The Top 6 Tax Mistakes Made By International Organization Employees
IRS Crackdown on International Organization (“I/O”) Employees
The IRS recently announced a campaign to review the U.S. tax returns and tax compliance of International Organization Employees.
The IRS said the review will be comprised of IRS Notices and audits of I/O employees.
Based on the announcement, the IRS said that they will be focusing on:
Underreporting of compensation
Incorrect reporting of compensation
Erroneous deductions and credits
Failure to properly pay Social Security taxes
Not properly completing informational forms
In working with I/O employees for over a decade, here are the 6 most common tax mistakes I see in practice.
U.S. Citizens and Green Card Holders
#1. U.S. Citizen Employees of I/Os Not Paying Self-Employment Tax
U.S. citizen employees of I/Os who work in the United States must pay U.S. Social Security tax by filing the Self-Employment Tax Form (Form SE) with their U.S. income tax return. Wages received for work performed outside the United States is not subject to the self-employment tax.
#2. U.S. Citizen Employees Taking Business Deductions
The Self-Employment tax form is the compliance mechanism for I/O employees to use to pay U.S. Social Security taxes. However, it does not mean that the I/O employee is self-employed! Therefore, no self-employment deductions for “business expenses” nor self-employed pension plan contributions are allowed.
#3 Failure to File Foreign Financial Informational Forms International Organization
Employees who are U.S. persons may have foreign financial assets or foreign income. All U.S. citizens, green card holders and other tax residents must report their worldwide income to the U.S. government, as well as file certain foreign financial information reports.
Here are some of the forms that may be required:
Form 114 (Foreign Bank Account Report)
This form is used to report foreign financial accounts when the taxpayer has a financial interest or in
foreign accounts, if the aggregate of such accounts exceeds $10,000 at any time during the calendar
year. In addition, the U.S. person must also report any signature authority he/she has over someone
else’s foreign financial account.
This form is used to report specified foreign financial assets (e.g., foreign bank accounts, certain foreign pensions, etc.) if the total value exceeds certain thresholds. Often the reporting on this form is the same as the Form 114. Although this may be the case, the Form 8938 may be required nevertheless. For a married couple living in the United States, the threshold for filing this form is $100,000 of specified foreign financial assets. Some I/O employee pensions, especially those of The World Bank, IMF and Inter-American Development Bank, may be reportable on this form, even in some cases where the employee is not yet retired.
This form is used to provide information to the U.S. government about the ownership of “passive foreign investment companies”, often referred to as “PFICs”. The most typical type of PFIC is a foreign mutual fund. However, if you’ve purchased a foreign mutual fund through a U.S. brokerage firm it is highly unlikely that you will be the owner of a PFIC.
This form is used to report the ownership of, or distributions from foreign trusts (often foreign pensions are viewed as foreign trusts). The form is also used for reporting an inheritance or gift from a foreign person of more than $100,000 during the year.
G-4 Visa Holders
#1 G-4 Visa Holders Filing Joint Income Tax Returns with Their G-4 Dependent Spouse
G-4 visa holder employees of I/Os are not allowed to file a joint income tax return with their G-4 dependent spouse. As long as the primary G-4 spouse is working full-time for an international organization, there is no way for the G-4 primary or G-4 dependent to be a U.S. tax resident. If the G-4 has a tax filing requirement, he/she must file a Form 1040NR (not a Form 1040).
#2 G-4 Visa Holders Filing Joint Income Tax Returns with a U.S. Spouse A G-4
Visa holder employee of I/Os is allowed to file joint income tax returns if his/her spouse is a U.S. citizen or green card holder. However, since only two U.S. tax residents may file a joint income tax return, the law provides that an election (called the 6013(g) election) is required in order to elect for the G-4 nonresident to be a U.S. tax resident. Once the election is made, the spouses may file a joint income tax return. If no election is made and the spouses file jointly, the joint tax return is invalid.
#3 G-4 Visa Holders Not Reporting Capital Gains
Generally, nonresidents of the United States are not taxable on capital gains recognized from the sale of stocks, bonds and mutual funds. However, there is a special rule that applies to G-4 visa holder nonresidents. If a G-4 visa holder is physically present in the U.S. for 183 days or more during the calendar year, he/she is taxable at a flat 30% tax rate on their worldwide capital gains from the sale of securities. This sometimes results in double taxation.
Please contact us if you need assistance with reviewing your prior year returns or need help in preparing your current return.