The IRS will provide relief to individuals and businesses whose tax residence might be affected by cross-border travel disruptions -- such as canceled flights, border closings, and shelter-in-place orders -- arising from the coronavirus crisis. This is welcome news for foreign citizens living in the U.S., U.S. nationals living abroad, and foreign businesses with activities in the U.S., as it eases some potential consequences that a prolonged stay in a country could have in determining where an individual or business is subject to taxation.
The details are as follows:
Foreign citizens living in the United States - Rev. Proc. 2020-20
Essentially deeming travel disruptions a medical condition, the IRS will presume that up to 60 consecutive calendar days of an individual’s presence in the U.S. arises 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.
With this relief, 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.
Eligible individuals who have a requirement to file a 2020 Form 1040-NR, U.S. Nonresident Alien Income Tax Return, will need to 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.
U.S. nationals living abroad - Rev. Proc. 2020-27
For U.S. nationals living abroad, days spent away from the U.S. person’s foreign tax home due to the COVID-19 travel restrictions will not prevent those individuals from qualifying for the foreign earned income exclusions from gross income under Sec. 911 of the Internal Revenue Code. This relief is only available to a U.S. national that reasonably expected to become a “qualified individual” for purposes of claiming the foreign earned income exclusion under section 911 but left the foreign jurisdiction during the corresponding relief period. The relief period for U.S. nationals living in China commenced on December 1, 2019. For residents of all other countries, the relief period begins February 1, 2020. This relief will expire on July 15, 2020 (if not further extended).
This provision alleviates the anxiety of “trapped visitors” to the U.S. of becoming accidental taxpayers. Employees of certain foreign corporations are also relieved of the burden of creating U.S. source income for themselves or, potentially, for their employers as a result of being forced to work remotely in the U.S. Finally, U.S. nationals who cannot return to their foreign tax homes as a result of the COVID-19 travel restrictions can also breathe a sigh of relief that they can still exclude their foreign earned income.
Given the complexities involved with the possible tax impact of extended physical presence in the U.S., it is essential that anyone in danger of exceeding the number of days of physical presence in the U.S. consult with a tax adviser to properly plan for this circumstance.
Foreign businesses with activities in the United States
Finally, on an FAQ webpage, the IRS offered relief to some foreign businesses that have activities in the United States. In determining whether a foreign corporation or nonresident alien is engaged in a U.S. trade or business or 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 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 foreign corporation or nonresident alien (or a partnership in which either is a partner), 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.