Reexamination Certificate
1995-04-17
2001-02-06
Hayes, Gail O. (Department: 2411)
Reexamination Certificate
active
06183140
ABSTRACT:
BACKGROUND OF THE INVENTION
This invention relates generally to a system and method for monitoring the US tax status of non-resident individuals, and in particular to an interactive knowledge based system for monitoring the combined effect of an individual's visa and travel activities, international tax treaties, and the presence or absence of potentially taxable income over specified periods of time.
Foreign students and scholars and foreign employees who come to the United States temporarily to study or work, may or may not be subject to Federal income taxation in the United States, depending on the type of income they earn while in the United States, the type of visa history they have (such as whether they are considered tax resident or not), the type of work activities performed and whether or not they can obtain the benefit of any international tax treaties that may be applicable to their situation. Institutions that employ or make payments such as fellowship or scholarship grants to such individuals need to comply with the applicable laws in order to withhold the appropriate amounts from payments to or on behalf of such individuals and file appropriate reports with taxing authorities.
Most institutions that have been faced with this problem try to deal with each individual on a case by case basis, but find this difficult to implement, if it can be done at all, given the institution's resources. A case by case analysis, however, is the approach suggested by the United States Internal Revenue Service.
While the United States has a “Model Treaty” it uses for international tax negotiations with other countries as a guide that might help standardize treaty terms, this does not contain provisions for teachers and only limited provisions for students. Thus, exemptions that might apply to these types of employees are developed during negotiations with a particular foreign country and, consequently, vary from treaty to treaty. Hence the reason why the IRS suggests the case by case approach.
In many cases, the treaty will have what is known as a “saving clause,” a provision in most tax treaties negotiated with the US, which provides that the US reserves the right to tax its citizens and residents as if the treaty did not exist. This means that a critical determination for each individual (and the institution monitoring his or her tax status for withholding purposes) is whether the US considers the individual to be a resident for tax purposes. A resident alien for tax (but not necessarily immigration purposes) is one who had the right of legal permanent residence in the US or who passes the substantial presence test (the individual was present in the US for a specified minimum number of days.) Individuals who are thus deemed residents for tax purposes normally lose any treaty exemptions. However, some treaties have exceptions to this exception for teachers, researchers and students, so long as these individuals do not have status as lawful permanent residents. These exceptions are unique to each treaty.
In addition, the language of each treaty may be unique, so that an exemption that may be provided for teachers, for example, may not be available under that same treaty for researchers.
Further complicating the problem, some treaties also limit how much of an individual's income is exempt and for how long a time. These provisions, too, differ by treaty.
Individuals who come to the United States as students or researchers and stay for a while longer as teachers also need to be concerned about consecutive exemptions. Some treaties allow an individual to have consecutive exemptions without returning to the home country in between. However, many do not. In these latter cases, the individual may not be entitled to a further exemption unless he or she returns to his or her home country for at least a year.
In attempting to deal with this situation, the individual and the institution must understand the individual's residence status not only from a tax and tax treaty perspective, but from an immigration law perspective as well. While nonresident status protects foreign-source income from US tax, it is usually advantageous for most individuals whose primary source of income derives from US sources to file resident tax returns in the US.
For example, students present in the US with F,J, M and Q visa status are required by law to file taxes as nonresident aliens for their first five years in the United States. Visa subclassifications that authorize employment in the US are:
F-1—students and trainees in academic language programs. These individuals may work in a curriculum related job program or on-campus job and are exempt from FICA for the first five years, usually.
J-1—for students, trainees professors, research scholars and specialists—these may be employed in a curriculum-related job or on campus provided they comply with visa requirements. They are usually exempt from FICA withholding while they are nonresidents, usually two years.
H-1—for individuals of distinguished merit and ability to permit them to work at the sponsoring institution only. These holders are usually not exempt from FICA withholding unless they are covered by a US Social Security Totalization Agreement that provides otherwise.
M-1—for individuals who are students or trainees in vocational institutions.
Q-1—for workers engaged in practical training in cultural traditions and history, for example, to permit them to perform temporary services for the sponsoring institution.
Students who have been in the US since 1988 and who were present for at least 183 days in 1995 would probably qualify as resident taxpayers for the year 1995.
Nonstudents with J visas (professors, scholars, researchers, etc.,) are considered nonresidents for at least their first two post-1984 years in the US. H visa holders must files as nonresident aliens if they do not pass the substantial presence test.
There are three primary ways for qualifying for tax residence:
1. The substantial presence test. Nonimmigrants who hold other than an F,J, M or Q visa and can pass the test for the minimum number of days present and do not have a closer connection to a foreign country than to the US, may qualify. However, F,J, M and Q students and their dependents are not permitted to use the substantial presence test for at least their first five years in the US. Nonstudent J's and Q's may not use the test for at least two years. Holders of diplomatic/consular status or individuals employed by international organizations are also exempt from the substantial presence test—that is, they remain non-residents for tax purposes.
2. Married individuals may also become tax resident through certain elections. However, there are a number of provisions related to this, as well.
3. US Permanent Residency. Individuals must file as US residents if they have been given the legal right to reside permanently in the US, and this right is granted at the time of the final interview with the Immigration and Nationalization service (INS) even if the “green card” does not arrive for some time. However, individuals who obtain their “green card” overseas, are only taxed from the first day they enter the US, unless they meet the substantial presence test. Special “dual-status” rules apply to individuals who obtain permanent residence with fewer than
183
days remaining in the tax year and who do not pass the substantial presence test or otherwise qualify as tax residents for the full calendar year.
Institutions who employ or make payments to foreign students, teachers and scholars, are required to report to the IRS the amounts paid, and taxes withheld for employees or payees who are tax resident aliens, using standard W-2 and 1099 forms. If the institution makes payments, either through payroll or through a scholarship or fellowship office, to an individual who is deemed to be a nonresident for tax purposes, the institution is required to report some of those payments to the IRS on Form 1042S.
Whether an institution likely to employ or pay foreign students or
Singer Gary
Singer Paula
Hayes Gail O.
Stretch Maureen
Windstar Technologies, Inc.
Yount Stevie Ray
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