Shakira, The pop-star entertainer finally settled her tax argument with Spanish authorities for a $5 million tax payment. The case fundamentally revolves around which country she resided in, so called “dual residency”. Although this case arose outside of U.S. tax jurisdiction, it does have significant tax implications to non-US citizens residing in the United States with either permanent US immigration status (“green card”) or citizenship abroad. As you will read, although there are U.S. income tax consequences in practice, the penalties for noncompliance of disclosing foreign assets can be quite substantial.

If you have a green card, you fall into the pool of potential dual tax residents. Also if you are present in the United States during the year for 31 days and meet the 183-day qualifying three-year test you may have to deal with dual residency. The reason non-US citizens may face this USA tax issue is because every country has its own definition of who is considered a resident.

Some countries determine residency under a 183-day test which differs how the USA computes its 183-day test. Some countries apply a domicile test which means if you have a home in the USA, but you never abandoned your home abroad or continued strong ties to a foreign country, you would also fall into the dual status trap.

The upshot of the dual residency scenario is double taxation, however, most countries institute in their tax laws provisions, allowing a taxpayer who falls into this scenario, the ability to claim a credit against another country's tax liability.

If one faces this dilemma, a US resident qualifying under the 183-day can negate US residency if they can demonstrate a closer connection to another country. One can meet this criteria if they own or rent a tax home in the foreign country and maintain in this country family and business ties throughout the year. U.S. taxpayers with a green card, would not be able to avail themselves of a closer connection exception.

The alternative for a green card is the use of income tax treaties between the US and other foreign countries. Tax treaties contain specific provisions that determine which country has residential tax preference over that individual. Specifically, the so-called tie breaking rules require the taxpayer to have a permanent home and strong linkage to vital personal and business interests in the resident country. In essence this remedy focuses on where the individual spends most of his time, both qualitative time and quantitative time within their country of residence.

Notwithstanding availing oneself by failing to address the two remedies previously discussed, aside from a US income tax assessment, one must address the myriad of penalties associated with failure to disclose foreign assets and transactions. For example, in cases where one has failed to disclose foreign bank and brokerage accounts, we have seen in practice very large civil penalties in the seven-figure amount.

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