With a view to benefit the H1 L1 visa holder community, this article covers at a high level the potential tax audit issues that H1 L1 information technology (IT) consultants may be facing.
The Tax Audit department in our office has come across several IRS Audit cases involving H1, L1 tax payers. Most of these tax returns were prepared and filed by offshore based tax preparers. The audit trigger seems to have been the excessive business travel expense deduction. Before we dive deeper into the issue, let us cover some fundamentals around the tax laws.
H1, L1 Visa Workers may be considered US Resident for Tax Purposes
The first tax distinction IRS makes is between a Non Resident and a Resident Alien. Although H1, L1 consultants may be considered as temporary workers on a Non Resident Alien visa status, IRS may consider them as US Resident for tax purposes.
IRS has specific guidelines to determine Resident Status for tax purposes through the ‘Substantial Presence Test'. Once it is established that someone is a US Resident (for tax purposes only), they are subject to US taxes on their global income, including income in their home country. For more detailed information on how to determine your tax status, visit online h1bvisataxes.
IRS Determination of H1, L1 tax payer's ‘Tax Home' and Temporary Assignment
To be able to claim any Travel Expenses away from home, one must first determine the ‘Tax Home' based on IRS guidelines. Generally ‘Tax Home' is the regular place of business or post of duty, regardless of where the family home is maintained.
If the assignment or job away from main place of work is temporary, the ‘Tax Home' does not change. Generally, a temporary assignment in a single location is one that is realistically expected to (and does in fact) last for 1 year or less.
Top Tax Audit Traps for H1, L1 and Information Technology (IT) Consultants
Business Travel Expense Deductions
Business travel expenses, or away from home expense deductions can be taken for non-reimbursed meals, lodging and travel if you have a regular job somewhere else, and are on a temporary assignment for work or training. Sec. 162(a) of the IRS Code limits the period to less than one year. So for example if the employer posts an IT Consultant in a different city on a temporary project for 8 months, they may qualify to take all of their meals, lodging and travel expenses as deduction. If the employer reimburses any of the expenses, the deduction may be limited.
However if the assignment is realistically expected to last for more than 1 year (and does last for more than a year), the Tax Home would change and the IT Consultant may not qualify for travel expense deduction. Even if the tax payer continues to maintain their family home in a different city, they may not be able to claim the travel expense deduction.
Some offshore and local tax preparers seem to be taking a liberal interpretation of the IRS code and assisting H1 L1 consultants to claim per diem living expenses including lodging, mileage, food, laundry etc, as per IRS publication 463. IRS is aggressive about this deduction and several Tax Audits are being triggered. Make sure you consult with a tax accountant and evaluate the overall audit risk of your tax return prior to submitting your tax return with this particular deduction.
Filing Tax return as US Non Resident Alien
We are seeing some cases where the offshore tax preparers have considered H1 L1 consultants as US Non Residents while filing their tax return with a view to claim a larger deduction for living expenses. This may not be accurate representation of their actual tax residency status.
Please check your US Resident status using the Substantial Presence Test. Also, if you have filed (or intend to file) for an I-140 immigration petition for alien worker or an I-485 petition for adjustment of status to permanent resident, you may not qualify as a US Non resident for tax purposes.
IRS Taxes Penalties and Impact to Immigration Case
Tax penalties assessed by the IRS for fraudulent tax return are very harsh. In many cases H1, L1 IT consultants may owe the IRS thousands of dollars in assessed tax dues, penalties and interest. The law gives IRS agents tremendous power to recover the tax money and they can put a lien on your assets including bank accounts in the US and abroad, house, property etc. In addition the tax payer may have to bear the cost of hiring a Tax Attorney or an Enrolled Agent to represent their case in front of the IRS.
During approval for the Green Card as well as Citizenship, having the tax status clear with the IRS is critical. Pending tax audits, penalties or tax dues, may negatively impact the immigration case as well as the potential to sponsor others. Having a good immigration lawyer and a reliable tax accountant may provide some peace of mind as you go through the immigration and tax matters together.
Keep in mind this column and the articles published here are only meant to provide you with high level information about taxes and in no way should you consider this as tax advice. Hopefully we have got you started thinking about protecting your hard earned money, and reduce your tax audit and immigration risks. Consult your tax advisor regarding your individual tax situation and your immigration attorney for any immigration related situation.
This Article provides only an overview to the complex Tax Laws. It is not exhaustive nor a substitute for independent tax advice provided by a Tax Accountant or a Tax Attorney familiar with your case.