A Practical Analysis Of Treaty Interpretation And The Quid Pro Quo Test

Spoiler Alert: If you have a boss, get performance reviews, and can be fired for poor work, you probably have a job and not a grant.

The recent Tax Court decision in Baturin v. Commissioner (T.C. Memo. 2026-12) provides valuable guidance on distinguishing between tax-exempt grants and taxable compensation under international tax treaties. After a Fourth Circuit remand, the Tax Court granted summary judgment to the IRS, clarifying when payments to researchers qualify for treaty exemptions.

This case offers important lessons for nonresident researchers working in the United States and the institutions that employ them.

Background And Treaty Provision

Dr. Baturin, a Russian citizen, worked at Jefferson Lab (a Department of Energy facility in Virginia) from 2007 to 2015. During tax years 2010-2011, he received approximately $76,000-$79,000 annually for his work on the 12 GeV Upgrade Project involving particle detector systems.

Article 18 of the U.S.-Russia Tax Treaty provides an exemption from U.S. taxation for individuals “studying or doing research as a recipient of a grant, allowance, or other similar payment from a governmental, religious, charitable, scientific, literary, or educational organization.”

Dr. Baturin claimed this exemption, arguing that his compensation qualified as a tax-exempt grant. The IRS disagreed, asserting that the payments constituted taxable wages for services rendered.

Procedural History and the Fourth Circuit Remand

The Tax Court initially ruled in Dr. Baturin’s favor in 2019 (Baturin I, 153 T.C. 231), finding that his compensation qualified as a tax-exempt grant under the treaty.

The Fourth Circuit reversed and remanded in 2022 (Baturin II, 31 F.4th 170). The appellate court instructed the Tax Court to apply the analytical framework set forth in IRC Section 117 and its implementing regulations, which distinguish between “Disinterested, no-strings educational grants” (tax-exempt) and “Work done as part of a substantial quid pro quo” (taxable compensation). 

The Fourth Circuit provided specific factors for the Tax Court to consider on remand, such as (1) would Jefferson Lab have hired someone else if Dr. Baturin were unavailable? (2) Did the projects pre-date and post-date his tenure? (3) Who retained the intellectual property rights? (4) How much discretion did Dr. Baturin have over his day-to-day work? (5) Was there a substantial quid pro quo?

Summary Judgment Analysis

On remand, the Commissioner moved for summary judgment, arguing that the undisputed facts established Dr. Baturin’s payments were compensation rather than grants. Dr. Baturin, proceeding pro se, raised several procedural arguments but failed to present specific facts creating a genuine dispute of material fact.

The Court analyzed the Fourth Circuit’s factors:

1. Replaceability

Jefferson Lab confirmed through Dr. Burkert’s declaration that the institution would have hired another qualified individual if Dr. Baturin had not been available. This indicated the position was not dependent on Dr. Baturin’s unique contributions but rather required any qualified scientist to perform specified duties.

2. Project Independence

The 12 GeV Upgrade Project commenced before Dr. Baturin’s employment in 2007 and continued after his departure in 2015. As of December 2024, the CTOF detector remains operational. This demonstrated that the research project existed independently of Dr. Baturin’s participation.

3. Intellectual Property Rights 

As a condition of employment, Dr. Baturin signed an agreement assigning all intellectual property rights from his work to Jefferson Lab. This arrangement is characteristic of an employment relationship rather than an independent research grant.

4. Supervision And Performance Review

Dr. Baturin worked under the supervision of Dr. Burkert (his direct supervisor) and Dr. Eloaudrhiri (project manager). His performance was evaluated annually, and his continued employment was contingent upon satisfactory performance reviews. These elements are consistent with an employer-employee relationship.

5. Substantial Quid Pro Quo

Jefferson Lab provided bi-weekly compensation in exchange for Dr. Baturin’s services on assigned projects. The Court found that “Jefferson Lab’s bi-weekly payments to Dr. Baturin were not disinterested, no-strings grants, but rather were a quid pro quo in exchange for his assigned work on the 12 GeV Upgrade Project.”

Legal Framework: Section 117 And Revenue Ruling 80-36

The Fourth Circuit directed the Tax Court to apply principles from IRC Section 117 (qualified scholarships) to interpret the treaty language. Under this framework, courts distinguish between payments that support independent study or research, and compensation for services rendered under supervision that primarily benefit the payor.

The Court also cited Revenue Ruling 80-36 (addressing researchers under the U.S.-Japan Income Tax Convention), which provides that payments are taxable when a researcher is “performing valuable research services under the supervision of the grantor that are primarily for the benefit of the grantor.”

Applying these principles, the Court concluded that Dr. Baturin’s payments constituted taxable compensation rather than tax-exempt grants.

Key Procedural Issues

Dr. Baturin’s pro se representation led to several procedural difficulties:

Confusion Between Withholding and Liability.

Dr. Baturin argued that withholding exemptions under Section 1441 established tax exemption. The Court clarified that withholding requirements imposed on payers are distinct from the taxpayer’s underlying tax liability.

Impermissible New Arguments On Remand

The Court applied the mandate rule, noting that Dr. Baturin raised arguments on remand that were not presented to the Fourth Circuit. Under the law of the case doctrine, remand proceedings are not appropriate for introducing new legal theories.

Failure To Create Genuine Factual Disputes

When opposing summary judgment, Rule 121(d) requires the non-moving party to present specific facts supported by appropriate evidence. Dr. Baturin’s responses were largely speculative (e.g., “this may be a subject to the genuine dispute”) rather than presenting concrete evidence disputing the Commissioner’s factual assertions.

Practical Implications For Research Institutions And Foreign Nationals

This decision provides important guidance for determining when payments to researchers qualify for tax treaty exemptions. The “Baturin factors” establish a framework for analysis. 

Would the institution hire an alternative candidate if the individual were unavailable? Does the research project exist independently of the individual’s participation? Who retains ownership of the intellectual property? Does the individual work under supervision with performance evaluations? Is there a substantial quid pro quo relationship?

When these factors indicate an employment relationship—characterized by assigned work, supervision, performance reviews, and institutional control over work product—payments constitute taxable compensation regardless of the research nature of the work.

The distinction is not based on the importance or value of the research, but rather on the structural relationship between the payor and payee.

Conclusion

The Tax Court granted summary judgment to the Commissioner, finding that Dr. Baturin’s payments from Jefferson Lab constituted taxable compensation rather than tax-exempt grants under Article 18 of the U.S.-Russia Tax Treaty.

The decision emphasizes that treaty interpretation requires careful analysis of the actual relationship between parties rather than reliance on labels. Employment relationships characterized by supervision, performance reviews, assigned duties, and institutional ownership of work product result in taxable compensation, regardless of whether the work involves research or advances scientific knowledge.

Key Takeaways

Treaty language must be interpreted in context: The terms “grant, allowance, or other similar payment” require analysis of the underlying relationship, not merely the characterization of payments.

The Quid Pro Quo Test Is Determinative –  When payments represent compensation for services that primarily benefit the payor, they constitute wages rather than grants.

Proper Legal Representation Matters – Complex tax treaty issues benefit from professional guidance, particularly when procedural requirements demand specific evidence and timely presentation of arguments.

Note On Treaty Status -The U.S.-Russia Tax Treaty was suspended effective August 16, 2024. However, the analytical framework established in Baturin—particularly the quid pro quo test and the application of Section 117 principles to treaty interpretation—remains applicable to similar provisions in other U.S. tax treaties.

