Form 1040NR Filing, Tax Payment Deadlines
I received an email from a CPA friend of mine today. She and another person in her office disagreed on a seemingly simple question. They were preparing a Form 1040NR for a nonresident alien and wanted to get an extension of time to file the tax return. They both agreed that Form 4868 should be filed before June 15 to get the extension of time to file a timely tax return. But they disagreed on making the tax payment: is the tax payment due on April 15 or June 15?
I was about to reflexively answer her question when I thought to myself, “Hang on. Let’s look at the Code.” I’m glad I did. My reflexive answer would have been conservative, safe, and wrong. (Hint: I would have said “Pay the tax by April 15, file Form 4868 by June 15. That’s wrong. But it’s safe!)
This blog post will now explain the rules entirely without using IRS Publications, instructions to various forms, or other similar unreliable and lazy crutches. This is totally an Internal Revenue Code plus Treasury Regulations boondoggle. The Board of Accountancy should award you bonus CPE credits for reading this blog post.
Since this post is written in response to a CPA’s question (and she will read this), you should approach it as if you are a CPA. Basic terminology will not be explained.
A nonresident alien who has U.S. taxable income and must file a U.S. income tax return (Form 1040NR) must do so on or before June 15.
The nonresident alien can get an extension of time to file a tax return by filing Form 4868. This will extend the filing deadline to December 15.
If the nonresident alien owes U.S. income tax, the payment deadline is June 15.
The rules are cheerfully and needlessly different for a nonresident alien who has wage income subject to U.S. income tax withholding. For these folks, the filing deadline is April 15. An extension of time will run to October 15. The payment deadline is April 15 for any tax liability.
I am going to ignore nonresident aliens who have wage income subject to U.S. income tax withholding. Let’s just talk about my friend’s client, who has rental income from U.S. real property and must file Form 1040NR to report the income and pay the income tax.
Internal Revenue Code Section 6072(c) contains the rule:
Returns made by nonresident alien individuals (other than those whose wages are subject to withholding under chapter 24) . . . under section 6012 on the basis of a calendar year shall be filed on or before the 15th day of June following the close of the calendar year and such returns made on the basis of a fiscal year shall be filed on or before the 15th day of the 6th month following the close of the fiscal year.
(Section 6012 of the Internal Revenue Code is the basic rule that says humans and other sentient and non-sentient beings must file income tax returns in the United States).
I am going to ignore fiscal year taxpayers. Rare indeed is the nonresident alien who has the presence of mind to claim a fiscal year for a tax year on his or her U.S. income tax return. Plus it is well known that fiscal year accounting (and the accrual method, for that matter) cause brain damage. It’s true! You can look it up.
So the nonresident alien who is using the calendar year as his or her tax year has a filing deadline of June 15.
There are the usual rules for pushing the filing deadline forward if June 15 falls on a weekend or public holiday. In 2013, for instance, June 15 falls on a Saturday, so the actual filing deadline will be the first business day after that, which is Monday, June 17, 2013.
You can find the filing deadline information easily enough in the Instructions to Form 1040NR.
Extension of Time to File Tax Return
A nonresident alien (again we are talking about someone with no wage income subject to U.S. income tax withholding)) who wants more time to file a tax return can apply for an extension. This is done with the normal Form 4868.
A properly and timely-filed Form 4868 extends the filing deadline for our nonresident alien to file his Form 1040NR until December 15. You want to know why? Here you go.
The time prescribed for filing the tax return is June 15. Internal Revenue Code Section 6072(c). The taxpayer can get an automatic six month extension of time from the time prescribed for filng the tax return. Treasury Regulations Section 1.6081-4(a) says:
(a) In general. An individual who is required to file an individual income tax return will be allowed an automatic 6-month extension of time to file the return after the date prescribed for filing the return if the individual files an application under this section in accordance with paragraph (b) of this section. In the case of an individual described in §1.6081-5(a)(5) or (6), the automatic 6-month extension will run concurrently with the extension of time to file granted pursuant to §1.6081-5.
The last sentence does not apply to a nonresident alien. An individual described in Treasury Regulations Section 1.6081-5(a)(5) or 1.6081-5(a)(6) is a U.S. citizen or resident living abroad. A nonresident alien is not that.
The method for getting the automatic six month extension is spelled out in Treasury Regulations Section 1.6081-5(b). In plain English? File Form 4868.
Time to Pay Tax
Now we know when the nonresident alien must file an income tax return that is treated as filed “on time”. What if the taxpayer has a tax liability? What is the payment deadline for the tax payment?
