Non-Resident Aliens Traveling from U.S. During COVID-19 Emergency Period Should Consider Relief in IRS Rev. Proc. 2020-20
Overview of IRS Rev. Proc. 2020-20
Rev. Proc. 2020-20 (link) provides certain qualifying non-resident aliens some administrative relief for certain extended stays in the U.S. caused by travel disruptions arising during the COV-19 pandemic. As discussed below, if the individual meets the revenue procedure’s criteria, then the individual may exclude up to 60 days from (i) the substantial presence test and (ii) the determination of qualification for certain tax treaty provisions.
The relief is significant because it may help a non-resident alien avoid becoming a U.S. resident for federal income tax purposes, which would subject the individual’s worldwide income to U.S. taxation.
Technically, the excluded days are treated as caused by a medical condition. Even in normal times, an individual can exclude days in the U.S. that are attributable to a delay in departure from the U.S. caused by a medical condition that arises while the individual is in the U.S. Generally, the non-resident alien must complete Form 8843, have the form signed by a doctor, and timely mail the form to the IRS. Rev. Proc. 2020-20 also requires an individual to timely file Form 8843, but no doctor signature is required.
Why are number of days in the U.S. is important to a non-resident alien?
Under the Substantial Presence test, if a foreign individual remains in the United States for a certain number of days in a three-year period, then the individual is treated as a U.S. resident subject to taxation on the individual’s worldwide income rather than only on the individual’s U.S. source income. This can lead to a major tax burden.
The Substantial Presence Test
An individual that is not a U.S. citizen can be considered a U.S. resident for U.S. tax purposes if the individual either: (i) is a lawful permanent resident of the United States (green card holder), (ii) meets the Substantial Presence Test[1], or (iii) makes the “first year election”.[2]
If the individual is not a U.S. citizen and does not meet one of these tests, then the individual is a “nonresident alien” and may only have to file a Form 1040-NR if the filing threshold is met.[3] The Form 1040-NR only requires the individual to pay tax on U.S. source income. However, if the individual becomes a “resident alien”, then the individual must file a normal Form 1040. The resident alien reports his worldwide income on Form 1040.
Per IRC § 7701(b)(3), an individual meets the substantial presence test if the individual is physically present in the U.S. for 183 days or more in the last three years and is also physically present in the U.S. for 31 days in the current year. For purposes of determining whether the individual was in the U.S. for 183 days in the last three years (current year and prior two years), you count:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
However, there are certain exceptions.
Medical Exclusion:
For purposes of the substantial presence test, you may exclude days that you are unable to leave the U.S. because of a medical condition that develops while you are in the United States.[4]
Under the Medical Condition Exception, an individual can exclude days (i.e., the individual is not treated as present in the United States) when the individual intended to leave the United States but was unable to do so because of a medical condition. However, that medical condition must arise while the individual was present in the United States.[5]
In order to claim this exception, the individual must file Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition. Form 8843 is required to be filed by the due date (including extensions) for filing Form 1040-NR regardless of whether the individual is required to file a Form 1040-NR.[6]
Travel During COVID-19 Emergency Period
In 2020, the coronavirus has made travel, particularly international travel, more complicated.
The COVID-19 Emergency, as defined in section 3.01 of this revenue procedure, may have affected the travel plans of foreign travelers who intended to leave the United States. Regardless of whether they were infected with the COVID-19 virus, individuals may have become severely restricted in their movements, including by order of government authorities. Individuals who do not have the COVID-19 virus and attempt to leave the United States may also face canceled flights and disruptions in other forms of transportation, shelter-in-place orders, quarantines, and border closures. Additionally, even those who can travel may feel unsafe doing so during the COVID-19 Emergency due to recommendations to implement social distancing and limit exposure to public spaces.
As a result, the IRS decided to extend the principle underlying the medical exception to foreigners that may have experienced trouble leaving the U.S.
Rev Proc 2020-20: Criteria, Relief, and Presumptions
Under Rev. Proc. 2020-20, an Eligible Individual who intended to leave the United States during the individual’s COVID-19 Emergency Period, but was unable to do so due to COVID-19 Emergency Travel Disruptions, may (i) exclude the individual’s COVID-19 Emergency Period for purposes of applying the substantial presence test; and (ii) exclude the COVID-19 Emergency Period in determining an individual’s eligibility for treaty benefits with respect to income from employment or the performance of other dependent personal services within the United States.
The Eligible Individual must file Form 8843 with timely a timely filed 2020 Form 1040NR if the individual has a filing requirement. If the individual is not required to file 2020 Form 1040-NR, then the individual is not required to file Form 8843. Those individuals that are not required to file form should retain all relevant records to support reliance on Rev. Proc. 2020-20 and be prepared to produce the records and complete a Form 8843 if requested by the IRS.
The term COVID-19 Emergency Period is a single period of up to 60 consecutive calendar days selected by an individual starting on or after February 1, 2020 and on or before April 1, 2020 during which the individual is physically present in the United States on each day.
An Eligible individual means any individual:
- who was not a U.S. resident at the close of the 2019 tax year,
- who is not a lawful permanent resident at any point in 2020,
- who is present in the United States (without regard to this revenue procedure) on each of the days of the individual’s COVID-19 Emergency Period, and
- who does not become a U.S. resident in 2020 due to days of presence in the United States outside of the individual’s COVID-19 Emergency Period.
Generally, an individual must have an intent to leave the US and an inability to leave the US in order to exclude days.
For purposes of Rev. Proc. 2020-20 there is a presumption that the individual had an intent to leave the United States unless that individual applied or otherwise took steps to become a lawful permanent resident of the United States. An Eligible Individual will be presumed unable to leave the United States for purposes of the substantial presence test on any day during the individual’s COVID-19 Emergency Period.
Similarly, an individual claiming benefits under an applicable U.S. income tax treaty with respect to income from employment or other dependent personal services performed in the United States will be presumed unable to leave the United States on any day during the individual’s COVID-19 Emergency Period.
Conclusion
Any non-resident that left the U.S. on or after February 1, 2020 and before May 31, 2020 (60 days from April 1) should speak with their tax adviser to consider if they can file Form 8843 in accordance with Rev. Proc. 2020-20 to omit days from the substantial presence test or application of income tax treaty.
Notes
[1] Section 7701(b)(3)
[2] Section 7701(b)(1)(A). The “first year election” is provided in § 7701(b)(4).
[3] Add note regarding the filing threshold.
[4] Treas. Reg. § 301.7701(b)-3(c)
[5] Generally, 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. Treas. Reg. § 301.7701(b)-3(c)(3). However, under Rev. Proc. 2020-20, the COVID19 Emergency Period will not be treated as a pre-existing medical condition, as described in section 301.7701(b)-3(c)(3).
[6] Treas. Reg. § 301.7701(b)-8(c). In certain circumstances, the requirement to timely file Form 8843 may be disregarded. See, Treas. Reg. §§ 301.7701(b)-8(d)(2) and 301.7701(b)-8(e)