Final thought: The Tax Court has now definitively confirmed that calling your paycheck a “grant” doesn’t make it one. No matter how impressive the research. 

International divorce frequently triggers a foreign-asset reporting cascade: accounts that were previously “handled by the other spouse,” jointly titled assets that get split, and new single-filer thresholds can turn a historically quiet situation into an immediate U.S. compliance problem, often with large civil penalties and, in willful cases, criminal exposure. The enforcement environment is also more aggressive, with enhanced IRS enforcement funding and more sophisticated analytics, increasing the likelihood that previously missed foreign reporting gets detected.

Foreign Asset Reporting: The “Big Three” Regimes (Quick Comparison)

Regime	What It Reports	Where Filed	Core Trigger	Due Date (for 2025 calendar year)	Key Penalty Framework
FBAR (FinCEN Form 114)	Foreign financial accounts (including bank, securities, some insurance/annuity accounts)	Separately from the tax return (FinCEN e-filing)	Aggregate foreign account value > $10,000 at any time during the year (all foreign accounts combined)	April 15, 2026 with automatic extension to October 15, 2026	For 2025 (inflation-adjusted): non-willful up to $16,536 per report; willful greater of $165,353 or 50% of the account balance per violation; criminal possible
FATCA (Form 8938)	Specified foreign financial assets (broader than FBAR: accounts plus many non-account assets like foreign stock/partnership interests, foreign pensions, etc.)	Attached to annual income tax return	Filing-status/residency thresholds (often $50,000/$75,000 for U.S. residents who are single/MFS)	Due with Form 1040 (generally April 15; expats often June deadline)	$10,000 failure-to-file plus $10,000 per 30 days after IRS notice up to $50,000
Foreign trust reporting (Forms 3520 / 3520-A)	Foreign trust transfers, distributions, ownership, gifts and annual foreign trust reporting	IRS (information returns)	Triggered by foreign trust transactions/ownership (common in international family wealth and divorce settlements)[1]	Form 3520-A due 15th day of 3rd month after trust year-end (calendar-year trust: March 15; 6‑month extension available via Form 7004)	Form 3520: often greater of $10,000 or 35% of reportable amount (depending on part); Form 3520‑A: generally greater of $10,000 or 5% of gross reportable amount

Critical Overlap Point: Filing Form 8938 does not replace FBAR. If you meet both sets of rules, you generally file both.

1) FBAR (FinCEN Form 114): What Divorce Changes (And Why It Gets Missed)

The Filing Trigger (The “$10,000 Aggregate” Test)

FBAR is required when the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the year, a low threshold that is easy to cross when accounts exist in multiple countries or when a spouse holds several accounts.

Divorce-Specific Trap: People often assume FBAR only applies if they own the account. In divorce situations, the risk is that a taxpayer had signature authority or another filing obligation over accounts tied to the other spouse (for example, family business accounts or accounts in the spouse’s name).

Deadline And Extension (For 2025 Accounts)

For the 2025 calendar year, the FBAR is due on April 15, 2026, with an automatic extension to October 15, 2026 (no separate extension form required).

Recordkeeping Expectation (Practical Audit Defense)

FBAR filers should retain supporting documentation with their tax records for at least five years.

In a divorce context, that retention period matters because spouses may lose access to account statements during or after separation; proactively preserving statements and proof of balances is often essential.

Penalties (Inflation-Adjusted Amounts For 2025)

• Non-Willful FBAR Penalty (Civil) – up to $16,536 per report
• Willful FBAR Penalty (Civil) – the greater of $165,353 or 50% of the account balance per violation

Criminal exposure is possible (especially in willful scenarios).

These numbers underscore why “we didn’t know” is not a strategy, particularly when divorce discovery, bank files, and cross-border information flows can surface old accounts.

Statute Of Limitations (Why Old Years Can Still Be In Play)

Standard audit limitation periods may not protect taxpayers when foreign reporting is missing. FBAR has a six-year period, and for certain failures (and fraud) older years may remain examinable.

2) FATCA Form 8938: “Specified Foreign Financial Assets” And Why Filing Status Changes Matter

What Form 8938 Covers (Broader Than Bank Accounts)

Form 8938 is required for certain U.S. taxpayers who hold specified foreign financial assets exceeding applicable thresholds. The IRS describes the basic rule as reporting when aggregate value exceeds $50,000 (with thresholds varying by taxpayer circumstances).

Form 8938 reaches beyond bank accounts and can include:

• foreign securities,
• foreign partnership/corporate interests,
• trusts, and
• foreign pensions.

This breadth is exactly why divorce restructurings (splitting entities, transferring shares, receiving pension rights) can suddenly trigger reporting even if “no foreign bank account” exists.

The Thresholds (Treas. Reg. §1.6038D-2): U.S. Residents vs. Living Abroad

The filing requirement turns on aggregate value exceeding a threshold that depends on residency and filing status.

Below are the thresholds expressly stated in the Form 8938 regulations:

Taxpayers Living In The U.S.

• Unmarried / Married Filing Separately – file if aggregate value exceeds $50,000 on the last day of the year or $75,000 at any time during the year.
• Married Filing Jointly – file if aggregate value exceeds $100,000 on the last day of the year or $150,000 at any time during the year.

Taxpayers Living Abroad (Qualified Individuals Under §911(d)(1))

• Unmarried (Or Not Filing Jointly) –  file if aggregate value exceeds $200,000 on the last day of the year or $300,000 at any time during the year.
• Married Filing Jointly (Living Abroad) –  file if aggregate value exceeds $400,000 on the last day of the year or $600,000 at any time during the year.

Divorce-Specific Trap: filing status changes (e.g., moving from married filing jointly to single or married filing separately) can materially lower the applicable threshold and create a new Form 8938 requirement even when the assets did not change. The regulation thresholds above show why: the U.S.-resident MFJ threshold is $100,000/$150,000, but single/MFS is $50,000/$75,000.

Deadline (Tied To The Income Tax Return)

Form 8938 is filed with the annual income tax return (as an attachment), not separately like FBAR. This creates a common divorce-year failure mode: the return gets filed on time, but the foreign asset schedule is omitted, even when FBAR was filed (or vice versa).

Penalties (And Why They Can Snowball)

• Initial Failure-To-File Penalty –  $10,000
• Continuation Penalty After IRS Notice – $10,000 for every 30 days of continued noncompliance after notice, up to $50,000 maximum (per year)

Statute Of Limitations Risk

Missing Form 8938 can keep the statute of limitations open, which means taxpayers may find that very old years are still exposed once the IRS identifies an unreported foreign asset footprint.

3) Foreign Trust Reporting (Forms 3520 And 3520-A): The Divorce Settlement Danger Zone

International divorces frequently involve structures that are “trust-like” (even when they aren’t labeled as such), offshore family arrangements, or wealth vehicles that make distributions or transfers as part of a settlement. 

Form 3520 – when penalties can be a percentage of the transfer/distribution.

The Internal Revenue Manual section provided includes detailed penalty computations that are especially important in divorce cases because transfers/distributions are exactly what settlements do.

For late-filed Form 3520, the IRS penalty computation depends on what is being reported:

If Form 3520 Part I (generally, certain foreign trust transactions such as transfers) is triggered, assess a penalty equal to the greater of $10,000 or 35% of the total amount reported (with specific line references in the IRM guidance).

• The IRM also provides that the aggregate penalty for Part I cannot exceed the gross reportable amount.

