MLP foreign partner US tax filing

[cipocip]

Hi, I am a foreign investor, interested to buy some mlp (master limited partnership) units through a broker. I know that a distribution tax is withheld. Filing US taxes is difficult for a foreigner since no tax software is set up to handle both 1040NR and schedule K-1. Also, I cannot open an online account with the IRS to check my returns, since I don’t have a US phone number for example. My question is, what are the legal consequences if I decide to invest in US mlp’s, but don’t file US federal and state tax returns?

 

[LdiJ]

Hi, I am a foreign investor, interested to buy some mlp (master limited partnership) units through a broker. I know that a distribution tax is withheld. Filing US taxes is difficult for a foreigner since no tax software is set up to handle both 1040NR and schedule K-1. Also, I cannot open an online account with the IRS to check my returns, since I don’t have a US phone number for example. My question is, what are the legal consequences if I decide to invest in US mlp’s, but don’t file US federal and state tax returns?

The partnership will be required to withhold 30% backup withholding. Since your tax might not be as high as 30% you would lose the amount of refund that you might be entitled to receive, if you don't file a US tax return. There are US tax firms that specialize in filing returns for foreign investors. A larger tax firm in your country might even be able to refer you to one, or have someone on staff that can handle the work.

 

[cipocip]

The partnership will be required to withhold 30% backup withholding. Since your tax might not be as high as 30% you would lose the amount of refund that you might be entitled to receive, if you don't file a US tax return. There are US tax firms that specialize in filing returns for foreign investors. A larger tax firm in your country might even be able to refer you to one, or have someone on staff that can handle the work.

It’s 37% actually, the highest bracket. The thing is that the witholding doesnt apply to capital gains on sale, which, unlike capital gains on regular stock, may have to be filed in the US, too. Also, I dont think that the withholding is directed to the states for state tax. Tax people in my country are clueless even when it comes to domestic stuff. I am just saying that buying US MLP’s is allowed by my broker, however it seems close to impossible to take care of the US filings, so I think I will stay away, which is sad (for regular stock, I don’t have to file). I really love their prospects and profit margins. Of course, I could just ignore everything, and hope that the IRS doesnt send bill collectors after me, in Europe. Which is what most foreign investors probably do, however I wished there was a way to be 100% legal.

 

[Just Blue]

@Taxing Matters

I tagged Taxing Matters ...He is a site vetted tax attorney.

 

[davew9128]

Filing US taxes is difficult for a foreigner since no consumer tax software is set up to handle both 1040NR and schedule K-1

Fixed it for you. I assure you, I file 1040NRs just fine for people with US sourced income from partnerships.

 

[cipocip]

Fixed it for you. I assure you, I file 1040NRs just fine for people with US sourced income from partnerships.

Yeah, ok, I am sure that businesses can hire a firm to do that, but for a common retail investor like myself, it’s just too much. Are you saying that Turbotax Business can do it for foreign retail investors? It’s software + online filing or bust. That’s why I wondered if there were any legal consequences for not filing in the US (I would still file in my home country), and just have the witholding.

 

[davew9128]

Yeah, ok, I am sure that businesses can hire a firm to do that, but for a common retail investor like myself, it’s just too much. Are you saying that Turbotax Business can do it for foreign retail investors? It’s software + online filing or bust. That’s why I wondered if there were any legal consequences for not filing in the US (I would still file in my home country), and just have the witholding.

I'm only correcting your comment that it isn't possible because the software you are using doesn't do it. I assure you, if you filed on paper by hand, it would work quite well.
The legal consequences might be a loss of any refund if you wait too long, and perhaps a steady stream of correspondence inquiring as to why you haven't filed.

 

[cipocip]

I'm only correcting your comment that it isn't possible because the software you are using doesn't do it. I assure you, if you filed on paper by hand, it would work quite well.
The legal consequences might be a loss of any refund if you wait too long, and perhaps a steady stream of correspondence inquiring as to why you haven't filed.

Well, I dont use any software for US taxes because all my investments are in regular US companies, that don’t require any filing on my part. However, I can check the capabilities of each software online, and it seems they can’t do what I want (they list what forms they can handle). I am not worried about me overpaying through the witholding. I am worried that the withholding only covers distributions, not capital gains and that as a foreigner, I cannot sign up on the IRS website to check if I owe anything (I have no US phone for example). Doing it by hand can lead to errors when you do it for the first time. Also, mlp’s require many state tax filings. Regular mail is problematic, can get lost, can take months to arrive. So, if the IRS and the states come to the conclusion that I owe something, I might never find out, and ten years from now I find that all the penalties and interests turned me into a poor man.

