Tax Return

Tax Return for Nonresident

If you’re a non-US resident, you may need to file a tax return if you meet any of these criteria:

• Throughout the year, you engage in a trade or business in the United States.
• You have U.S. income, and the tax on it wasn’t withheld at the source.
• You’re an agent or representative responsible for filing on behalf of someone who falls under the above categories.
• You are a fiduciary for a nonresident alien estate or trust.
• If you’re a resident or domestic fiduciary, or someone looking after a nonresident individual’s affairs, you might also need to file a tax return for them and ensure the taxes are paid.

After meeting your eligibility criteria, proper taxation with the IRS is a must.

What Is Zero Tax Return?

A Zero Tax Return, is a tax return that reports no income and no tax liability, even though the taxpayer might actually have wages, salary, or other forms of income. It’s a situation where the income is either not enough to trigger tax obligations, or the taxpayer qualifies for enough deductions and credits to offset any taxable income, bringing the liability to zero.

Note: Regardless of tax liability amount, filing a tax return within the required deadline is a must.

Example of Zero Tax Return

Meet Arshan Rushdi, a small business owner who found himself in an unusual situation in 2023. His business was operational but didn’t earn a single dollar. No sales, no transactions—no income to report. Without any bank statements or revenue for the year, Arshan technically had no tax liability.

But to stay in the IRS’s good books and maintain his business’s good standing, Arshan made the smart move of filing a zero tax return, officially declaring his income as zero. Since there were no deductions or credits to worry about, the process was way too simple.

Imagine skipping this step, though. Even with no income, failing to file could raise red flags with the IRS, possibly triggering penalties or scrutiny. It’s a small task with big benefits—don’t skip it, even if your liability is zero!

What Triggers Tax Obligations: Nexus, PE, and ECTI

Knowing when a U.S. tax obligation kicks in is a must for non-US business owners. Let’s discuss the three key terms to watch for that may indicate when taxes are due:

• Nexus: Think of Nexus as a link between your business and the US—a link strong enough to trigger taxes. If your business has any physical presence in the U.S., like employees, offices, or inventory, it may create Nexus. And once that link is in place, state or federal taxes could apply to income tied to those U.S.-based operations.
• Permanent Establishment (PE): Under international tax treaties, having a Permanent Establishment (PE) in the U.S.—such as an office, warehouse, or branch—means the IRS might consider your business taxable. If your business runs out of a fixed location here, any income earned through that setup can be subject to U.S. taxes.
• Effectively Connected Taxable Income (ECTI): If your income is linked to U.S.-based activities—selling products, providing services, or directly managing operations within the U.S.—it’s likely considered “effectively connected” and taxable. ECTI ensures that income from U.S. business activities is taxed appropriately by the IRS.

Understanding Nexus, PE, and ECTI can help you recognize situations where U.S. tax obligations might apply and take the right steps to manage them effectively.

Legal Basis of Zero Tax Filing Within the US Tax Law

Filing a zero-tax return is completely legal and can be done by strategically using U.S. tax laws to lower your taxable income to zero. Here are the legal bases for zero tax filing:

• IRS Guidelines (Publication 17): The IRS allows individuals and businesses to reduce taxable income through deductions (e.g., business expenses, depreciation). If deductions bring taxable income to zero, filing a zero-tax return is completely legal​.
• U.S. Code Section 6012: This section specifies that individuals or entities whose income is below the threshold (e.g., non-residents or those with deductions exceeding income) may not need to file or may legally file a zero-tax return.
• Estimated Tax Penalty Exemption: If you had no tax liability in the previous year, you may not face penalties for underpayment of estimated taxes, even with zero-tax filing​.
• Non-Resident Entities: Non-resident businesses can legally file zero-tax returns under U.S. tax treaties that prevent double taxation, further lowering liability.