If Form 3520 Part III (generally, certain foreign trust distributions) is triggered, assess a penalty equal to the greater of $10,000 or 35% of the amount reported (again with detailed line references).

• The IRM similarly limits the aggregate penalty so it cannot exceed the gross reportable amount.

Form 3520-A: Annual Return For Foreign Trusts With A U.S. Owner

A foreign trust must file Form 3520-A annually when a U.S. person is treated as an owner of any portion of the foreign trust under the grantor trust rules (sections 671–679), and Form 3520-A includes required owner and beneficiary statements.

To avoid penalties for failure to timely file Form 3520-A, the U.S. owner must ensure the foreign trust timely files it, or the U.S. owner must file a substitute Form 3520-A with a timely-filed Form 3520.

Due Date

Form 3520-A is due the 15th day of the 3rd month following the end of the trust’s tax year (e.g., for a calendar-year trust, March 15), with a 6-month extended due date if the trust files an extension (Form 7004).

Penalty Framework (Form 3520-A)

The IRM states: the initial penalty for failure to file Form 3520-A generally is the greater of $10,000 or 5% of the gross reportable amount, where the gross reportable amount is the gross value of the portion of the trust’s assets treated as owned by each U.S. owner at year-end.

4) A Key Practical Point: “FBAR vs. Form 8938” Is Not Either/Or

A recurring compliance failure in international divorce matters is assuming that one form “covers” the other. It does not.

Form 8938 is filed with the IRS as part of the income tax return and covers “specified foreign financial assets.”

FBAR is a separate filing with its own threshold and due date mechanics (including automatic extension).

Filing Form 8938 does not relieve the taxpayer from filing FBAR when the FBAR rules are triggered.

Divorce Implication: You can be “compliant” on the tax return and still have FBAR exposure, or you can have FBAR filed and still have Form 8938 exposure, especially after filing status changes lower the 8938 threshold.

5) Common International Divorce Reporting Triggers That Deserve Special Attention

A. “I Never Benefited From The Account” (But Had An Obligation)

Divorce can reveal unrecognized historical obligations tied to a spouse’s accounts or business (including signatory authority). This matters because the FBAR regime is driven by account access/relationship and aggregate balances, not just whether you considered it “your money.”

B. Filing Status Shift Can Turn “No Form 8938” Into “Form 8938 Required”

The reporting thresholds change significantly when filing status changes (MFJ to single/MFS), creating new reporting requirements. The regulation thresholds show exactly how large the shift can be for U.S. residents: $100,000/$150,000 (MFJ) versus $50,000/$75,000 (single/MFS).

C. Trust Structures Embedded In Settlements (Or Foreign “Pensions” That Behave Like Trusts)

If a settlement causes a transfer to a foreign trust or a distribution from one, the IRM penalty computations show why the exposure can be economically severe (35% regimes for certain Form 3520 failures; 5% asset-value penalty for certain Form 3520-A failures).

D. Deadlines And “Hidden” Annual Compliance Calendars

FBAR – April 15 with automatic extension to October 15 (for 2025, due April 15, 2026 / Oct 15, 2026).

Form 8938 –  with the tax return.

Form 3520-A – March 15 for calendar-year trusts (15th day of the 3rd month), extension possible via Form 7004.

International divorce clients often focus on the divorce timeline (court deadlines, settlement deadlines) and miss that these compliance calendars run independently.

E. Old-Year Exposure Can Persist When Foreign Reporting Is Missing

For most tax issues, the IRS has three years to audit (six years if the income understatement exceeds 25%). But foreign reporting failures have different rules:

• No Form 8938 File – Statute never begins to run on the entire return
• No FBAR Filed – Six-year statute of limitations under Bank Secrecy Act
• Fraudulent Return –  No statute of limitations ever

Real-World Impact: The IRS can audit a 2015 return in 2026 if foreign asset reporting was required but not filed.

Conclusion: International Divorce Turns “Foreign Assets” Into An Active Compliance Event

The foreign reporting rules are deliberately complex. The IRS uses this complexity as a weapon, assuming that confusion equals willful violation. In international divorce cases, the complexity multiplies because you’re dealing with:

• Changing filing statuses mid-year
• Assets you may not have known existed
• Reporting obligations that weren’t yours during marriage but became yours after divorce
• Settlement agreements that don’t account for international tax issues

When divorce changes ownership, access, filing status, and documentation availability all at once, the safest posture is to treat foreign-asset reporting as its own workstream—with clear form-by-form mapping, threshold testing, deadline management, and record retention aligned to the regimes above.

“All happy families are alike; each unhappy family is unhappy in its own way.”

Leo Tolstoy’s Anna Karenina (1878)

Anna felt trapped in her high society marriage in 19th-century Russia. The divorce was frowned upon by the Orthodox Church. Thus, she did not formally divorce Karenin and instead ran off with Vronsky. While most divorces nowadays are less dramatic, they are still unpleasant for both parties and quite complicated. International divorce adds more complications, confusion, and frustration since the divorce process is rarely “just family law.” A decree may be issued under Australian law and negotiated entirely in Australia, but U.S. tax outcomes for a U.S. citizen can still turn on U.S. rules—especially rules that hinge on status (married vs not married), tax residency (resident vs non-resident alien), and ownership/control of offshore accounts and structures.

The key difficulty is that cross-border divorce compresses multiple high-stakes determinations into one year:

• Your U.S. filing status may be determined by what is true on December 31, even if you separated long before that. 
• If your spouse is a non-resident alien for U.S. tax purposes, you generally cannot file a joint return unless a specific election applies. 
• “Divorce transfers are tax-free” is not always true in international divorces because the U.S. divorce-transfer nonrecognition rule generally does not apply when the recipient spouse is a non-resident alien. 
• Divorce often changes ownership and signatory authority over foreign accounts, which can change offshore reporting responsibilities, especially FBAR and Form 8938.

U.S. Citizens Living Abroad: The Baseline Is “Worldwide”

A persistent misconception in expat divorces is that living abroad changes who is a U.S. taxpayer. It does not. The IRS’s Internal Revenue Manual states plainly that U.S. citizens living or traveling outside the United States are generally required to file U.S. income tax returns and report worldwide income. 

That’s the baseline. Even if foreign tax credits, exclusions, or treaty positions reduce U.S. tax, the filing and reporting framework still exists, and divorce often changes what must be reported.

Your Spouse: “Resident Alien” vs “Non-Resident Alien” Drives Most Cross-Border Outcomes

For U.S. tax purposes, an “alien” is anyone who is not a U.S. citizen. IRS Publication 519 explains the core split: aliens are classified as resident aliens and non-resident aliens;

Resident Aliens – are generally taxed on worldwide income,

Non-Resident Aliens – are generally taxed only on U.S.-source income and certain income effectively connected with a U.S. trade or business. 

The IRS also summarizes the practical mechanics of classification: an alien is a resident alien if he or she meets the green card test or the substantial presence test, or makes certain elections (including an election under IRC §6013(g) or (h)). If the person does not meet those tests and does not elect, that person is a non-resident alien and must file Form 1040‑NR to report certain U.S. tax items.

In a U.S./Australia or any other foreign divorce where the non-U.S. spouse lives outside of the U.S. and does not meet U.S. residency requirements, the spouse is commonly treated as a non-resident alien for U.S. tax purposes. That single fact ripples into filing status, withholding, and property transfer consequences.

Filing Status: Why December 31 Controls Even If Your Divorce Is “Non-U.S.”

The year-end rule is statutory, not a “paperwork” detail.