 

[Zigner]

Well, I dont use any software for US taxes because all my investments are in regular US companies, that don’t require any filing on my part. However, I can check the capabilities of each software online, and it seems they can’t do what I want (they list what forms they can handle). I am not worried about me overpaying through the witholding. I am worried that the withholding only covers distributions, not capital gains and that as a foreigner, I cannot sign up on the IRS website to check if I owe anything (I have no US phone for example). Doing it by hand can lead to errors when you do it for the first time. Also, mlp’s require many state tax filings. Regular mail is problematic, can get lost, can take months to arrive. So, if the IRS and the states come to the conclusion that I owe something, I might never find out, and ten years from now I find that all the penalties and interests turned me into a poor man.

Very true...so now you have some decisions to make. You could do it by hand. You could, instead, hire someone to do it. You could, instead, simply ignore it. You could, instead, dump your holdings and get out the game. Each option has it's pros and cons, so you will need to examine each carefully in order to make your choice.

 

[cipocip]

Very true...so now you have some decisions to make. You could do it by hand. You could, instead, hire someone to do it. You could, instead, simply ignore it. You could, instead, dump your holdings and get out the game. Each option has it's pros and cons, so you will need to examine each carefully in order to make your choice.

I decided to stay away from mlp’s. It’s too hard to file from abroad. If I’ll ever have 100 million, I’ll invest in them and pay a US firm to file for me. Only have have to find out who Nicolas Cage’s accountant firm was, to stay away from that one.

 

[davew9128]

I decided to stay away from mlp’s. It’s too hard to file from abroad. If I’ll ever have 100 million, I’ll invest in them and pay a US firm to file for me. Only have have to find out who Nicolas Cage’s accountant firm was, to stay away from that one.

MLP's can cost a lot even for US persons when it comes to time for US tax preparation. People get into these things without the vaguest concept of what they even are.

 

[cipocip]

MLP's can cost a lot even for US persons when it comes to time for US tax preparation. People get into these things without the vaguest concept of what they even are.

It’s not a matter of cost for me. For a US person, the filings would be easy and worth it. Yes, people see a ticker on robinhood and buy a fractional share for one dollar, and then realize one year later they have to spend 100 to get the premium filing software.

 

[LdiJ]

It’s not a matter of cost for me. For a US person, the filings would be easy and worth it. Yes, people see a ticker on robinhood and buy a fractional share for one dollar, and then realize one year later they have to spend 100 to get the premium filing software.

A tax professional who specializes in that sort of thing wouldn't charge you any more than they would charge a US citizen for filing the tax documents. There is no special software that a US citizen can access that you cannot. That sort of thing is the kind of thing that even US citizens generally need a professional to assist with. Its not normally something that they can do on their own. Its not impossible to do on their own, but 9.9 times out of ten its not wise to attempt on their own.

If someone actually bought something for 1 dollar, unless they sold it for 100 times that they wouldn't have to file a tax return anyway.

 

[cipocip]

Lets take Turbotax. It doesnt handle 1040NR! However, it has a partnership with Sprintax to do that. But Sprintax doesn't handle schedule K1. So, there is this problem. I also need the software to be able to submit everything online, because regular mail is not reliable, especially during covid. 1040NR instructions require submission by regular mail if I did it by hand. The other one is that I cannot get an online account with the IRS (lack of US phone on my name, thus they cannot verify my identity). They should make a law stating clearly that foreign retail investors dont have to file unless they want a reduction of the withholding.

 

[davew9128]

It’s not a matter of cost for me. For a US person, the filings would be easy and worth it. Yes, people see a ticker on robinhood and buy a fractional share for one dollar, and then realize one year later they have to spend 100 to get the premium filing software.

You seriously don't understand it. Buying into an MLP is buying into a publicly traded partnership, not a stock. The tax reporting associated with owning an interest in a partnership that is probably involved in oil & gas is a LOT more complicated than buying a share of common stock. Worlds apart in terms of reporting and difficulty.

So forgive me if I'm not buying into the whole woe is me, this isn't fair to a non-resident shtick. The dilemma is the same for a US person. There are publicly traded partnerships that take me an entire hour to properly enter into a US person's tax return.