Key Factors That Facilitate Zero Tax Return

So, we covered the legal basis of zero tax returns. Now, let’s talk about the components that facilitate this advantageous aspect for the taxpayers. Several factors can help businesses and individuals legally file a zero-tax return, reducing their taxable income to zero or as low as zero. Here are the key elements that facilitate this process:

• Business Deductions: Expenses like operational costs, employee salaries, rent, and utilities can be deducted from your revenue, minimizing taxable income.
• Depreciation and Amortization: By spreading out the cost of assets like equipment or property over time, businesses can reduce taxable income year by year.
• Tax Credits: Leveraging available tax credits, such as those for research and development (R&D) or clean energy, can offset taxes owed.
• US Tax Treaties: Non-resident businesses may benefit from U.S. tax treaties, which prevent double taxation and, in some cases, lower the taxable amount to zero.
• Choosing the Right Business Structure: LLCs, partnerships, or S-Corps offer different tax advantages, and selecting the right structure can help reduce or even eliminate tax liabilities.
• Zero or Minimal Income: If a business shows little to no profit in a year, especially after deductions and credits, it may result in a zero-tax filing.

Benefits of Filing a Zero Tax Return

There are several benefits to filing a zero income tax return. Some of those are briefly explained below:

Establishing a Record

Filing a zero income tax return can help establish a taxpayer’s compliance history with the IRS. This can be particularly important for individuals who might have minimal or no income in certain years but expect to have higher earnings in future years. By filing, they may also start the statute of limitations for audits.

Audit Protection

Filing a return starts the clock for the IRS’s statute of limitations on audits. If you don’t file, the IRS can perform an audit at any time.

Claiming Refunds

If any taxes were withheld from previous earnings, filing a zero return allows individuals to claim refunds for those withholdings. This is particularly relevant for those who have part-time or temporary jobs during the year.

Protecting Against Identity Theft

Filing a return—even with zero income—can help protect against identity theft by ensuring that no one else can fraudulently file using your Social Security number.

Zero Tax Filing Requirements

Even if you’re aiming for a zero-tax return, there are still certain filing requirements you must meet to stay compliant with U.S. tax laws. Take a look below to learn those and to stay compliant:

• Income Thresholds: Whether or not you need to file depends on your total income. The IRS sets specific income thresholds based on your filing status (single, married, etc.) and age. For the 2023 tax year, individuals with gross income below these thresholds are generally not required to file:
  
  • Single Filers: Up to $13,850
  • Heads of Household: Up to $20,800
  • Married Filing Jointly:
    
    • $27,700 or more (both spouses under 65)
    • $29,200 or more (one spouse under 65)

      These amounts are adjusted annually for inflation. It’s essential to verify the current thresholds for the applicable tax year.

       

• Business Entities: If you run a business, you may still need to file even if your business income results in no taxable income after deductions. Corporations, partnerships, and LLCs each have different filing requirements.
• Nonresident Businesses: Nonresident individuals or businesses must file if they generate U.S. income, but tax treaties may exempt certain incomes from taxation or filing, depending on the agreement between the U.S. and the foreign country.
• Deductions and Credits: If your deductions, such as business expenses or tax credits, bring your taxable income to zero, you still need to file a return to document these properly.
• Accurate Reporting: Ensure your all income, deductions, and credits are accurately reported through the required forms. Maintaining detailed records and documentation is crucial to substantiate your claims in case of an audit.
• Electronic Filing: Consider filing your tax return electronically. For the 2023 tax year, the IRS Free File program allows individuals and families with an Adjusted Gross Income (AGI) of $79,000 or less to use the service for free.

