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Tax Bar Calls on U.S. Treasury to Provide Residency Relief

Posted on Apr. 8, 2020

The Florida Bar Tax Section has asked Treasury and the IRS to provide relief for foreign individuals unable to leave the United States because of COVID-19 by excluding days of presence under existing regulations.

Treasury and the IRS should issue guidance or regulations that specifically exclude days of presence beginning on or after January 1 to July 3 — or a longer period if the current situation persists — from the definition of “day” under section 7701(b), the Florida Bar Tax Section said in a March 26 letter recently obtained by Tax Notes. According to the letter, Treasury likely has the authority needed to do so, but if it does not, Congress should use its authority to allow Treasury to publish updated guidance or regulations.

If Treasury and the IRS do not find it appropriate to temporarily exclude days of presence, the letter says, Treasury should provide updated guidance that expands the medical exception and amends Form 8843, "Statement for Exempt Individuals and Individuals With a Medical Condition." Also, the "closer connection" exception should be expanded and Form 8840, "Closer Connection Exception Statement for Aliens," should be amended, it says.

Jennifer J. Wioncek of Bilzin Sumberg Baena Price & Axelrod LLP, principal coauthor of the letter, told Tax Notes that the Tax Section tried to highlight the simplest approach possible because the alternative approaches could result in administrative complications for the IRS and for practitioners, especially since the IRS is probably experiencing personnel shortages. And the alternative approaches might result in more informational forms that the IRS may not want to receive, she said. 

Leslie Share of Packman, Neuwahl & Rosenberg PA, also a principal coauthor, said the exclusion of days would be a “streamlined approach” and would be preferable to an expansion of exceptions that would look at taxpayers' situations on a case-by-case basis.

The COVID-19 pandemic has led many countries to implement travel bans, close their borders, and order employees to work remotely, which has a direct effect on taxpayers’ physical presence. Under the United States' standard substantial presence test, a taxpayer is considered a U.S. resident if she is 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 the two immediately preceding years, which is subject to a weighted average basis formula prescribed by the IRS.

“It doesn’t matter if a person is stuck here or not; the income tax rules just look at the number of days and don't look at if these individuals were knowingly or intentionally here,” said Alfredo R. Tamayo of Packman, Neuwahl & Rosenberg PA, another principal coauthor of the letter .

There are two notable exceptions to the test. According to the IRS, under the closer connection exception, the taxpayer can qualify under the substantial presence test but will still be treated as a nonresident if, for the current year, the taxpayer is present in the United States for less than 183 days in the year, has a tax home in another country, and has closer connections to that country. The letter suggests that Treasury suspend the 183-day requirement for 2020, which would allow taxpayers to claim the exception regardless of the number of days present in the United States for the tax year.

Under the medical exception, a taxpayer’s presence will not be counted under the substantial presence test if the taxpayer cannot leave the United States because of a medical condition that arose while the taxpayer was in the United States. The letter suggests that this exception be expanded to encompass individuals who may not have contracted the coronavirus themselves but have a family member or legal dependent who has received treatment for COVID-19. And any individual who is unable to leave the United States as a result of COVID-19 should qualify for the exception, it says.

The letter also calls on Treasury and the IRS to enhance treaty relief, suspend information return filing requirements, relax residency rules for individuals with student visas, and exempt U.S.-source income for exempt individuals. Tamayo told Tax Notes that if Treasury does not implement any relief measures, “we will have chaos," and practitioners and the IRS will be completely overwhelmed. Tamayo said foreign clients have already asked his firm if they might face a problem because of COVID-19 travel restrictions. “These are real-life situations,” he said.

COVID-19 has already had a devastating impact on the U.S. economy, and it should be in the government's best interest to provide foreign multinationals with flexibility, Tamayo said. He said he has clients who have expressed disinterest in returning to the United States for future visits because they will fall under the scope of the substantial presence test. That reluctance would have a significant impact on the U.S. economy, Tamayo said.

“The United States will be a little bit behind the curve if they don’t do something,” Wioncek said. She added that the actions of other countries in this area could encourage the government to publish updated regulations or guidance out of concern for how the United States will look publicly.

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