The general rule is that income tax is due and payable at the time and place fixed for filing the tax return. Internal Revenue Code Section 6151(a) says:
Except as otherwise provided in this subchapter, when a return of tax is required under this title or regulations, the person required to make such return shall, without assessment or notice and demand from the Secretary, pay such tax to the internal revenue officer with whom the return is filed, and shall pay such tax at the time and place fixed for filing the return (determined without regard to any extension of time for filing the return).
As is common in the Internal Revenue Code, we are invited to go on a treasure hunt. “Except as otherwise provided in this subchapter” is the magic incantation that sends us on our quest. “This subchapter” refers to Title 26, Subtitle F, Chapter 62, Subchapter A of the United States Code. (Title 26 of the United States Code is colloquially referred to as the “Internal Revenue Code” and it is where Federal tax law lives). Subchapter A includes Sections 6151 through 6159. Trust me. There is no exception lurking in Sections 6151 through 6159 of the Internal Revenue Code that would apply to our nonresident alien.
Therefore, we conclude that a nonresident alien individual who must file Form 1040NR must — if tax is due — pay that tax on or before June 15.
An extension of time to file a tax return does not extend the time for payment of the tax due. Internal Revenue Code Section 6151(a); Treasury Regulations Section 1.6151(a)(1).
Note that the normal rules for estimated payments of tax will apply. If you make a big lump sum payment on June 15 and you should have made quarterly estimated payments, expect a little letter from the IRS asking you to shed some blood in penance.
Nonresidents with Wage Income Tax Withholding
Finally, I will just wave a flag here. My friend the CPA did not have this problem so I did not look at it. But if the nonresident alien taxpayer had received wage income on which withholding was imposed under “Chapter 24″ (i.e., Title 26, Subtitle F, Chapter 24 of the United States Code), then all of this would not apply.
Alimony Payments to Nonresidents
[I am preparing course materials for an upcoming presentation at the 2012 CalCPA Family Law Conference (01 Nov 2012 in Los Angeles, 02 Nov 2012 in San Francisco; the San Francisco event will be webcast) on the international tax aspects of divorce. This is a piece of what I am working on. It is a draft version, so please forgive mistakes. People who attend the live show will get the final version of this, along with the other topics I will cover.]
Alimony payments to nonresidents can be tricky. The tax rules are similar enough to purely domestic situations to encourage complacency, but with withholding, paperwork, and penalty risks for the complacent.
Property you acquired before coming to the USA
This is a quick little blog post to answer a recurring question for many people out there. It came up in the course of some work I am doing right now.
You are a nonresident of the United States. Thirty years ago you bought a piece of land in your home country for US$10,000. Now it is worth US$200,000.
You immigrate to the United States, then sell the land for its current value — US$200,000.
Do you pay U.S. capital gain tax on the entire $190,000 of capital gain?
Just because you change status from nonresident to resident of the United States, you don’t change the U.S. tax laws that apply to your transaction. Unfortunate but true. You calculate your U.S. tax results using U.S. tax law, despite the fact that you were a nonresident when you bought the property.
From 1998 FSA LEXIS 402:
In several cases, the Tax Court has determined the adjusted basis of property acquired by a U.S. taxpayer outside the U.S. before becoming a U.S. resident. The court has assumed as the starting point the taxpayer’s appropriate basis under U.S. tax principles. Compare Gutwirth v. Comm’r, 40 T.C. 666 (1963) (1939 Code) and Benichou v. Comm’r, T.C. Memo 1970-263 (taxpayer’s basis was initial cost) with Reisner v. Comm’r, 34 T.C. 1122 (1960) (taxpayer’s basis was fair market value upon inheritance). In general, the taxpayer’s cost basis for purchased property has been determined to be the initial expenditure in the foreign jurisdiction.n5 See Heckett v. Comm’r, 8 T.C. 841 (1947).
The same idea is true if you acquired the property by inheritance. Your acquisition basis (and therefore the starting point for calculating capital gain) is the date of death value for property. (Date of death = the date the person from whom you inherited the property died).
But I digress . . .
The Reisner v. Commissioner case contains an interesting little tidbit of information for those of you handling World War II restitution cases. (Yes, I still run into this every so often, most recently in an OVDI case). There a gentleman was forced to sell property in Berlin in 1937. He had inherited the property in 1926 from his parents. After the war he recovered the property under an order of restitution — Order No. 49 by the Allied Berlin Kommandatura. The legal effect of this order told the Tax Court everything it needed to know about calculating the basis of the buildings in the hands of the taxpayer.
