IRS grants relief for COVID-19 disruptions on tax residency

Time rules are eased for the substantial presence test for foreign citizens in the US and the foreign earned income exclusion for US citizens abroad.
By Dave Strausfeld, J.D.

The IRS provided relief to individuals and businesses whose tax residence might be affected by cross-border travel disruptions arising from the COVID-19 crisis, such as canceled flights, border closings, or shelter-in-place orders.

The relief eases some potential consequences that a prolonged stay in a country may have on the determination of where an individual or business is subject to taxation. The relief will benefit certain foreign citizens living in the United States, U.S. nationals living abroad, and foreign businesses with activities in the United States.

The IRS announced the relief in two revenue procedures and two frequently asked questions (FAQs).

Foreign citizens in the US

In Rev. Proc. 2020-20, the IRS provided relief to affected foreign citizens living in the United States. The Service will presume that up to 60 consecutive calendar days of their U.S. presence arise from COVID-19 travel disruptions and will not count this time span for purposes of determining U.S. tax residency under the substantial presence test or whether the person qualifies for certain tax treaty benefits with respect to income from dependent personal services performed in the United States.

Essentially, the IRS will consider the COVID-19 emergency a medical condition that prevented the individual from leaving the United States. Without this relief, some foreign citizens in the United States who are prevented from returning home by COVID-19 might be deemed resident aliens under the substantial presence test. Others might lose out on a tax treaty benefit with respect to income from dependent personal services performed in the United States because of their extended U.S. stay.

With this relief, these individuals can avoid having 60 days counted against them. The date when the 60-day period begins is chosen by each person, but it must start between Feb. 1 and April 1, 2020.

To obtain this relief, eligible individuals required to file a 2020 Form 1040-NRU.S. Nonresident Alien Income Tax Return, should attach Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition, claiming the COVID-19 medical condition travel exception. Eligible individuals who are not required to file a 2020 Form 1040-NR do not need to file Form 8843, but they should retain all relevant records to support their reliance on this revenue procedure.

To claim an exemption from withholding on income from dependent personal services pursuant to a U.S. income tax treaty, an individual 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.

US nationals living abroad

The IRS also provided relief to certain U.S. nationals living abroad. The Service announced in Rev. Proc. 2020-27 that days spent away from the foreign country due to the COVID-19 emergency will not prevent those individuals from qualifying for Sec. 911's exclusions from gross income of foreign earned income and housing cost amount. This relief benefits individuals who established residency or were physically present in China, Hong Kong, or Macau as of Dec. 1, 2019, and elsewhere as of Feb. 1, 2020, and reasonably expected to become a "qualified individual" for purposes of Sec. 911 in 2019 and 2020 but departed the foreign jurisdiction on or after Dec. 1, 2019, or Feb. 1, 2020, as applicable, but on or before July 15, 2020.

FAQs for foreign businesses

Finally, in an FAQ webpage, the IRS offered relief to some foreign businesses that have activities in the United States. In determining whether a foreign corporation, nonresident alien, or partnership in which either a partner is engaged in a U.S. trade or business or that has a U.S. permanent establishment, certain business activities in the United States will not be counted for up to 60 consecutive calendar days. However, this relief is available only if those activities were performed by one or more individuals temporarily present in the United States and would not have been performed in the United States but for COVID-19 travel disruption.

The date when the 60-day period starts is chosen by the eligible individual or entity, but it must start between Feb. 1 and April 1, 2020.

The IRS stressed the need to retain contemporaneous documentation to establish a right to this relief.

— By Dave Strausfeld, J.D., a JofA senior editor.

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