A nonresident who is temporarily present in the United States for up to 60 consecutive calendar days because of COVID-19 travel disruptions will not be considered a U.S. resident under the IRS’s substantial presence test.
On April 21 Treasury and the IRS announced guidance, in the form of two revenue procedures and a list of frequently asked questions, that provides tax relief for nonresident individuals who may be present in the United States indefinitely as a result of COVID-19 travel disruptions, including travel bans, government-mandated lockdowns, and canceled flights.
Rev. Proc. 2020-20 allows an individual to claim a COVID-19 medical condition travel exception for purposes of the substantial presence test under section 7701(b)(3) if pandemic-related measures prevented the individual from leaving the United States during the individual's COVID-19 emergency period. That is a period of up to 60 consecutive calendar days selected by the individual starting between the dates of February 1 and April 1 during which the individual was physically present in the United States each day.
Also, those claiming tax treaty benefits will be presumed to be unable to leave the United States during the prescribed period and should provide their employer or withholding agent with a Form 8233, "Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual."
Under the standard substantial presence test, a taxpayer is considered a U.S. resident for tax purposes if she has been physically present in the United States for 31 days during the current year and 183 days during the three-year period that includes the current year and two immediately preceding years, which is subject to a weighted average basis formula prescribed by the IRS.
The individual must claim the COVID-19 medical condition travel exception when filing Form 8843, “Statement for Exempt Individuals and Individuals With a Medical Condition,” and maintain all relevant documentation to be produced at the IRS’s request. The individual may also claim other exceptions, including the medical condition exception, under the substantial presence test. Under the medical condition exception, an individual's presence won't be counted under the substantial presence test if she cannot leave the United States because of a medical condition that arose while she was in the United States.
Jennifer J. Wioncek of Bilzin Sumberg Baena Price & Axelrod LLP, principal coauthor of the Florida Bar Tax Section's March 26 letter to Treasury and the IRS requesting relief from the tax residency rules, told Tax Notes she was pleased that the government acted on the Tax Section's comments and those of other practitioners. However, she said the 60-day period should be revisited if the COVID-19 restrictions continue beyond April.
Rev. Proc. 2020-27 waives time requirements under section 911(d)(1) for any individual who reasonably expected to meet the eligibility requirements during 2019 or 2020 but cannot because they departed a foreign country as a result of COVID-19 measures. Section 911 allows qualified individuals who live outside the United States to exclude foreign earned income and housing costs from gross income.
The guidance says the COVID-19 pandemic is an “adverse condition that precluded the normal conduct of business” in China from December 1, 2019, and globally from February 1, 2020. It says qualifications for exclusions will not be affected by days spent outside a foreign country because of COVID-19, based on specific departure dates. The guidance will be effective until July 15, unless extended by Treasury and the IRS. To qualify for relief under section 911(d)(4), the individual must have established residency in the foreign country or have been present there for 330 days in a 12-month period.
The IRS FAQ provides that a nonresident alien, foreign corporation, or a partnership in which either is a partner may choose an uninterrupted period of up to 60 calendar days starting between February 1 and April 1 during which its services or other activities conducted in the United States won't be considered in determining whether it is engaged in a U.S. trade or business, if the activities were performed by one or more individuals temporarily present in the United States and would not have been performed there were it not for COVID-19 emergency travel disruptions. The activities also won't be considered in determining whether the nonresident or foreign corporation has a permanent establishment.
The IRS said individuals should maintain documentation to provide to the IRS upon request establishing that they were present in the United States starting from the COVID-19 emergency period, and that the individual would not have performed these business activities but for the COVID-19 travel disruptions. Further, nonresidents and foreign corporations may make protective filings for their tax returns, even if they don't think they need to file for this tax year, to preserve any deductions or claim treaty relief.
Seth Entin of Holland & Knight LLP said that while the guidance will provide much-needed relief to nonresident individuals, "there are bound to be individuals for whom this guidance is too narrow and who will not benefit from the relief provided." For example, an individual who becomes a green card holder on December 31 won't qualify.
"Such an individual may have been expecting his or her U.S. tax residency to commence only at the end of 2020, but without any relief, the individual could become a U.S. income tax resident much earlier in the year," Entin said.