U.S. tax law generally determines whether you are married as of the close of your taxable year. The joint return statute, IRC §6013(d), similarly measures marital status as of the close of the year for spouses with the same taxable year, and provides that individuals legally separated under a decree of divorce or separate maintenance are not considered married. 

Practical Meaning – A divorce finalized in early January can mean you were “married” for U.S. tax purposes for the entire prior year.

“Legally Separated” Is Meaningful In The U.S. Tax Sense

IRC §7703 states that an individual legally separated under a decree of divorce or separate maintenance is not considered married. That phrase matters because not all “separation” ideas used in foreign jurisdictions map neatly to U.S. divorce or separate maintenance decrees. When your divorce is governed by foreign law, you still need to identify whether you have a decree that the U.S. tax rules treat as ending “married” status.

Head Of Household: Possible, But Facts Matter

Many separated expat parents are interested in the Head of Household (HOH) status. IRC §7703(b) provides a “certain married individuals living apart” rule that allows a married person filing separately to be treated as not married if they maintain a household that is the principal place of abode of a qualifying child for more than half the year, provide over half the cost of maintaining the household, and the spouse is not a member of the household during the last six months of the year. 

In international divorces, HOH analysis becomes fact-intensive quickly:

• where the child actually lived,
• who paid household costs,
• whether the spouse was a member of the household during the last six months,
• and dependency entitlement mechanics.

So, while HOH can be a valuable filing status, in cross-border divorce, it should be treated as a fact pattern to prove, not a default assumption.

Married To A Non-Resident Alien Spouse: Why Married Filing Joint (MFJ) Is Often Blocked And How Elections Change The Landscape

The default rule: no joint return if either spouse is a non-resident alien.

IRC §6013(a)(1) provides a clear limitation: no joint return shall be made if either spouse at any time during the taxable year is a non-resident alien. However, non-resident aliens married to U.S. citizens or residents can choose to be treated as U.S. residents and file joint returns.

This is the first major “international divorce fork”:

• If the foreign spouse remains a non-resident alien and no election is made, you may be limited to separate filing (and the spouse may file Form 1040‑NR for U.S. income items). 
• If you want MFJ, you are typically talking about a statutory election regime.

The §6013(g) election (and related rule §6013(h)): MFJ becomes a choice, not a default.

IRC §6013(g) allows spouses to elect to treat a non-resident alien spouse as a U.S. resident for (1) income tax for the entire year, and (2) wage withholding for wages paid during the year.

Regulation §1.6013-6 provides a clear summary of who can elect.  The election is made by either the husband or the wife at year-end, when one spouse is a U.S. citizen or resident, and the other is a non-resident alien. Once an election is made, each spouse is treated as a U.S. resident for various Internal Revenue Code purposes and specific filing/administrative provisions for the entire year. 

The election is made by attaching a statement to a joint return for the first year; the statement must include identification (U.S. Social Security or taxpayer identification numbers) and be signed by both spouses. 

The election terminates if spouses are legally separate under a decree of divorce or separate maintenance; the regulation also provides timing for termination. 

Therefore, if you make the election, you and your spouse are treated as residents for income tax purposes for the entire year; neither spouse can claim under any treaty not to be a U.S. resident; both are taxed on worldwide income; you must file a joint return for the year you make the choice.

US Taxpayer Identification (ITIN) Mechanics

If the non-resident spouse does not have and is not eligible for a U.S. Social Security Number, he or she must apply for an ITIN. In a divorce year, this creates a practical timing issue: the ability to file as intended may depend on whether the spouse will cooperate in obtaining an ITIN.

Community Property Twist: Foreign Community Property Laws Can Matter (And The Election Can Switch Them Off)

International couples sometimes encounter community property concepts. IRC §879 addresses community income where one or both spouses are non-resident aliens and states that “community property laws” include those of a foreign country. It also provides that the §879 rules do not apply for any year in which a §6013(g) or (h) election is in effect. 

Even if Australian marital property isn’t “community property” in the U.S. sense, this section is a reminder that the Code sometimes explicitly contemplates foreign marital property regimes, and elections can change the default allocation framework.

Treaties And Dual Residents: When The Treaty Changes “How You Compute Tax”, But Not Necessarily Everything Else

Dual Resident Taxpayers: Treaty Tie-Breaker Can Require Form 1040-NR + Form 8833

If you are treated as a resident of a foreign country under a tax treaty, you are treated as a non-resident alien in figuring your U.S. income tax; for purposes other than figuring your tax, you will be treated as a U.S. resident. In a practical sense, it means that while you are not going to pay U.S. income tax on foreign source income, you will still need to report all non-US financial assets and file applicable international disclosure forms like 3520, 3520-A, 5471, 8865, etc.

Divorce Support And Cross-Border Cash Flows: Withholding-Agent Issues That Don’t Exist In Domestic Divorces

The cross-border “support” issue is often less about whether something is deductible (U.S. law changed in recent years for many divorces), and more about:

• recipient status (foreign or not),
• income sourcing, and
• withholding and reporting responsibilities.

Withholding Agent Concept (And Why Divorce Can Create One)

The IRS defines “withholding agent” broadly as any person required to withhold income tax on U.S.-source income received by a non-resident alien and others, and states that the withholding agent is responsible for submitting withholding information on Form 1042 and providing recipient information on Form 1042‑S. 

Many divorcing taxpayers do not realize they can become a “withholding agent” simply by agreeing to pay periodic amounts to a foreign recipient out of U.S.-source FDAP streams or other U.S.-source payments.

The non-resident alien withholding baseline and why it can matter in divorce.

Treasury regulations governing non-resident alien taxation explain that a non-resident alien not engaged in a U.S. trade or business is liable for a flat tax of 30% on certain U.S.-source amounts received during the year (subject to treaty limitation). IRS Publication 519 provides the same idea in plain language: dividends, for example, are generally taxed at 30% (or lower treaty) and are generally withheld at source; if not withheld correctly, a Form 1040‑NR may be required to claim refund or pay additional tax. 

Divorce is relevant because many settlements create:

• periodic payments,
• distributions from investment accounts,
• payments funded by dividends or interest,
• and third-party payments for the benefit of the foreign spouse.

These can create withholding and reporting tail obligations that need to be planned in advance, including documentation flow and timing.

For International Marital Gifting, There Are Two Different “Spouse” Regimes

Income tax regime governed by IRC 1041 and gift tax marital deduction under IRC 2523.

Marital deduction is disallowed for transfers to a spouse who is not a U.S. citizen at the time of the transfer. Instead, if the transfer otherwise qualifies (e.g., present interest), there is a special annual exclusion amount (inflation-adjusted). For the calendar year 2025, that amount is $190,000 ($194,000 for 2026). Citizenship drives your gift tax cap, but it does not magically convert a gift into a taxable sale or a basis step‑up.

Property Division: When “Divorce Transfers Are Tax-Free” Is False In International Divorces

The General Rule: IRC 1041 Nonrecognition For Spouse Or Incident-To-Divorce Transfers

IRC 1041(a) provides that no gain or loss is recognized on a transfer of property to a spouse or to a former spouse if the transfer is incident to divorce. Section 1041(b) provides carryover basis: the transferee generally takes the transferor’s adjusted basis.  A transfer is incident to divorce if it occurs within one year after the marriage ceases or is related to the cessation of the marriage. If our analysis stopped here, we would have a familiar US domestic non-recognition outcome.

