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IRS Provides COVID-19 Emergency Relief to NRAs Stranded in the United States

Posted on June 8, 2020
Andrea Darling de Cortes
Andrea Darling de Cortes
William M. Sharp Sr.
William M. Sharp Sr.
Alan W. Granwell
Alan W. Granwell
Alexander R. Olama
Alexander R. Olama

Alan W. Granwell is with Holland & Knight LLP in Washington. William M. Sharp Sr. is with Holland & Knight in Atlanta; Tampa, Florida; and San Francisco. Andrea Darling de Cortes and Alexander R. Olama are with Holland & Knight in Tampa.

In this article, the authors examine recently issued guidance on tax relief for nonresident aliens stranded in the United States because of the coronavirus outbreak.

The IRS recently published helpful relief (Rev. Proc. 2020-20, 2020-20 IRB 801) for nonresident aliens stranded in the United States as a result of the global outbreak of the coronavirus.

The new COVID-19 medical condition travel exception will enable qualifying NRAs to benefit from an up-to-60-day exemption from U.S. physical presence for computing the Internal Revenue Code’s substantial presence test.

The new guidance, in combination with current law and treaty exclusions and exceptions, should be useful in avoiding U.S. income tax resident classification. The IRS guidance will not apply for state taxation purposes unless adopted by the states.

On May 28, 2020 (after this article had been written), the IRS issued five FAQs. These FAQs are summarized in a postscript and are also discussed in the text where applicable.

Introduction

For U.S. federal income tax purposes, individuals who are not U.S. citizens are classified either as NRAs or resident aliens. A U.S. citizen, as well as a resident alien, is taxable on worldwide income and subject to expansive filing and reporting obligations. An NRA generally is taxable only on U.S.-source income and subject to limited filing and reporting obligations.

NRAs who are stranded in the United States as a result of the COVID-19 emergency are concerned that they could be classified as U.S. income tax residents under the substantial presence test. Under that test, an alien individual would be classified as a resident alien in the tested calendar year (2020) if: (1) she was present in the United States for at least 31 days during the tested calendar year; and (2) the sum of (a) the number of days present in the tested calendar year, (b) one-third of the number of days present in the preceding calendar year (2019), and (c) one-sixth of the number of days present in the second preceding calendar year (2018) is at least 183 days.

Accordingly, U.S. residency status would be presumptively triggered (absent an IRC or a treaty tiebreaker exception) if an NRA were to spend at least 183 days in the United States in 2020 or an average of at least 122 days per calendar year over a three-year period (2018 to 2020).

Eligible NRAs can exclude up to a 60-day period of U.S. physical presence (beginning on or after February 1, 2020, and on or before April 1, 2020) for substantial presence purposes.

Other exceptions to the substantial presence test under the IRC or any applicable treaty may be used by an eligible NRA in combination with, or exclusive of, the new relief to avoid U.S. income tax residency classification. Those include the exempt individual exception, the medical condition exception, the 182-day-or-less closer connection exception, and treaty tiebreaker rules.

This article explains the new exception, its rationale, presumptions for application, and its interaction with other IRC and treaty exceptions.

The Medical Condition Travel Exception

In plain language, the new exception applies to an eligible individual who intended to leave the United States but could not because of COVID-19 travel disruptions. If those conditions are satisfied, for computing substantial presence, the individual may exclude up to 60 consecutive days (starting on or after February 1, 2020, and on or before April 1, 2020, when she was continuously physically present in the United States).

The COVID-19 emergency will be considered a medical condition under the medical condition exception that prevented the eligible individual from leaving the United States on each day during her COVID-19 emergency period — that is, her 60-day exemption period — and will not be treated as a preexisting medical condition under the medical condition exception.

For applying the COVID-19 medical condition travel exception, a series of presumptions apply regarding an NRA’s intent and inability to leave the United States:

  • an eligible individual will be presumed to have intended to leave the United States on any day during her 60-day period unless she has applied for, or otherwise has taken steps, to become a green card holder;1

  • an eligible individual will be presumed unable to leave the United States for substantial presence purposes on any day during her 60-day COVID-19 emergency period;

  • an individual claiming tax treaty benefits from employment or dependent services performed in the United States will be presumed unable to leave the United States on any day during her 60-day exemption period.

Features

Scope of Medical Condition Travel Exception

The exception applies solely for substantial presence and for treaty benefits for income from employment or the performance of other dependent services in the United States. It does not apply for other purposes, such as for addressing capital gains of NRAs present in the United States for 183 days or more. That rule thus could apply to an exempt individual.