How to Achieve Zero Tax Filing

Achieving a zero-tax filing is a strategic process that involves careful planning and knowledge of the tax code. Let’s look at the following tips to understand the process better:

• Know Your Income Limits: Understand the IRS income thresholds. Those will help you to learn in which category you fit in.
• Maximize Deductions: Keep track of all deductible expenses related to your business. Common deductions include operating costs, travel, and equipment purchases. Make use of personal deductions such as the standard deduction or itemized deductions if they exceed the standard​.
• Utilize Tax Credits: There’s a saying, “Tax credits reduce your tax liability dollar-for-dollar.” And it’s kind of true if you know about tax credits. Some popular credits include:
  
  • Earned Income Tax Credit (EITC): Beneficial for low to moderate-income individuals and families.
  • Child Tax Credit: This credit provides significant savings for families with children.
• Select the Right Business Structure: The type of entity you choose (e.g., single or multi–member LLC) can influence how income is taxed. Some structures provide greater opportunities for deductions and credits.
• Claim Losses: If your business incurs losses, these can offset your taxable income. Be sure to document all losses properly to maximize this.
• Leverage U.S. Tax Treaties: If you’re a non-resident, review applicable tax treaties that may allow you to avoid U.S. taxes on certain types of income​.

The Role of U.S. Tax Treaties in Zero Tax Filing

US Tax treaties are agreements between the United States and other countries designed to prevent double taxation and clarify which country has taxing rights over various types of income. These treaties can provide significant benefits—through remarkable exemptions and reductions—especially for individuals earning income in the US while being residents of another country.

IRS Free Tax Filing

IRS Free Tax Filing allows eligible taxpayers to file their federal tax returns at no cost. Here’s a short briefing on IRS free-tax filing:

• Adjusted Gross Income (AGI): Your AGI must be less than $79,000.
• Age Requirement: You should be aged between 20-58.
• Active Military: If you are an active member of the military, you can also qualify with an AGI under $79,000.

Free State Filing: If eligible for free federal filing, you may also file a free state return in certain states, including Arkansas, Iowa, Idaho, Mississippi, Montana, North Dakota, Rhode Island, Vermont, Washington, and West Virginia.

How to File Zero Tax Return?

So, let’s talk about the procedure: How can you file your zero tax return? Well, take a look at the following steps to learn the whole process:

Confirm Eligibility

Understand your filing requirements. Ensure that you meet the criteria for filing a zero-income return. If your income is below the IRS threshold for your filing status and age, you may not be required to file but can still do so for record-keeping or to claim credits.

Gather Necessary Information

Ensure you have your Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN), and any other required personal details ready.
Previous Tax Returns: If applicable, have copies of your previous year’s tax returns for reference.

Accurate Information Entry

Complete all required fields in the required forms. When filling out your tax return, ensure that all fields marked with asterisks (*) are completed accurately. This includes your personal information as well as any other relevant information.

Indicate Zero Income Clearly

On the tax form, explicitly check the box indicating that your federal adjusted gross income is zero. This step is crucial to prevent misunderstandings about your filing status.

Review All Entries

Double-check all information entered on the form, including personal details and any credits you may be eligible for, such as the Earned Income Tax Credit (EITC) or Child Tax Credit (CTC), if applicable.

Use Appropriate Forms

Depending on your situation, use the appropriate tax form (e.g., Form 1040). If you have no income information, select “no” when prompted about W-2 or 1099 entries.

E-Filing Vs. Paper Filing

E-filing is generally faster and more efficient than mailing a paper return. If you e-file, ensure you receive a confirmation email after submission, which serves as proof of filing.

Keep Records

After submitting your return, print or screenshot the confirmation page. This includes your confirmation number, which can be used to track your return status later.

Monitor Processing Status

After filing, you can check the status of your return using the IRS “Where’s My Refund?” tool if you expect a refund. This tool updates you on the status of your refund and processing. Processing times can vary but typically range from 15 to 45 days after e-verification.

Do Not File Duplicate Returns

If you file electronically, do not send a paper copy to avoid processing delays.

Addressing Issues

If you receive any communication from the IRS regarding discrepancies or issues with your return, respond quickly to resolve them. Your response may involve providing additional documentation or clarification.