The International Exception: IRC1041(d) When Spouse Is Non-Resident Alien

Section 1041(d) is explicit; Code section 1041(a) shall not apply if the spouse (or former spouse) receiving the transfer is a non-resident alien

This is the single most important property division issue in the U.S./foreign divorces involving a U.S. citizen spouse and a foreign spouse who remains a non-resident alien for U.S. tax purposes.

As a result, transferring appreciated property to a spouse who is a non-resident alien can be a taxable event for U.S. purposes (absent another nonrecognition provision).

Carryover basis still matters (even when  IRC 1041 does apply)

Even in cases where IRC 1041 applies (e.g., transfers between two U.S. people), the carryover basis rule means that the divorce settlement often shifts built-in gain. For portfolio-heavy couples, “equal value” does not mean “equal after-tax value.”

Transfers In Trust Where Liabilities Exceed Basis

Section 1041(e) provides that IRC 1041(a) does not apply to certain transfers in trust to the extent liabilities exceed basis.  For business-owner divorces involving trusts and leveraged assets, this provision can be relevant. Trust-based settlement structures should be reviewed not only for family-law goals but also for U.S. income tax consequences, including debt and basis mechanics.

Post-Divorce Compliance Reset: FBAR, Form 8938, And Foreign Trust Reporting

Divorce changes facts. Offshore reporting rules often attach to facts like ownership, signatory authority, beneficial interests, distributions and loans, and whether you are elected into broader residency treatment.

A useful approach is to treat post-divorce compliance as a “reset” exercise rather than a continuation of pre-divorce assumptions.

FBAR

A U.S. Treasury reporting requirement that can change with signatory authority.

Every U.S. citizen or resident alien with an interest in or signature authority over foreign financial accounts exceeding $10,000 in aggregate value at any time during the calendar year must report that relationship. The report is filed electronically on FinCEN Form 114 and is separate from the tax return; failure to file may result in civil and criminal penalties. 

Divorce relevance: even if the accounts didn’t change, divorce often changes who is a signer or owner, which can change reporting requirements in the divorce year.

Form 8938 (FATCA)

A broader “specified foreign financial assets” concept.

You may have to file Form 8938 if you are a resident alien for any part of the year, or a non-resident alien who makes an election to be treated as a resident to file a joint return (among others). 

Specified foreign financial assets include foreign financial accounts and, if held for investment, foreign stock and securities, interests in foreign entities, and financial instruments/contracts with non-U.S. issuers/counterparties. 

Penalties can apply for failure to file Form 8938 and for understatement of tax related to undisclosed assets. 

Divorce relevance: if you previously filed jointly and later file separately, or if you are considering a §6013 election in the divorce year, Form 8938 scope and thresholds can change. 

Foreign Trusts And Non-U.S. Trusts

Why do business-owner divorces require special attention?

Many U.S./Australia divorces involve family structures and entities that behave like trusts for Australian purposes or are classified as non-U.S. trusts under U.S. rules. Certain types of foreign accounts or entities are classified as non-U.S. trusts (an example could be certain superannuation accounts). If a U.S. citizen or resident is considered the beneficiary, trustee, or owner, certain information reporting forms may be required, with separate deadlines and penalties for failure to file. 

Form 3520 is filed yearly by an owner of a non-U.S. trust to report ownership, and also for certain contributions/loans to, distributions/loans from, or large gifts from non-U.S. persons/entities; generally filed by the due date (including extensions) of the individual’s return. 

Form 3520‑A is filed yearly by the trustee of a foreign trust with a U.S. owner and is generally due March 15 for a calendar-year trust; a six-month extension may be requested by March 15. 

Divorce Relevance – Divorce is often the first time a U.S. spouse sees trust deeds, trustee statements, trust distributions, or intercompany loans in one place. That is precisely the moment when a controlled “cleanup” plan should be considered if past years were inconsistent or incomplete.

A Practical Checklist Specific To U.S. Citizens Divorcing Foreign Spouses

Year-end marital status: determine what is true on December 31 for U.S. purposes. 

Spouse U.S. tax status: confirm whether the Australian spouse is a non-resident alien. 

MFJ election decision: if MFJ is desired, evaluate the §6013(g) election and its consequences (worldwide income inclusion, treaty limitations, ITIN, and termination timing). 

Divorce property transfers: identify any appreciated property being transferred to a spouse who remains a non-resident alien; §1041 nonrecognition may not apply.

Withholding/FDAP awareness: identify any U.S.-source income streams being paid to a foreign recipient and treat withholding/reporting as part of the settlement administration. 

Offshore reporting reset: rebuild the offshore asset/account/entity/trust inventory after separation and again after final orders; ensure ownership and signatories match what is reported.

International Divorce Is Manageable, But It Rewards Early, Structured Planning

If your divorce is revealing previously undisclosed foreign accounts, inconsistent prior-year offshore reporting, or trust/entity structures that were never fully integrated into U.S. filings, the most effective next step is often a structured offshore disclosure cleanup plan built around the divorce timeline—so ownership changes, trust reporting, FBAR/Form 8938 posture, and any required information returns can be corrected in a controlled, consistent way before asset division and post-divorce filing positions become fixed. 

Section 6048 requires US taxpayers to make an annual report regarding financial or asset transfers in relation to the receipt of distributions from foreign trusts. Taxpayers can be penalised if they fail to comply. Unfortunately many taxpayers have been caught out when it comes to reporting foreign retirement investments and other trusts. 

On March 2nd 2020 the IRS released Rev. Proc. 202-17. This change comes into effect on March 16 and provides taxpayers with certain foreign investments with an exemption from section 6048 reporting requirements on those investments. Accordingly, eligible US citizens with some tax favored foreign retirement investments and other trusts, have less duties in their reporting requirements. Furthermore, eligible individuals can now apply for a refund of any penalties that they have incurred as a result of section 6048 reporting requirements with their applicable tax-favored foreign trusts. 

The reason behind the change is that there are already a number of restrictions imposed by the countries where those trusts are located and there are already additional reporting requirements in the US under section 6038D regarding interests in these trusts. This alleviates the pressure of being penalized for meeting the section 6048 reporting requirements and reverses the penalties previously imposed in such cases. 

Once the change comes into place it will apply to any prior tax year that is still open. 

One of the reasons this relief is important is because it covers a requirement that many taxpayers and tax professionals haven’t realized was in place. This is because people tended to assume that the tax and reporting requirements were deferred until the point of retirement and they didn’t understand which international information reporting forms were to be used. Alleviating this reporting requirement will help reduce a lot of confusion in the field. 

If you have a foreign retirement or trust investment that may qualify you should look into Rev. Proc. 2020-17 or seek further advice for your specific situation. 

This article relates to foreign business founders with an active business, who are moving to the US. There is a risk that foreign earnings may be double taxed when your organisation is taxed as a US entity. This is due to the application of US attribution rules (Controlled Foreign Corporation (CFC) rules) and Passive Foreign Investment Company (PFIC) rules.

To avoid being double taxed and ensure that foreign tax credits can be appropriately applied, it may be advisable to make a check-the-box election. This election essentially means that foreign corporations are choosing to elect their US tax status at the point in time that the US tax system becomes ‘relevant’ to them.

This check-the-box system is a tax regime that doesn’t just impact organisations that are set up in the US. It can also impact Australian businesses and global businesses when the foreign founder of the corporation moves to the US.

When does the US tax system become ‘relevant’ to a foreign corporation:

The US tax system is considered to be ‘relevant’ to a foreign corporation when one of the following applies:

a) the foreign corporation derives US sourced income;

b) the foreign corporation is required to file an income tax return in the US; or

c) the owner of a foreign corporation becomes a US tax resident (ie a US Person).