The order said that anyone receiving restitution under the order would be treated as if he had an unbroken chain of title — that the property had always been his.
This gave the Tax Court an easy way to determine the basis of the buildings in the hands of the taxpayer — date of death valuation in 1926 plus the cost of capital improvements.
It is rare that you find a non-tax fact so clear as that postwar order. Usually these World War II restitution cases are messy in the extreme.
I’m back now
And the results of this case give us clear guidance on how you should handle your capital gain tax for the year of sale. This gentleman was deemed to have acquired the property by inheritance while a nonresident of the United States. He got the 1926 acquisition cost (calculated under U.S. tax law).
Exception for exit tax
There is a weird little exception for people who expatriate. Green card holders. I will write a blog post about this later. If you come to the United States, stay long enough with a green card, then leave the country and are subjected to the exit tax (Section 877A; go see Form 8854), you can use the “date of entry” value to calculate your capital gain for purpose of the mark-to-market gain.
All gibberish for those of you who don’t live inside the Holy Temple of Exit Tax, I’m sure. Here’s an example.
You are a nonresident of the United States. Thirty years ago you bought a piece of land in your home country for US$10,000. Now it is worth US$200,000.
You immigrate to the United States, stay for 10 years, and then say “Oh, (blankety blank blank). I’m outta here!” and relinquish your green card. You still have the land. At that point it is worth $300,000.
For exit tax purposes (assuming you are a “covered expatriate”) you are deemed to have sold the land at fair market value on the day before you gave up your green card. So you’re treated as selling at $300,000. Lucky for you, though, you get to use the value of the property on the day you came into the USA — $200,000 — to calculate that exit tax. So you only pay tax on $100,000 of capital gain. Make-pretend capital gain. Lucky you.
We need more unnecessary complexity. Please Congress — write more ill-conceived tax laws charmingly devoid of common sense and jet-fueled by partisan lobbyists and Poli Sci majors burnishing their resumes with three years of work on the Hill, all with an ideological ax to grind and a pocket to stuff with government largesse. (Who by the way couldn’t spell “If A, then B” if you handed them both letters). (Both parties offend me; spare me your tortured outrage. I’ve received too many emails saying “How COULD you??? Are you one of THEM?????” emails). (But I’m not bitter.)
Nonresidents’ U.S. bank interest earned to be reported to IRS
The IRS came out with their Regulations which tell banks that they must report interest earned by nonresidents. Up to now, this was not done. If a nonresident opened a bank account in the United States, the interest earned was not reported to the U.S. government.
The bank interest itself is not taxable in the United States. These new Regulations do not change that. These new Regulations merely force the bank to tell the U.S. government how much interest was earned, and the identity of the nonresident bank account holder.
The IRS is trying to force every foreign bank in the world to report the accounts of U.S. persons. It wants information from other countries shared with the IRS. In that way, the IRS believes it can reduce tax evasion by U.S. persons.
If the IRS wants banks in Mexico to share information with the United States, it is reasonable that Mexico would ask for information about Mexicans with U.S. bank accounts. Oh, wait.
Up to now, the U.S. government has not had any information to share. If the IRS wants to play the game of “Let’s share information on each other’s taxpayers!” then the IRS needs stuff to share. These Regulations make that happen.
This move by the IRS makes complete sense, within the government’s tiny logic box. The IRS Commissioner would be laughed out of the Diplomat Club as a hypocrite if information sharing was a one-way affair. The U.S. government has not been shy about strong-arming other countries into changing their laws to serve the purposes of the United States. This cannot go on forever. The U.S. has to make a pretense at being even-handed.
The Regulations will stand. Diplomats will junket amongst themselves happily and solemnly. Treaties and Agreements will be signed. Press releases will be released. Everyone will be happy. Within the logic box.
Outside the box
For those living outside the logic box, we know of the concept of “perverse incentives” and “unintended consequences.” We understand that humans are not static. New situations trigger new behavior.
The movement of capital out of U.S. banks to other countries is an obvious one. (What are the effects to the U.S. economy?) This has been resoundingly and repeatedly rejected by the IRS. We now get to watch and see whose prediction is right.
