COVID-19 has placed a burden on traveling due to restrictions being set in place. While these restrictions can become an inconvenience for some, for foreigners there are far greater implications that relate to U.S. tax laws. Since this pandemic began, the IRS
has been quiet on guidance related to foreign individuals who may have been stranded in the U.S. and are unable to return to their home country or having to return to the U.S. sooner than planned. Recently issued revenue procedures, 2020-20 and 2020-27 offer some guidance.
Revenue Procedure 2020-20
Relief under this revenue procedure relates to days when a foreigner was unable to leave the U.S. and may then be considered a resident for U.S. tax purposes. The Substantial Presence Test is one of two tests that are used to determine if an individual is considered a U.S. resident for tax purposes. This test states that an individual will be considered a U.S. resident for tax purposes if the individual was physically present in the U.S. for at least 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 years immediately before that. A foreigner visiting the U.S. on vacation could trigger the Substantial Presence Test if they are unable to leave the U.S., and subsequently have to file a U.S. income tax return and pay taxes on their worldwide income.
Revenue Procedure 2020-20 grants relief to individuals by allowing them to exempt up to 60 consecutive days of physical presence from the Substantial Presence Test. For an individual to claim this exemption, they must have been in the country between February 1, 2020 and April 1, 2020 and start their 60-day exemption during that window.
If an individual is required to file a Form 1040NR, the exemption may be claimed by attaching Form 8843 to the return. If Form 1040NR is not otherwise required, then there is no additional filing requirement to claim the exemption.
Revenue Procedure 2020-27
Relief under this revenue procedure relates to U.S. individuals who would ordinarily claim the foreign earned income exclusion but will no longer qualify as a result of a return to the U.S. due to COVID-19. The foreign earned income exclusion allows U.S. citizens or resident aliens that live abroad to exclude either all or a portion of their foreign earnings if they meet certain requirements. One of these requirements includes either being a bona fide resident of a foreign country or being physically present in a foreign country for a certain period of time. If an individual would have qualified for the earned income exclusion but had to return to the U.S. due to COVID-19, this revenue procedure will grant an exemption for the period of time the individual was required to remain in the U.S., thus allowing them to meet the residency requirement for the foreign earned income exclusion. The beginning day of the relief period for this procedure will vary depending on which country the individual is claiming residency. If an individual claims residency in China, the period began on December 1, 2019. If the individual claims residency in any other country, the period began on February 1, 2020. The exempted period is set to expire on July 1, 2020 for all individuals unless an extension is granted.
If you have any questions regarding relief for foreigners due to COVID-19, please consult your HBK tax advisor, we are standing by and ready to help.