Why might a check-the-box election be made?

The most basic reason for making the check-the-box election is to ensure that the owner of the corporation in the US is properly credited with the foreign tax payments. A check-the-box election will avoid the attribution of income under CFC rules or the loss of long term capital gains tax rate discounts when shares are transferred in a passive foreign investment company (PFIC).

When will a foreign corporation be a CFC?

When US shareholders own more than 50% of the shares, either directly or indirectly, then the foreign corporation will be considered to be a controlled foreign corporation (CFC). To be considered a ‘US shareholder’ the person must own more than 10% of the voting rights or stock value of the foreign company.

When is a foreign corporation a PFIC?

A passive foreign investment company (PFIC) exists when one of the following two conditions are satisfied:

1. Passive investments generate at least 75% of a corporation’s gross income (as opposed to regular business activities); or
2. At least 50% of the corporation’s assets create passive income. Passive income includes interest, dividends and capital gains.

What is a foreign eligible entity?

A foreign eligible entity is defined by whether a member has limited liability or not. This is a default classification under the check-the-box regulations. When all members of the corporation have limited liability the US taxes the foreign eligible entity as a corporation. When at least one member does not have limited liability the entity is not a foreign eligible entity.

An eligible entity may make a check-the-box election to opt out of the default classifications.

Warning on making an election after default classification has been made

It is important to make your election prior to the default classification being applied. This is because making a later election will change the organisation’s classification. Such a change in classification can trigger a liquidation event.

When you should make a check-the-box election:

To ensure the check-the-box election is made appropriately you should consider making the election when you meet all of the following conditions:

1. you own a foreign corporation
2. the US tax system is relevant for your corporation
3. you need to apply foreign tax credits against your US corporate tax regime
4. you wish to avoid applying the CFC or PFIC rules.

In our previous article on the topic of sales tax in September 2018, titled “Understanding Sales Tax in the US” Click here to read the post, we discussed the ways in which US states themselves have taxing powers over sales where there is a sales tax nexus. The sales tax nexus is where your business has a substantial enough presence in a state for the state authorities to deem that you are taxable in such state. Now, however, companies that engage in online sales may be subject to tax obligations regardless of their sales tax nexus under the recent Supreme Court case, South Dakota v. Wayfair.

What happened in South Dakota v. Wayfair?

In South Dakota v. Wayfair, the state of South Dakota was suing Wayfair, an online retailer, for their failure to withhold and remit taxes on online sales inthe state.Wayfair argued against having to do so because under a prior Supreme Court decision, states could only apply sales tax on sellers with a sales tax nexus, which required some sort of physical presence. The Supreme Court decided it was time to take a hard look at this precedent as the growth of online retailers skyrocketed. In doing so, the Court held that states can now require online retailers to collect sales tax if certain revenue or quantity thresholds are met, regardless of whether they have a physical presence in the state.

What are the effects of South Dakota v. Wayfair?

Now, your business will need to withhold sales tax where the business:

1. Has a sales tax nexus with the state; or
2. Engages in online sales that meet the threshold level for the state (“Economic Nexus”).

This ruling primarily affects businesses with large eCommerce sales, Software as a Service sales, and digital goods/services sales. Additionally, for foreign companies who transact business in the US, this ruling may affect you even if you do not have a US permanent establishment.

What is the applicable state “threshold” for online sales?

A business will only need to comply with the ruling of South Dakota v. Wayfair if it reaches the particular state’s gross revenue or quantitative transaction threshold. The most popular gross revenue threshold utilized by states is $100,000 or more in in-state sales; whereas, the most popular state threshold based on the number of transactions is 200 in-state sales. It is critical that for each state you transact business in, you review their specific threshold requirements to ensure compliance.

I think my business meets the online sales threshold of a state, what next?

If your business has meets the online threshold of a particular state pursuant to the sales tax rules of such state, you will be required to register for a state sales tax permit and collect sales tax from all buyers in that state. The sales tax permit is obtained from the relevant state tax department.It is imperative that your business file sales tax in all jurisdictions where your business meets the threshold.

Upon receiving the sales tax permit you will be assigned a sales tax filing ‘frequency’ requiring sales tax filing to be made monthly, quarterly or annually. Again, each state has its own requirements and criteria in determining the filing frequency.

It is important to note that the process of determining whether your business is subject to the state sales tax and therefore is required to register for a sales tax permit, is of particular importance as failing to obtain a sales tax permit is deemed as criminal fraud.

How can CST help you?

Navigating through the sales tax rules can become an overwhelming process when trying to focus on the growth of your business in a new market. If you need assistance in analyzing whether your business has a sales tax nexus (physical and/or economical) in a state and whether you are required to be sales tax compliant, please don’t hesitate to get in contact with a member of our team.

About CST Tax Advisors

CST Tax Advisors is a global firm of CPAs, chartered accountants, and attorneys that advise globally mobile private clients, family offices, and established privately owned companies on market entry. CST believes in a ‘tax without borders’ approach to integrating global private clients solutions. CST has offices in 3 countries that are connected daily to deliver integrated solutions.

Responsibilities

• Under direct supervision of a licensed Certified Public Accountant (CPA), review and analyze financials to prepare federal and state income taxes, sales and use, extensions, and estimated tax for corporations, partnerships, and individuals, focusing on expats and international clients of high net worth
• Prepare documents, records, and financials to ensure proper international tax compliance under US tax laws and different tax treaties and reporting requirements for state/federal tax law
• Evaluate, design, implement, and review tax process procedures to support adequate data input and analysis as well as accurate tax planning, advice and consulting to clients
• Interpret and analyze various tax legislation (i.e. proposed tax regulations and Tax Cuts and Jobs Act of 2017) impacting U.S. residents, expats, and foreigners and provide recommendations on compliance
• Conduct tax research on tax controversy for pre-immigration consulting and managing director’s assignments through CCH and Bloomberg Tax and provide specialized advice and counsel on domestic and foreign taxes

Minimum Requirement

• Bachelor’s Degree in Accounting, Finance, Taxation, or similarly related field.
• Master of Taxation preferred

Compensation

Competitive

What is a CFC?

A CFC is a foreign corporation in which more than 50% of the shares are held by US Shareholders. US Shareholders are shareholders in a foreign corporation that own more than 10% of the total voting or value of shares on issue in such foreign corporation.

What is a PFIC?

A PFIC is a passive foreign investment company. A passive foreign investment company is a company that derives at least 75% of its gross income from passive sources that are not regular business activities, or at least 50% of the company’s assets produce income that is passive.

What is a grantor trust?

A grantor trust is a trust (whether domestic or foreign) of which the grantor is considered the owner of the trust assets income and losses for US tax purposes. In the context of a foreign trust any income, gains or losses that are derived by the trust are attributed to the grantor and taxable to them in the US regardless of who they are distributed to under the laws of the foreign country.

What is GILTI?

Global Intangible Low Tax Income is income that is derived by a controlled foreign corporation that is not Subpart F income that is taxed at a rate of not more than 95% of the US Corporate Tax rate of 21%.

What is BEPs?

BEPS means Base Erosion and Profit Shifting. The G20 BEPS initiative was implemented to allow the global community to fight large scale tax avoidance through profit shifting.

What is transfer pricing?

Transfer pricing is the price at which divisions of related party companies transact with one another.

What are the check the box regulations?

