Is filing taxes necesssary for a non-resident alien working remotely from abroad

Question

This question is for a cousin of mine, who is a citizen of the UAE. In January 2019, she went to the US (Washington State) for her master's studies. She has a US SSN which she got for some on-campus employment in her first term. Her last semester (fall 2020) was virtual, and she returned to the UAE in late 2020 once some of the COVID restrictions were lifted.

Before leaving the US, she had applied for her OPT work authorization and had secured two remote jobs. Since then (from January 2021 till now), she has been working both jobs remotely from the UAE, without mentioning anything to her employers or her school, who both presumably have her school address (the one she had when she applied for the jobs) on file. In January 2022, she even extended her OPT authorization, having the USCIS send the new card to a friend who forwarded it to her in the UAE. The I-9 verification consisted of just sending a picture of the EAD to the HR people at either job.

She is not required to pay medicare taxes (she wouldn't have been required even if in the US, since the first five years on a student visa are exempt), and she also marks her W-4 every year saying she's not required to pay US tax on her income. This is all done through the payroll portal, and her employers have not withheld any federal tax on her income so far, presumably due to the W-4s.

But they do issue W-2 at year-end, and presumably her bosses still don't know she's not in the country. I don't think she needs to pay US taxes, being a non-resident alien working from outside the US, but does she need to file anything with the IRS to certify this? Her OPT runs out this December, and she's not looking to continue these jobs or go back to the US immediately after. I don't know if the UAE has any treaty, but even if so, it doesn't matter since it has no income tax. She's mostly worried that the IRS thinks she's in the US and will come after her later if she returns to the US at any time.

She has not filed taxes for 2021 or 2022. If she does need to file anything, what form should she file and how? The 1040-NR has a box for W-2s, but she somehow needs to put somewhere that all her W-2 income is exempt from US tax since she's not in the US. How/where does one do this? Would love to have some pointers, many thanks in advance!

Answer 1

From tax perspective - no, she doesn't have to pay taxes in the US. Without filing a tax return claiming her non-resident status, the IRS (and the State) will indeed think she is a US resident and is in the US and will assess penalties or fines for underpayment and not filing the returns. The statute of limitations may prevent her from challenging this after 3 years, but will not start for the IRS for collections while she's abroad.

How to fill the form is tricky, since it's not designed for such a situation. I suggest hire a professional to handle this, since the IRS may reject a claim for refund given without proper statements and accompanying documentation, and trigger a full audit.

I would strongly advise to discuss this with an immigration attorney if she ever wants to receive any immigration benefit in the US ever again. It might be worth checking with an attorney even before applying for a tourist visa. From what you're describing, by extending the OPT she must have lied to the USCIS (claiming she's in the US when she wasn't), and a question about obtaining fraudulent immigration benefits is on almost any immigration-related form in the US.

She might not be liable for income taxes in UAE, but she should probably check with a local professional what other liabilities there might be (social benefits, self-employment responsibilities, what's not).

On top of all that she has put her employers and the school in a bad position since they've clearly handled this whole thing badly. On top of violating US laws on tax withholding for non-US residents and incorrect reporting of the OPT by the school, they have also probably violated the UAE labor laws by having an employee there without proper registration as an employer. On the UAE side, it may end up flying under the radar, but in the US it will eventually come to light one way or another. For example, the IRS may come back to the employer to ask why they decided not to have any withholdings for the employee when she clearly (per the IRS) owes Federal taxes. The W4 will come up (note the jurat), and there will be mess. Alternatively, the IRS (and the State) may start looking into the discrepancy between the W2 and the NR return, which will bring the I-9 to light. Mess will ensue, again.