Presence in the United States

In computing days of presence in the United States, an alien is considered present if she is physically present in the United States at any time during the day; thus, partial days are counted. Importantly, one counts the day the alien arrives and the day she departs, but several days are excluded: (1) any day that an individual is present in the United States as an exempt individual; (2) any day that an individual is prevented from leaving the United States because of a medical condition that arose while she was present in the United States; (3) any day that an individual is in transit between two points outside the United States; and (4) any day on which a regular commuter residing in Canada or Mexico commutes to and from employment in the United States. The United States includes the states and the District of Columbia, and U.S. territorial waters (12 nautical miles). It does not include Puerto Rico, U.S. possessions, or airspace over the United States. Thus, if an alien were to fly over the United States but not land, the time and day would not be counted. That is particularly important for NRAs who may regularly cruise between the United States and its possessions or between the United States and Caribbean ports.

Eligible Individual

To claim the COVID-19 medical condition travel exception, an individual must be an eligible individual — a key term that contains tricky aspects. First, an individual is an eligible individual if she: (1) was not a U.S. income tax resident under the IRC at the close of the 2019 tax year; (2) is not a lawful permanent resident at any point in 2020; (3) is continuously present in the United States on each of the days of her COVID-19 emergency period; and (4) does not become a U.S. income tax resident in 2020 because of days of presence in the United States, not taking into account her COVID-19 emergency period.

Accordingly, if an alien were to have used the treaty tiebreaker rule in 2019 or in 2020, or were to become a green card holder, she would be disqualified from using the exception. Further, the alien must be continuously present during the up-to-60-day period; if an alien were to leave during that period, she would be disqualified. Finally, an alien cannot be a U.S. income tax resident after reduction by the 60-day period.

Emergency Period and Travel Disruptions

The exception is up to 60 continuous days during a specified period. Questions have been raised whether the period might be extended. We believe the IRS and Treasury are monitoring the situation and could extend the period if warranted.

Travel disruptions are broadly defined and apply irrespective of whether an individual was infected with the COVID-19 virus. They include government travel restrictions; canceled flights and other transportation disruptions; shelter-in-place orders; quarantines; border closures; and even if able to travel, concerns about unsafe travel because of recommendations to implement social distancing and limit exposure to public spaces.

In comparison, the medical condition exception is much more narrowly defined. Under that exception, it is unclear whether the medical condition is required to be the taxpayer’s or would include a medical condition of a dependent or someone who requires the taxpayer’s care. Further clarification on that topic by the IRS and Treasury would be useful.

Claiming the Medical Condition Travel Exception

In brief, NRAs otherwise required to file a U.S. income tax return in 2020 must attach Form 8843 to their timely filed returns. It is unnecessary to attach a physician’s statement to claim the COVID-19 medical condition travel exception. NRAs not otherwise required to file a U.S. income tax return are not required to file Form 8843 to qualify for the new exception, although they should retain records to later confirm their eligibility if requested. The IRS in Q5 has provided guidance as to the types of documentary evidence to support eligibility for the COVID-19 medical condition travel exception (see Postscript).

Even though NRAs not otherwise required to file U.S. income tax returns are excused from filing Form 8843, they may be well advised in appropriate cases to consider timely filing a Form 1040NR, “U.S. Nonresident Alien Income Tax Return,” along with Form 8843 to commence the running of the applicable three-year statute of limitations prescribed by section 6501(a). As stated in section 6501(c)(3), the failure to file an income tax return enables the IRS to claim that the relevant year is open for retroactive examination in perpetuity because the failure to file a return does not initiate the running of the applicable statute of limitations.2 Even though NRAs may have no reportable U.S.-source income and otherwise would be providing the IRS with only the information specified in Schedule OI, “Other Information,” of Form 1040NR, including the days spent over the three-year substantial presence period and the dates of entry and exit during the current year, the return should include Form 8843 to constitute a complete filing for statute of limitations purposes.

To claim a treaty benefit for services income, if not otherwise previously provided, file Form 8233, “Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual,” and on line 14 insert “COVID-19 medical condition travel exception” and specify the individual’s up to 60-day exemption period.