The check-the-box regulations establish how a foreign or domestic entity should be taxed in the US (i.e. as a disregarded entity, a partnership or a corporation). All entities have a default status. If an entity is an ‘eligible entity’ that can also choose to an alternate tax status.

Is superannuation taxable in the US?

i. The US Australia Income Tax Treaty predates the introduction of the Superannuation Guarantee in Australia.

ii. It was designed to deal with the old form of defined benefit plan that had one taxing point, which was on distribution not the three taxing point system that exists today. If you compare the US Australia Income Tax Treaty with the US UK Income Tax Treaty you can clearly see the gaps.

iii. To the extent that the treaty is silent to the manner in which a type of income should be taxed it will be taxed under domestic law.

iv. The two sections of the International Revenue Code of 1986 that can tax Australian superannuation are sections 409A or 402(b) IRC. To say there is a one size fits all model when it comes to the US taxation of Australian super is a bit like saying that Russia did try and influence the US election. In case it is not clear I am saying that there simply is not one model that suits all circumstances and the reason for that is set out below.

v. Section 409A governs non qualified deferred compensation plans and 402(b) governs non exempt employee trusts.

vi. If you apply section 409A to your super you treat it as social security and you exempt it from US taxation under Article 18(2) of the US Australia Income Tax Treaty. You have found a big red bow and tied it around this issue. You are wining.

vii. However, here is the rub. In order to classify your super as social security you need to have the protection of the US Australia totalization agreement and this agreement only cover contributions that are mandatory contributions that have been made by employers on behalf of their employees under the superannuation guarantee system.

viii. I can understand the rationale for that. The guarantee does bear some similarity to social security. However, for most Australians their superannuation is more complex than that. Most employees have in addition to the guarantee amounts, made further taxed and non taxed contributions to their accounts.

ix. Furthermore, many other Australians that do not hold their superannuation in a retail accounts are owners of self managed superannuation funds. When you look at legislation and verbiage of section 409A it feels like it should have application to a retail superannuation account and not a self managed superannuation fund and the legislation and verbiage of 402(b), feels like it would have application to a self managed superannuation fund and not a retail account.

x. The big issue here is that if a superannuation benefit is not protected by the Treaty under Article 18(2) or Article 18(1) you need to apply the domestic law that is applicable to your circumstances and just because section 409A has some application to your circumstances does not mean you should not consider or apply section 402(b) to your circumstances. This applies for both retail or self managed superannuation funds.

xi. You need to be mindful of the position you are taking and the risks associated with getting it wrong.

xii. If your benefits are taxed under section 402(b) rather than 409A the taxation and information reporting consequences are dramatically different. One is not taxed and the other is taxed as ordinary income. If you are reporting your benefits under section 409A you do not have an obligation to report your benefits on a Fincen 114 (Fbar) or 8938 whereas if your benefits are taxable under section 402(b) you do have an obligation to report the benefits on those forms.

xiii. These forms carry substantially penalties if they are completed incorrectly or they not completed at all and should be.

xiv. Whenever I see one outcome that is all gravy and another that all hellfire I step back and ask myself what is the catch.

xv. When it comes to super there is no silver bullet. You need to understand the issues and apply them to your circumstances in way that suits your tolerance for risk.

How do double tax agreements work?

Double Tax Agreements are conventions signed between 2 countries that override domestic law to ensure that an individual or entity formed in a particular country is not taxed twice on the same income.

What is a permanent establishment and why should I know about it?

A permanent establishment is the cornerstone of business taxation as determined by double tax agreements. If a business that is resident of a particular country with which the US has a double tax agreement does not have a permanent establishment in the US, it cannot have a liability for federal taxation in the US.

How does state income tax work?

In the US, state income tax laws are administered and levied separate to the Federal tax laws enforced by the Internal Revenue Service (IRS). Each state applies their own tax system when can often create confusion and complexities for both individuals and businesses alike as the state tax rules can vary widely.

For companies doing business in the US, you can create a state corporate income tax liability where you have triggered a sufficient connection or “nexus” with a state. The state income tax is generally based on the business income of the corporation attributable to activities and revenue generated from activities within such state. Again, each state has different rules on what will amount to a taxable nexus. Some examples of nexus include attending trade shows, warehousing, having staff resident in a particular state or where the business server is located.

More recently we have seen a spike in queries regarding whether a state income tax nexus has been created by selling products on Amazon FBA. Products are often warehoused in states before being sent to the purchaser. This can create a state income tax nexus for sellers on Amazon FBA which may require state income tax and other registrations to be made.

Anyone doing business across more than one state should ensure that they have an understanding of their state tax requirements to ensure they are compliant with state business and tax requirements.

How does state sales tax work?

Much like state income tax, sales tax is governed by each individual state and is separate to the federal tax system. The result of this is that anyone doing business in the US can often find themselves trying to navigate through the sales tax rules of each state. This can get clear as mud.

You are required to collect sales tax from customers or buyers in any state in which you have a sales tax nexus. A sales tax nexus is created when you have a certain level of connection to the state. The criteria for creating a sales tax nexus is different in every state, however having a physical presence in a state will most likely create a nexus. In certain states, making sales exceeding a certain revenue amount or making a certain number of transactions in a state can create a nexus. If you have a sales tax nexus, you are required to register for a sales tax permit in that state.

The sales tax rate you are to collect will vary on whether you are based in an origin-based sales tax state, or whether you have created a sales tax nexus in a destination-based sales tax state. If you are based in an origin-based sales tax state, generally you charge the sales tax rate of the state in which you are located on all sales. If you have a sales tax nexus in a destination-based sales tax state, you collect sales tax based on the where the buyer is located.

What are the tax consequences of arriving in USA and becoming tax resident?

The consequence of becoming a U.S. Person (a U.S. tax resident) is that you are taxed on your worldwide income. That is income and gains sourced anywhere in the world are taxable in the U.S., subject to reduction by foreign tax credits or exclusions.

What is the minimum time I can remain in USA without being tax resident?

The U.S. is one of only two countries in the world to tax extraterritorially, that is to tax its citizens and permanent residents (Green Card holders) on their worldwide income regardless of how much time they spend in the country. So if you are a citizen or you hold a Green Card you are taxable on your worldwide income even if you spend 0 days within the U.S. in a calendar year. If however, you reside in the U.S. on a non-immigrant visa, you need to apply the Substantial Presence Test to your circumstances.

The Substantial Presence Test determines if you are physically present in the US at least 31 day during the current year and 183 days during the 3-year period that includes the current year and the previous two years by applying the following formula:

Days in U.S. in current year x 1 (Year 1) + Days in U.S. in year immediately preceding current year x 1/3 (Year 2) + Days in U.S. in year preceding the Year 2 (Year 3) x 1/6;

If you exceed the minimum 183-days under this formula, then you will be a resident for purposes of U.S. tax law.

Students, teachers and trainees are exempt from substantial presence test. Please contact our office regarding more details.

Does USA tax its residents on a world wide or territorial basis?

The U.S. taxes on a worldwide and extraterritorial basis.

Is foreign income taxable in USA e.g. foreign rental income, foreign interest income and foreign dividend income?

Yes, foreign sourced income is taxable in the U.S., subject to reduction by foreign tax credits and exclusions.

Does USA tax on a remittance basis?

No, the U.S. does not have a remittance basis of taxation.

Does USA have a sales tax or VAT tax on purchases?

Yes, the U.S. does have a sales tax on the sale of goods. Sales tax rate is determined by the state and local governments and thus varies from 5.5% to 9.45%. California state sales tax rate is 8.41%. Few states do not have sales tax.