Avoid Frivolous Claims

Ensure that your zero-income claim is legitimate. The IRS actively rejects frivolous returns and may impose hefty penalties if they determine that you have taxable income but file a zero return.

Is There Any Zero Tax Filing Form?

In the United States, there is no “Zero Tax Return Filing Form,” but you can indicate zero income on a standard tax return, whether for an individual or a business.

What Could Cause the IRS to Reject Your Tax Return?

Filing a zero-tax return sounds simple, but mistakes can happen. The IRS can reject your return for several common reasons. Here’s what to watch out for:

• Mismatched Personal Information: Incorrect name, Social Security number (SSN), or birth date that doesn’t match IRS records can cause rejection. Always double-check this information.
• Previously Accepted Return: If someone else has already filed a return using the same SSN or Tax Identification Number (TIN), your return will be rejected. This can occur due to identity theft or if a spouse has already filed.
• Dependent Claimed on Another Return: Claiming a dependent who has already been claimed on someone else’s tax return will lead to rejection, often seen in divorced or separated parents.
• Dependent Files Own Return: If a dependent files their own return and claims themselves, it conflicts with your claim.
• Employer Identification Number (EIN) Mismatch: An incorrect EIN on your W-2 that doesn’t match IRS records can cause rejection. Ensure all employer information is accurate.

There are other mistakes that could happen and lead to the IRS rejection of your submitted forms; such as mismatched electronic signatures, unmatched Bank information, missing forms, incorrect filing status, etc.

What Can I Do if the IRS Rejects My Tax Return?

If your return is rejected, don’t panic! The IRS provides rejection codes indicating the issue. Here’s how to address it:

• Identify the Rejection Code: Check the notification from the IRS for rejection codes to pinpoint the problem.
• Make Corrections: Correct any personal information or dependent claims as needed.
• Resubmit Your Return: After corrections, e-file again at no extra cost or print and mail your corrected return.
• Contact the IRS if Necessary: If unsure about the rejection or believe there’s an error, contact the IRS for assistance.

By being aware of these common pitfalls and knowing how to address them, you can help ensure that your tax return is accepted without unnecessary delays.

FAQ

Q1: What Does a Zero Tax Return Mean?

Answer: A zero tax return is a tax filing submitted to the Internal Revenue Service (IRS) indicating that an individual or business had no taxable income for the year. This means that, after accounting for all income, deductions, and credits, the total tax liability amounts to zero.

Q2: Is It Legal to File Zero Tax Returns?

Answer: Absolutely. If you are eligible to file a zero tax return—based on various factors—then you can of course file one.

Q3: Is It Necessary to File a Zero Tax Return if I Did Not Earn Any Income?

Answer: If you’re not required to file a return, you may still want to file to claim refundable credits, establish tax records, or avoid issues with future filings.

Q4: What Are the Benefits of Filing a Zero Tax Return?

Answer: The benefits are:

• Claiming refundable credits like the Earned Income Tax Credit (EITC).
• Creating an official tax record with the IRS.
• Avoiding penalties or issues with missed filings in subsequent years.

Besides, regardless of tax liability, filing a return is a must.

Q5: What Is Zero Income Tax Return Form?

Answer: There is no such thing as a zero income tax return form. The taxpayers can submit their zero income tax return through standard forms—based on their entity reporting form or through an individual income tax return form.

Q6: What Is Cost Sharing Arrangement (CSA)?

Answer: A Cost Sharing Arrangement (CSA) is a collaborative agreement between related parties, typically within a corporate group, to share the costs and risks associated with developing intangible assets, such as intellectual property or technology.

Q7: What Is the IRS Free File?

Answer: IRS Free File is a fantastic program designed to help eligible taxpayers file their federal income tax returns at no cost. IRS Free File allows U.S. taxpayers with an adjusted gross income (AGI) of $79,000 or less to prepare and e-file their federal tax returns for free using commercial tax software.