Interaction of Exceptions

An eligible individual may claim the COVID-19 medical travel exception in addition to, or instead of, other exceptions from the substantial presence test for which he is otherwise eligible. Further, other IRC and treaty exceptions also apply, including:

  • Exempt Individuals. Any day on which an NRA individual is an exempt individual3 is not counted for the substantial presence test. The immediate family of an exempt individual includes the individual’s spouse and unmarried children (whether by blood or adoption), provided the spouse’s or unmarried children’s visa status is derived from, and dependent on, the exempt individual’s visa classification.

  • Medical Condition Exception. An NRA does not count as a day of physical presence in the United States any day during which he qualifies for the medical condition exception. An alien individual is not treated as present in the United States on days when he intended to leave the United States but could not because of a medical condition that arose while in the United States. A medical condition will not be considered to arise while the individual is present in the United States if the condition or problem existed before the individual’s arrival in the United States and the individual was aware of the condition or problem. Further, under tax treaties, days spent in the United States because of an illness that prevents an individual from timely leaving the country are not taken into account in determining the availability of treaty benefits for income from dependent personal services performed in the United States.

Interestingly, Q1 and Q5 (summarized in the Postscript) detail different opportunities to claim the medical condition exception. First, one can claim the 30-day medical condition exception specified in Q1, which enables an NRA who otherwise qualifies for the medical condition exception to exclude 30 consecutive days without providing a physician’s statement, but subject to maintaining and retaining documentation as specified in Q2 and completing Form 8843 as specified in Q3. Second, Q4 provides that, in addition, an NRA also can claim the medical condition exception and supply the physician’s statement, and, in addition claim the COVID-19 medical condition travel exception, again without the need to provide a physician’s statement, but subject to retaining the required documentation specified in Q2 (see Q5).

  • The Closer Connection Test. Even if an alien were to trigger the substantial presence test, he still could be treated as an NRA if he: (1) was present in the United States less than 183 days in the current tax year; (2) during the year had a closer connection4 to a foreign country where he has a tax home5 than to the United States; (3) maintained a tax home in that foreign country during the entire year; (4) does not have an application for adjustment of status pending at any time in the current year and has not taken any steps to apply for lawful permanent resident status; and (5) timely notifies the IRS on Form 8840, “Closer Connection Exception Statement for Aliens,” that he qualifies for the exception.

  • The Treaty Tiebreaker Test. An alien may be a dual resident; tax treaties generally contain a four-part tiebreaker provision to determine residency for treaty purposes that looks to permanent home, center of vital interests, habitual abode, and nationality.6 If an alien is treated as a treaty resident, he can be treated as a treaty-benefited NRA for reducing his U.S. income tax liability. However, for IRC purposes, other than for computing his U.S. income tax liability, the individual is treated as a U.S. resident, which could disqualify him from using the COVID-19 medical condition exception.

Thus, for example, an alien who would otherwise be a U.S. income resident as a result of days spent in the United States (say, 240 days) could exclude eligible days under the COVID-19 medical condition travel exception. Because she now would be deemed to have spent only 180 days in the United States, she could use the closer connection test to avoid U.S. residency.

Conclusion

The IRS and Treasury should be commended for their prompt issuance of guidance. Although the relief is helpful, taxpayers seeking to avail themselves of it must fully understand its scope and conditions, because there are multiple planning opportunities as well as traps for the unwary in the interaction of the applicable provisions.

Postscript — FAQs

The FAQs provide useful guidance as to the implementation of the COVID-19 medical condition travel exception as well as the medical condition exception.

Q1. Modification as to Physician’s Statement to Claim Medical Condition Exception. Form 8843 requires a physician’s statement (line 18) in order for an NRA to claim the medical condition exception. Due to the COVID-19 emergency, it may be difficult to obtain a signed physician statement attesting to the NRA’s individual’s inability to leave due to a medical condition. According to this FAQ, an NRA who is eligible and fulfills the requirements to claim the medical condition exception may file Form 8843 without a physician’s statement to cover a single period of up to 30 consecutive days in calendar year 2020. Thus, this FAQ does not modify the eligibility requirements to claim the medical condition exception; it only modifies the procedures for claiming the exception on Part V of Form 8843 and only with respect to a single period of up to 30 consecutive calendar days of presence in the United States in calendar year 2020. Those days are not counted for purposes of the substantial presence test. Most importantly, the exemption from the Form 8843 requirement to obtain a physician’s statement for a 30-day medical condition exception can be claimed in addition to the relief provided in Rev. Proc. 2020-20, which, as noted in the article, does not require a physician’s statement.