The IRS will acquire a lot of information about interest earned by nonresidents. Will this information be valuable? Will it be useful in acquiring the reciprocal information that the U.S. government hopes to get? Or will other governments find ways to resist the coquettish “come hither” blandishments of the U.S.? My guess is that the government will get rather less use out of the information than expected. This is a hypothesis that unfortunately cannot be tested rigorously because the data (if it is collected) will be inside the belly of the beast, and not available to impartial outsiders.
The IRS probably expects this to be an incentive that drives future voluntary income reporting by U.S. taxpayers with bank accounts abroad. Maybe. Again, the data to prove/disprove this hypothesis will lie deep inside the government, immune to truth serum. Equally plausible is that this will continue to accelerate expatriations (we get calls daily for this).
The U.S. government launched itself on an aggressive course of rooting out and punishing U.S. tax evaders. The hallmark of this quest was continued pressure to get information from other countries. Once launched, the course of action must continue to its logical conclusion despite the best efforts of many to point out its flaws.
Mexican cross-border families and U.S. taxation
I received an email today from a CPA with an interesting situation. I shot him a quick email to respond to a question, but the situation is interesting enough that it is worth sharing.
I have a practice in (U.S. city near the US/Mexico border). I’m seeing a prevalence of a nonresident alien spouse & children living in the U.S. for security purposes while the working spouse lives and works in Mexico. Working spouse visits family in the U.S. for short periods of time (no substantial presence), brings cash for living expenses, mortgage, etc. In this case, I believe that there is no U.S. tax impact because the nonresident alien spouse has no income (from any source) and the amount in the U.S. is under the restricted marital deduction. Let me know if I’m missing anything.
I am not going to cover all of the possible U.S. tax implications. Let’s just talk about income tax compliance for the U.S.-resident spouse. Let’s ignore the working spouse who lives/works in Mexico. Let’s ignore the children.
U.S. resident for income tax means disclosure requirements apply
Regardless of visa status, the nonworking spouse living in the United States is probably here too many days per year, so will be a resident alien for U.S. income tax purposes. This is almost built into the example, by definition. The nonworking spouse is in the United States full-time for personal safety reasons.
At first blush, this seems like an inoffensive situation. The nonworking spouse has no income, therefore being a U.S. resident (thus exposed to income tax on worldwide income) carries no cost — what’s the income tax on zero income?
However, once the nonworking spouse is a resident, it is not only the income tax cost that is a worry. It is all of the other junk in the Internal Revenue Code (and elsewhere) that we now have to worry about:
* Form TD F 90-22.1;
* Form 8938 (maybe; the filing requirements are baroque in their complexity);
* Form 5471; and
* Other bizarre stuff.
One of the forms in that “bizarre stuff” category that the nonworking spouse will have to worry about is Form 3520. The nonworking spouse is a U.S. resident because of the substantial presence test. The working spouse is making gifts to the nonworking spouse, so the nonworking spouse can, y’know, feed the kids ‘n stuff. This must be reported on Form 3520 if the gift exceeds $100,000 per year.
Tax treaty doesn’t solve the problem
The income tax treaty between the United States and Mexico doesn’t solve the problem. Let’s assume that the nonworking spouse (living in the USA with the kids) can qualify to claim the treaty benefits. Making the election under Article 4 (the treaty tie-breaker provisions) to be taxed as a resident of Mexico rather than a resident of the United States will not solve the compliance problems.
The Treasury Regulations say that when you make a treaty election to be treated as a nonresident alien for income tax purposes, this is only effective as to the method of calculating your U.S. tax liability. For that purpose, you compute your income tax as a nonresident alien. For all other purposes, you are still a resident alien. This means you still have to file Form TD F 90-22.1, Form 3520, etc. etc.
Closer connection exemption probably doesn’t work, either
There is another way a person can opt out of being treated as a resident for U.S. tax purposes. See Form 8840, which is the form used to claim that you really, truly live in another country and you are not a resident of the USA for income tax purposes.
This can work for many people, but it probably won’t work for our spouse living in the United States. In order to use this, you must be in the United States under 183 days in the year. The living situation my CPA friend described assumes nearly 365 days per year in the United States.
Moral of the story
I haven’t talked about the kids or the working spouse in Mexico who goes back and forth across the border. I haven’t talked about estate tax or gift tax. The moral of this story is simple: there are no reflexive, obvious answers to international tax situations. This stuff is complex and complicated. The IRS seems hell-bent on penalizing every paperwork foot-fault it can find.
Do not give instant answers. They’re probably wrong. Or at least incomplete.
Do not accept (or expect) instant answers, for the same reasons.