Tax & Accounting Blog

Who Is a U.S. Citizen and Why It Matters – Part 1

1099, ONESOURCE, Tax Information Reporting, W-8 & W-9 Foreign Reporting, Withholding Management September 14, 2012

When it comes to U.S. income tax, not all individual income recipients are treated alike. The Internal Revenue Code and IRS regulations have special rules for determining when foreign national individuals are resident aliens and taxed like U.S. citizens and rules for taxing the income of foreign nationals when they are nonresident aliens. As a result, the IRS has implemented special withholding certificates and information reporting rules for payments made to these individuals.

Payroll and accounts payable administrators along with tax advisors and return preparers face many new challenges today because the IRS has increased enforcement of the special rules that apply to payments to and tax returns for nonresident aliens. Payroll administrators must deal with special wage withholding and Form W-4 rules, conditions required for exemption from Social Security and Medicare withholding tied to an employee’s U.S. immigration status and tax status, and forms and procedures for withholding exceptions under an income tax treaty. Accounts payable administrators must apply different withholding and information reporting rules for payments to nonresident alien income recipients than those that apply to U.S. citizens and resident aliens. In addition, new legislation is adding more requirements for accounts payable administrators. The new Foreign Account Tax Compliance Act (FATCA) procedures, while not requiring FATCA withholding on payments to individuals, will have an impact on the forms and presumptions in the absence of documentation that accounts payable administrators must follow to avoid liability for underwithholding.

Tax advisors and return preparers must know whether their client is a U.S. citizen or not in order to explain and apply the correct tax, disclosure, and treaty rules and prepare a correct tax return. When a client is not a U.S. citizen taxpayer, the task can be complex. For example, a foreign national might be a resident alien and taxed like a U.S. citizen, a nonresident alien with different income and tax return requirements, a dual-status taxpayer – a part-year nonresident alien and part-year resident alien – or a resident of a tax-treaty country who might be able to elect treaty exemptions from tax. The income tax rules and tax return procedures vary with the client’s income tax status.

This series focuses on U.S. citizens and the tax and tax-related rules that apply to them as well as the rules that determine who is a U.S. citizen.