Q2. Documentary Evidence to Support NRA’s Claim for the 30-Day Medical Condition Exception. In lieu of a physician’s statement, an NRA claiming the 30-day medical condition exception (Q1 above) should retain documentary evidence that substantiates the NRA’s medical condition, the inability to leave due to the medical condition, and the period of the medical condition, such as (i) evidence of consultations with a healthcare provider (for example, a phone bill or a text message or email from the healthcare provider), (ii) receipts related to healthcare purchases, (iii) evidence of canceled or changed travel reservations, or (iv) official medical records or written healthcare correspondence that the individual received (for example, automated responses instructing an individual to self-isolate). These documents should not be submitted with the Form 8843, but the NRA claiming the 30-day medical condition exception should be prepared to produce these records if requested by the IRS.

Q3. How NRAs Only Claiming the 30-Day Medical Condition Exception Should Complete Form 8843. This FAQ provides guidance on completing the form under this circumstance — namely, the NRA should write “30-Day Medical Condition” and then describe in detail the 30-day medical condition that prevented the NRA from leaving the United States.

Q4. How NRAs Claiming Multiple Medical Condition Exceptions Should Complete Form 8843. This FAQ provides guidance as to how an NRA can claim the medical condition exception and the COVID-19 medical condition travel exception. Note: It is possible to claim multiple medical condition exemptions: (1) the medical condition exception with a physician’s statement; (2) the 30-day medical condition exception without a physician’s statement; and (3) the COVID-19 medical condition travel exception without a physician’s statement.

Q5. How to Document the COVID-19 Medical Condition Travel Exception. The FAQ suggests retaining evidence of an eligible individual’s U.S. presence during the NRA’s up to 60-day COVID-19 emergency period such as Customs and Border Protection (CBP) Form I-94 (now in digital form) reflecting the NRA’s entries in the U.S. (generally by accessing the information through the CBP website), hotel receipts, and travel reservations (including confirmation of changes or cancellations). If the eligible individual was actually ill or advised to self-quarantine in the U.S. during the NRA’s excluded days under Rev. Proc. 2020-20, the NRA may also retain the documents described in Q2 (above) to demonstrate presence in the United States through U.S.-based medical records and treatments, although failure to document an actual illness will not affect eligibility to claim relief under Rev. Proc. 2020-20.

Importantly, this FAQ clarifies that an eligible individual who does not qualify for the presumption of an intent to leave the United States because the individual has applied, or otherwise taken steps, to become a lawful permanent resident of the U.S. but is not yet a lawful permanent resident), should also retain any documents that may support a “facts and circumstances” analysis of the eligible individual’s intent to leave the United States under the medical condition exception.

FOOTNOTES

1 Importantly, Q5 (see Postscript) provides that an eligible individual who does not qualify for the presumption of an intent to leave the United States (meaning, the individual has applied, or otherwise taken steps, to become a lawful permanent resident of the United States but is not yet a lawful permanent resident) could rebut the presumption through a “facts and circumstances” analysis of the eligible individual’s intent to leave the United States under the medical condition exception.

2 The harsh yet clear language of section 6501(c)(3) flags “open statute” exposure for a nonfiler: “In the case of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time.”

3 Exempt individuals include an individual temporarily present in the United States as a foreign-government-related individual under an A or G visa, other than individuals holding A-3 or G-5 class visas; a teacher or trainee temporarily present in the United States under a J or Q visa, who substantially complies with the requirements of the visa; a student temporarily present in the United States under an F, J, M, or Q visa, who substantially complies with the requirements of the visa; and a professional athlete temporarily in the United States to compete in a charitable sports event.

4 In determining whether an alien has maintained more significant contacts with the foreign country than with the United States, facts and circumstances to be considered include the location of the alien’s permanent home; family; personal belongings; social, political, cultural, or religious affiliations; and business activities.

5 The term “tax home” is an individual’s regular fixed place of business, employment, self-employment, or post of duty and not necessarily an alien’s permanent residence. If an alien does not have a regular or main place of business, tax home may be the place where he regularly lives.

6 Under the People’s Republic of China-U.S. tax treaty, that requires a competent authority determination. See Alan W. Granwell, William M. Sharp Sr., and Ajay C. Whittemore, “What Happens in China Stays in China: Tax Traps for Immigrant Investors,” Tax Notes Int’l, Dec. 16, 2013, p. 1039.

END FOOTNOTES

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