Need help with NRA and Amended Return Issues

Jan 30, 2014
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Hi All,

I'm having a difficult time with a client and need some help- I hope you guys can come to my rescue.


I have a client who is a Spanish citizen but first time US tax filer as a permanent resident. I had her file on paper and apply for ITEN s for her two small children. That worked out just fine. She claimed child tax credit and dependents for them.

BUT- her non-resident alien husband, who she claimed as a dependent was rejected because his SSN does not match the name on record. He is a Dutch citizen and owns an architecture business in Mexico city. They now live in Los Angeles.

QUESTION #1 is this. She paid the revised increased total to the IRS- accepting their claim.

Now it is time to file CAL state taxes. Can she still claim the husband as a dependent? If she does so, Cal and Fed AGI will be different amounts. OR is she obligated to use the increased AGI on the Cal 540?

QUESTION #2- If her husband satisfies the substantial presence test MUST he be considered a permanent US resident? That would mean US taxes on his world wide income- the business in Mexico. It seems to me that if a non resident alien earns less than the exemption amount in US sourced income they don't need to file.

Like all taxpayers they want to limit their liability. As first time US tax payers they don't want to pay taxes on income sourced from Mexico, understandably.

QUESTION #3- Should I recommend that they pay the full greater amount of the Cal taxes? Is there a risk that the IRS could challenge the non-resident alien status of the husband and levy taxes on his income from Mexico?
Thanks for helping me with such a difficult series of questions!
Jun 30, 2014
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1. I would suggest following federal number of dependents, I am assuming your tax software will automatically bring in the federal AGI

2. See publication 519. If satisfies substantial presence test, he is treated as US resident and must file returns as US resident. subject to taxation on world-wide income. Could take Foreign tax credit for any taxes paid in MX or possibly Foreign Earned Income Exclusion on Form 2555. Now that he is taxed on world-wide income he may well easily earn over the exemption amount.

3. Aren't you the professional? It never hurts to overpay as far as interest & penalties go. I suppose it is possible, however IRS audit rates are around 0.8% I believe and as funding continues to be cut audit rates are presumed to go even lower.

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