country meets the substantial presence test and becomes one too. Nonresidents are taxed on U.S.-source income and on income connected to a U.S. business.

When two countries both claim someone as a resident, an income tax treaty usually contains tie-breaker rules. Claiming treaty residence has to be disclosed on Form 8833, and it does not switch off the information-reporting rules that apply to a U.S. person.

Relief from double taxation

• The foreign earned income exclusion for wages earned while living abroad, subject to residence or physical presence tests
• The foreign tax credit for income tax paid to another country on the same income
• Treaty provisions that reduce withholding on dividends, interest, royalties and pensions

Each requires an election on a timely return. Missing the return usually means losing the benefit for that year, which is how a taxpayer who owed nothing ends up with a balance.

The information returns that carry the penalties

Foreign accounts are reported on the FBAR and, above separate thresholds, on Form 8938 under FATCA. Ownership of a foreign corporation or partnership is reported on Forms 5471 or 8865, foreign gifts and foreign trusts on Form 3520, and a foreign disregarded entity on Form 8858. Each carries its own penalty for a late or missing form, commonly $10,000 per form per year, and the statute of limitations on the whole return stays open while a required form is missing.

Coming into compliance

Missed forms are usually fixable, and the right route depends on whether the failure was willful. The Streamlined Filing Compliance Procedures and the delinquent international information return procedures handle non-willful cases; the voluntary disclosure practice handles the rest. The international tax overview explains how to choose.

Leaving the system

Giving up citizenship or long-term residence requires a final return and Form 8854, and can trigger the exit tax for covered expatriates. Planning before the expatriation date, not after, determines whether that tax applies.