During the past six months, we have received a number of inquiries from both Bermuda employers and Bermuda nationals as to their liability to United States income tax.

Our response, which is usually "yes,'' is initially met with disbelief, followed by the question "how will they know?'' This month we will explore this issue in depth.

Can A Bermuda National Have A US Tax Filing Requirement? There are several instances in which a Bermuda national may have to file a United States income tax return and pay taxes. The reasons can range from working in the United States for your Bermuda employer, to receiving rental income from a vacation home you own in the United States, to receiving pensions, annuities or investment income.

Do You Travel To The United States On Business? If your Bermuda employer sends you to the United States on business, and you perform personal services such as visiting clients, meeting with co-workers at corporate headquarters, attend a seminar or convention, or are purchasing goods for your business in Bermuda, you are deemed to be engaged in a trade or business in the United States.

If your annual compensation from these personal services is more than $3,000, the entire amount is subject to United States income tax. Your income attributable to working in the United States is determined by using a simple formula of days worked in the United States over days worked everywhere, times your compensation. Your compensation includes your salary, bonus, company contributions to a retirement plan, stock options, etc.

For example, if Jeff Jones was employed by a local insurance company and was sent to the United States on business for 20 days during 1997, Jeff would compute his US source income as follows. 20 days worked in the United States over 240 days worked everywhere during the year, times Jeff's compensation of $96,000, equals $8,000.

Jeff is required to file a Form 1040NR, report the $8,000 as income, is allowed a personal exemption of $2,650, have taxable income of $5,350, and owe a United States income tax of $800. Depending on circumstances, the return must be filed by June 15, 1998.

What Happens if The Tax return Is Not Filed? The United States imposes both civil and criminal penalties on an individual for failure to file a tax return. The interest and penalties range from a 9 percent interest for failure to make estimated payments, to a 5 percent a month penalty for failure to file a tax return to a 1 percent to 2 percent per month additional interest and penalty. If the $800 went unpaid for 10 years, Jeff would probably accumulate $20,000 in penalties and interest. In selective cases, criminal prosecution is possible.

How Will They Know? Our most frequently asked question. Each time you leave Bermuda to go to the United States, you pass through United States Immigration. Your name and passport information is entered into a computer system which can be accessed by numerous agencies, including the Internal Revenue Service. How do they know how long you were there? When you return to Bermuda, you pass through local immigration. Under the information sharing agreement between the United States and Bermuda, we understand that such information is available to the Internal Revenue Service.

The more likely instance is upon examination of a United States entity with whom your Bermuda employer does business. When the Internal Revenue Service audits a United States entity that is engaged in international business, they usually closely review payments to foreign entities to ascertain whether income taxes should have been withheld, They then ask about foreign visitors, who pays them, etc, and backtrack from there.

Do Business People From Other Countries Have This Problem? No. The United States has entered into income tax treaties with most of its trading partners which contain a clause allowing a foreign business person to work as many as 183 days in the United Sates each year without incurring income tax, provided that they are employed by a foreign entity and their remuneration is not charged back to a United States entity. However, the tax treaty between the United States and Bermuda does not contain such a clause.

Rental Income A common form of investment in the United States is the ownership of a condominium or apartment in a vacation area such as Florida. Rental income which is received by a Bermudian national is subject to a 30 percent withholding tax. Because most rental payments first go to a United States rental management agent, this tax is usually not imposed. However, when the internal Revenue Service discovers that the withholding has not been made, they impose a 100 percent penalty on the withholding agent.

This tax can be wholly negated if you file a United States income tax return.

An option exists that will allow you to make an election to treat this income as effectively connected with a United States trade or business. This election will allow you to take as a deduction against the rental income, mortgage interest, real estate taxes, commissions, rental management bees, repairs.

insurance, depreciation, etc. it is generally better to make this election than to have the gross income subject to a 30 percent flat tax.

The tax advice given in this column is, by necessity, general in nature. You should check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances. James Paul Sabo, CPA, is the President of Expatriate Tax Services, P.O. Box 617, Bernardsville, NJ, and is associated with GulfStream Financial Ltd. in Bermuda.

BUSINESS BUC