By Samuel Handwerger
April 13, 2018 at 5:00 am ET
Could over a million foreign students studying at U.S. universities and colleges be wrong and in line for Internal Revenue Service penalties for failing to file Form 8843 on an annual basis?
Recent experience at the Volunteer Income Tax Assistance site at the University of Maryland’s Robert H. Smith School of Business suggests that might be the case.
Night and after night, we volunteers see 10 or more foreign students studying under an F-1 student visa. They come for help filing their non-resident tax returns to report part of their stipend and/or paid research work.
Our volunteers have been trained to inform all such students visiting the VITA program of their need to file Form 8843 every year they are here in the United States, under F-1 visa status, even if they don’t have an income tax requirement. Few, if any, students have heard of this form, let alone have filed one before. Yet, it is required.
The question they often ask after learning about the form is, “What will happen since I have not filed this in the past?” We did some research. At first, it seemed that by not filing the form the students were opening themselves up to having to pay tax as a U.S. resident.
OK, some background.
Under the Internal Revenue Code, students with F-1 visa status do not assume U.S. residency for tax purposes for the first five calendar years they are here in the United States. This is an exception to the general rule of residency based on being present in the States for a certain number of days per year — a somewhat complex formula known as the Substantial Presence Test.
Almost all foreign visitors to the United States must count their days here and when they meet the SPT test they have to file tax returns here in the country as a U.S. resident. This is important because as a U.S. resident for tax purposes you have to report and pay tax on your worldwide income, as regular Americans do. Additionally for these F-1 visa status students filing as a resident, they could lose tax treaty benefits that exist between the United States and their home country.
These results can often be draconian, so the benefit of not counting days present as a student in the United States can be an important luxury while studying. The IRC allows for this statutory exception but requires the student to file a statement annually (Form 8843) showing the years of exception, acting as a sort of calendar that keeps track of when the exception is used up.
Asked repeatedly what would happen if the annual statements weren’t filed, our student volunteers did some quick internet research. They found several websites that suggest that by not filing Form 8843, foreign students would be forbidden from using the student exception to the counting-of-days rule.
We decided to dig a bit deeper, and we found some irregularities.
The first clue that something was amiss was that the IRS instructions mention penalties for non-filing Form 8843, but doesn’t specifically mention penalties for students not filing the form. Well, IRS forms are legally limited in their authority by nature so the absence of a mention there wasn’t entirely dispositive.
So we moved on to IRS regulations and that’s where we found something interesting.
While the regulations do require students to file the form annually, they specifically exclude them from any penalty whatsoever for failure to file. That proved the deliberate oversight in the IRS instructions to the form, but interestingly, and true to the IRS way of doing things, they do not tell the reader that there is no penalty for F-1 student failures to file. The reader has to deduce it on their own.
Further, the statute excluding the days while a student from the SPT still applies even without filing this form.
And as for those websites that vouched that there are tax consequences for not filing the form? A good example of misinformation on the internet.
So where does this leave the foreign F-1 status student? Not so fast to ignore the form, that’s for sure.
Immigration authorities have it within their grasp to deny applications by F-1 students appealing for more permanent status in the United States. If the student has not been compliant with our tax law while here, immigration might reject these requests. Thus, you can’t ignore filing the form, but at least your only worry is immigration — not the IRS. This also brings us to conclude that late filings should be made for any delinquent years, again now armed with the knowledge that no repercussions ensue with the IRS who handles these.
Samuel Handwerger, CPA, is a full-time lecturer in the Accounting and Information Assurance Department at the University of Maryland’s Robert H. Smith School of Business.
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