Does USA have a capital gains tax that taxes me when I sell foreign assets?

Yes, the U.S. taxes its residents on gains realized on the sale of foreign assets.

Does USA have an estate tax or death tax?

Yes, the U.S. has an estate tax.

What is the top tax rate in USA?

Currently highest federal tax rate is 39.6%. The highest state rate of tax in California is 12.3% and 8.82% in New York.

Does the tax rate vary for different types of income and if so what are the rates?

Yes, long term capital gains (gains realized upon the sale of an asset that has been owned for 12 months or more) are taxed at the rate of 20%, as are qualified dividends. All other forms of income are taxed at full tax rates.

What are the common tax deductions available in USA?

Passive property losses (negative gearing) are deductible if you earn less than $100,000. If you earn between $100,000 and $150,000 the losses are partially deductible. If you earn more than $150,000 the losses are not deductible currently but may be carried forward and offset against future passive income or capital gains. Contributions to qualifying pension plans are deductible provided they do not exceed statutory limits. Home mortgage interest on up to $1M of debt for your principal residence is deductible as is property tax. Contributions to Health Services Accounts are deductible.

Does USA require joint tax returns to be filed for me and my spouse or are separate tax returns required?

Married taxpayers usually file married joint tax returns. Married separate tax returns may be filed as well.

If I have a foreign company or foreign trust before I arrived in USA is the income of that company or trust taxable?

If the trust is a grantor trust or the company is a controlled foreign company and the income it derives is Subpart F income, the income will be taxable in the U.S., even it is earned in another country. Most European and English common law trusts are grantor trusts.

Do children under 18 pay a higher rate of tax on certain types of income?

Yes, there is a so called “Kiddie” tax in the U.S.

Is there a gift tax in USA?

Yes, there is a gift tax in the U.S. 2014 annual exclusion gift amount is $14,000.

What are the personal tax exemptions in USA e.g. a gift from an overseas relative or a foreign insurance payout?

Most earned and passive investment income in taxable in US, however there are types of receipts that are excluded from taxable income. Examples are life insurance proceeds received by the qualified beneficiary, tax-exempt interest, property acquired by bequest, devise, or inheritance.

If I receive shares as part of my salary is this taxed in USA?

Yes, compensation received via the issuance of shares is taxable (in the year of the grant or later, depending on type of the grant) in the U.S.

When I leave the country is a ‘termination payment’ taxed by USA before I leave?

Yes, if a termination payment is received in consequence of the termination of employment in the U.S., the income derived will be sourced to the U.S. and taxable in the U.S.

What are other tax consequences of leaving the country?

Since the United States taxes its citizens and residents on their worldwide income, the only way to avoid paying U.S. tax is to expatriate or terminate residency.
If you are a “covered expatriate”, you might be subject to income tax on the net unrealized gain as if all property that you had as of the day before the expatriation or residency termination has been sold for its fair market value. Any net gain on the deemed sale is recognized to the extent it exceeds $680,000 (2014 exclusion amount).

With certain exceptions, “covered expatriates” include U.S. citizens who relinquish their citizenship or certain long-term U.S. permanent residents who terminate their residency if such individuals: (a) have relatively high tax liability (a 5-year average income tax bill of at least $147,000, adjusted annually for inflation thereafter); (b) have relatively high net worth ($2 million or more); or (c) either have not certified under penalties of perjury that they have complied with all U.S. federal tax obligations for the previous five years or have not submitted the requisite evidence of compliance.

Are there any tax consequences of me transferring money from USA to my say home country?

While, the transfer of money from one country to another does not carry a tax consequence, the exchange of one currency for another (i.e. USD for AUD) is a taxable event.

The IRS has announced that it will close the 2014 OVDP effective September 28, 2018. For taxpayers that have failed to disclose foreign financial assets and income, this limits avenues to coming into compliant with the U.S. tax requirements.

Clients with foreign holdings, financial assets and business holdings are often unaware of the stringent disclosure requirements in the US and it is very common for taxpayers to be entering into the various programs with the IRS to properly disclose financial assets.

Under certain circumstances and where a taxpayer was completely unaware of their disclosure and reporting requirements, this leaves the following options to get into compliance with IRS requirements:

c. Filing under the streamlined procedures; or

d. filing of delinquent FBARs and amended tax returns.

Streamlined procedures

The streamlined procedures include the streamlined domestic offshore procedures(SDOP) and streamlined foreign offshore procedures(SFOP). The streamlined domestic offshore procedure is available where a U.S. taxpayer does not meet the non-residency requirement contained in section 911 of the Internal Revenue Code (IRC) and is designed for U.S. taxpayers primarily residing in the U.S. The streamlined foreign offshore procedure is available where a U.S. taxpayer meets the non-residency requirement contained in section 911 of the IRC and is designed for U.S. taxpayers not living in the U.S.

The streamlined procedures require amending the last 3 years of tax returns to report undisclosed income from foreign assets, and filing FBAR disclosures for the last 6 years. The program also requires that a taxpayer files a statement to the satisfaction of the IRS that their noncompliance was non-willful. This is of particular importance as the taxpayer will do so under the penalty of perjury which can have criminal penalties. Making a fraudulent statement can carry substantial penalties and carry criminal charges.

In addition to payment of back-taxes, a miscellaneous offshore penalty of 5% is due under the SDOP. There is no miscellaneous penalty under the SFOP. The 5% penalty is on the highest aggregate balance of the taxpayer’s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the 3-year tax return period and the 6-year FBAR period. For this purpose, the highest aggregate balance is determined by aggregating the year-end account balances and year-end asset values of all the foreign financial assets subject to the miscellaneous offshore penalty for each of the covered years and selecting the highest aggregate balance from among those years.

As you can see, the streamlined procedures were designed for U.S. taxpayers that have non-willfully failed to disclose their foreign financial assets and foreign income.

Delinquent and amended filings

In certain circumstances, it can make more sense to file amended tax returns and delinquent FBARs outside of the streamlined procedures. This will generally be the case where you have foreign financial accounts that have not been disclosed, and where there is no additional income and therefore no further US tax liability.

In our experience, this may be the case where you have failed to disclose your superannuation on an FBAR, and you may need to include rental income from a foreign property in your U.S. tax return, however the property is generating losses.

Taxpayers should file delinquent FBARs if they do not need to use either the OVDP or the streamlined procedures to file delinquent or amended tax returns to report and pay additional tax, but who:

• have not filed an FBAR,
• are not under a civil examination or a criminal investigation by the IRS, and
• have not already been contacted by the IRS about the delinquent FBARs

The IRS will not impose a penalty for the failure to file the delinquent FBARs if you have properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.

The key requirement of filing delinquent FBARs is including a statement explaining why you are filing the FBARs late and that your failure to report is non-wilful. Willfulness has been defined by courts as “an intentional violation of a known legal duty”.

The IRS recommends that amended returns should be filed where a taxpayer has claimed the wrong filing status and has to change income, deductions or credits. This method is advisable where no further tax is due as you are able to disclose the correct income and information without penalties, tax and interest. To the extent further tax should be due upon amending the prior tax returns due to undisclosed income, you may not be able to file amended returns without penalties in which case the streamline process is advisable.

Considering a move to the US? Listen to our webinar on important considerations regarding moving to the United States is now available, featuring our own Peter Harper, Naomi Seddon from Littler and David Camerlango from Queensland Government.