In Rev. Proc. 2020-20, the Internal Revenue Service (IRS) provided relief to foreign citizens who were caught out by travel disruptions occasioned by the corona virus, and as a result, remained in the United States for too many days thereby causing them to be subject to US income tax. Under the Revenue Procedure, the IRS will presume that up to 60 consecutive calendar days of the individual’s US physical presence was due to COVID-19 travel disruptions. This 60-day period is referred to as the “COVID-19 Emergency Period”. The 60 consecutive calendar days are selected by the individual so long as the period starts on or after February 1, 2020 and ends on or before April 1, 2020; in addition, the individual had to be physically present in the United States on each day in the chosen period.
In essence, under the Revenue Procedure the IRS will treat the COVID-19 emergency as a medical condition preventing the individual from departing the US. Absent the relief of this “COVID-19 Medical Condition Travel Exception”, some foreign citizens in the US who cannot return home due to the corona virus may be classified as US resident aliens under the Substantial Presence Test, discussed below. The prolonged US stay may cause others to lose the ability to claim certain tax treaty benefits. Many US income tax treaties exempt income from employment within the US if certain requirements are satisfied, including the requirement that the individual be present in the US for no more than 183 days in any 12 month period that begins or ends in the relevant tax year.
The IRS will not count the 60 days in the COVID-19 Emergency Period for purposes of determining (i) the individual’s status as a US income tax “resident” under the Substantial Presence Test and (ii) whether the individual qualifies for the tax treaty benefits for income earned from personal services carried out in the US.
What is the “Substantial Presence Test”?
The criteria often cited for meeting the Substantial Presence Test is being physically present in the US for more than 182 days in a given calendar year. This is very misleading, as the actual calculation used by the IRS is more complicated and looks at US residency over a three-year period. An individual has a “substantial presence” in the US for a particular calendar year (e.g., the “current” calendar year) if the sum of the following equals 183 days or more:
1) The number of days they were present in the US during the current calendar year;
2) One-third the number of days they were present in the US during the previous calendar year;
3) One-sixth the number of days they were present in the US during the second previous calendar year;
In addition, the individual must have spent at least 31 days in the United States in the current calendar year.
This means that a person who is physically present in the US for 121 days each year, for three consecutive years, would fall just short of the substantial presence criteria (calculation would be as follows: 121 days + 40.33 days + 20.16 days = 181.49 days). Any more than that means the individual risks being classified as a US person, or more specifically what is called a “resident alien”, taxable on his worldwide income in the same manner as a US citizen.
With the COVID-19 pandemic, an individual who may have otherwise been carefully parsing out his days of physical presence in the US so as not to trip the Substantial Presence Test wire, may have been caught out by travel restrictions and lock-downs. This individual can likely find relief with the Revenue Procedure.
Days of Presence in US
Some individuals are unsure of the days spent in the US. No problem! You can now view the dates that you have entered and exited the US on the U.S. Customs and Border Protection I-94 website. When travelers visit the I-94 webpage they can retrieve their I-94 arrival/departure record number and five-year travel history by entering the required name, date of birth, and passport information. Just follow the simple steps to track your entrance to and exit from the US.
Who is Eligible for this Relief?
Described below are the requirements for relief provided in Rev. Proc. 2020-20. An eligible Individual is any individual (1) who was not a US resident at the close of the 2019 tax year (2) who is not a lawful permanent resident (i.e., obtains a green card) at any point in 2020, (3) who is present in the US (without regard to the revenue procedure) on each of the days of the individual’s COVID-19 Emergency Period, and (4) who does not become a US resident in 2020 due to days of presence in the US outside of the individual’s COVID-19 Emergency Period. Thus, it is imperative that individuals be particularly careful with days of US presence once the pandemic is under control and travel restrictions are lifted.
How to Obtain Relief
Individuals eligible for the relief announced in the Revenue Procedure who have a requirement to file a Form 1040-NR, U.S. Nonresident Alien Income Tax Return for the 2020 tax year, must attach Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, claiming the COVID-19 medical condition travel exception. If the individual is not required to file a 2020 Form 1040-NR but is eligible for the relief, the individual need not file Form 8843, but he or she should retain all relevant records to support reliance on the IRS revenue procedure. Additionally, they must be prepared to produce these records and complete a Form 8843 if requested by the IRS.
If the individual is claiming an exemption from withholding on income from dependent personal services under the terms of a US income tax treaty he or she should certify that the income is exempt by providing the employer or other withholding agent a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual.
Individuals who qualify for other exceptions to the Substantial Presence Test do not need to claim the COVID-19 Medical Condition Travel Exception in order to claim other available exceptions. Furthermore, the IRS makes clear that individuals may choose to claim all exceptions for which they are eligible. For example, an alien individual who would be a US resident due to days spent in the US even after excluding eligible days under the COVID-19 Medical Condition Travel Exception may still be considered a nonresident alien if the individual is eligible to claim the so-called “closer connection exception” provided under relevant Treasury Regulations, or is eligible to use a US income tax treaty “tie-breaker” provision. Additional tax filings will likely be necessary in either case.
What about State Income Taxes?
Foreign persons whose travel plans were disrupted resulting in prolonged days of US presence should consult with a tax professional to determine the best course of action. Remember the relief provided in the Revenue Procedure applies at the federal level only. The individual may still have State income tax issues given the prolonged presence in that State. Don’t engage in guess work. Get the assistance of a qualified tax professional. If you need help in claiming the special relief or other exceptions to US resident status, let me know.
Posted April 30, 2020
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