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Practitioners Request Expansion of COVID-19 Tax Residency Rules

Posted on May 19, 2020

The Florida Bar Tax Section has asked Treasury and the IRS to extend beyond 60 days the duration of the COVID-19 emergency period under the medical condition travel exception for nonresident individuals because of continued travel disruptions.

Following requests from practitioners, on April 21 Treasury and the IRS announced guidance, including Rev. Proc. 2020-20, that allows a nonresident 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. 

The COVID-19 emergency period is up to 60 consecutive calendar days selected by the individual starting between February 1 and April 1, during which the individual was physically present in the United States each day. The individual must claim the 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 Florida Bar Tax Section said in a May 14 letter that the duration of the emergency period should be extended to the amount of days the IRS deems appropriate to avoid an “unjust burden for alien individuals.” The tax section said airports remain closed in some jurisdictions and individuals believe it is unsafe to travel. The letter references an April 1 article published by the Pew Research Center that says cross-border travel has come to a standstill. Therefore, the IRS’s 60-day period ending April 1 is insufficient, the tax section said. Even if an individual’s COVID-19 emergency period started on April 1, it is unlikely that travel disruptions will subside by May 31, it said.

The tax section also said that the IRS and Treasury should provide clarification on what types of documents are required for proving an individual’s physical presence in the United States during the COVID-19 emergency period, and on the long-standing uncertainties regarding the medical condition exception under the substantial presence test.

In a May 14 letter submitted to Treasury and the IRS, Michael Karlin of Karlin & Peebles LLP suggested extending the 60-day period to 120 or 150 days. If Treasury and the IRS won't consider extending the period, they should at least allow nonresidents to elect a longer period by providing facts or circumstances that made more time in the country necessary, he said. Karlin also requested that the IRS approve the use of the information on U.S. Customs and Border Protection Form 1-94 for the documentation requirement under the medical condition travel exception.

Karlin requested in a May 15 letter to Treasury and the IRS confirmation that a nonresident individual need not be suffering from a medical condition to fall within the scope of the medical condition exception under section 7701(b)(3)(D), if they are prevented from leaving a country by another person’s medical condition.

The Florida Bar Tax Section submitted a letter March 26 asking Treasury and the IRS to provide guidance or regulations that specifically exclude days of presence beginning on or after January 1 through July 3 — or a longer period if the current situation persists — from the definition of “day” under section 7701(b). The tax section said if Treasury and the IRS don't find it appropriate to temporarily exclude days of presence, they should provide updated guidance that expands the medical exception and amends Form 8843.

The tax section also requested in its May 14 letter that the IRS and Treasury expand on the IRS FAQ, released April 21, to provide relief for sourcing of personal services income. The tax section noted that nonresident aliens or foreign corporations performing services in the United States can be taxed on a gross withholding tax basis under sections 871 and 881.

The 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.

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