The Internal Revenue Service (“IRS”) recently published issuances that address two critical matters currently affecting both U.S. and non-U.S. individuals due to “COVID-19 Emergency Travel Disruptions” (i.e., restriction of movements of individuals due to canceled flights/other means of transportation, shelter-in-place orders, quarantines, border closures, or self-imposed travel restriction due to recommendations on social distancing). One offers relief to foreign travelers who have found themselves stranded in the U.S. while the other applies to U.S. citizens or residents who work in a foreign country.

Revenue Procedure 2020-20: Determination of Residence Status and Benefits Under Tax Treaty

The U.S. taxes resident and nonresident alien individuals in two ways. U.S. resident alien individuals are subject to tax on worldwide income, while nonresident alien individuals are only subject to tax on certain U.S.-source income and all income, U.S. or foreign, that is effectively connected with a U.S. business as to that individual. U.S. Tax Code Section 7701(b) provides a definition of resident and nonresident aliens. In short, alien individuals who are not lawful permanent residents (i.e., green-card holders) and have met the “substantial presence test” for a given calendar year by virtue of having sufficient days of actual physical presence in the U.S. are generally treated as U.S. residents for that year.

On the other hand, many U.S. income tax treaties exempt an alien individual’s income from employment (or other dependent personal services) if, among others, the recipient is present in the U.S. for more than 183 days in any twelve-month period that begins or ends in the relevant taxable year.

Due to the COVID-19 pandemic, many foreign individuals who intended to leave the U.S. have been forced to stay in the country. The extended stay could have the unintended effect of: (a) nonresident alien individuals meeting the substantial presence test, and/or (b) foreign individuals failing to avail tax treaty benefits with respect to income from dependent personal services performed in the U.S.

The IRS provided reliefs to these two groups of individuals as follows:

1. Determination of Residence Status

When applying the substantial presence test, an alien individual may exclude certain days of physical presence in the U.S., including qualification for the Medical Condition Exception, which provides that an alien individual is not treated as present in the U.S. on days when the individual intended to leave the U.S., but was unable to do so because of a medical condition that arose while the individual was present in the U.S. (but not if the condition existed before the arrival in the U.S. and the individual was aware of such condition).

Revenue Procedure 2020-20 treats the COVID-19 Emergency (i.e., global outbreak of the COVID-19 virus) as falling under the purview of the Medical Condition Exception. It states that an “Eligible Individual” who intended to leave the U.S. during the individual’s “COVID-19 Emergency Period,” but was unable to do so due to COVID-19 Emergency Travel Disruptions may exclude his or her COVID-19 Emergency Period for purposes of applying the substantial presence test. “COVID-19 Emergency Period” is defined as 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 U.S. on each day.

There is a presumption that the Eligible Individual intended, but was unable, to leave the U.S. during the individual’s COVID-19 Emergency Period, unless he or she applied or took steps to apply for U.S. permanent residency.

To claim this benefit, an Eligible Individual who is required to file a Form 1040-NR for 2020 must claim the COVID-19 Medical Condition Travel Exception by attaching Form 8843, Statement for Exempt individuals and Individuals with a Medical Condition, to the Form 1040-NR by the form’s due date (with extensions) and mailing the forms to the address shown on the Form 1040-NR instructions. Section 5 of Revenue Procedure 2020-20 provides specific instructions for completing Form 8843 as well as relief for failure to file.

Individuals who are not required to file a Form 1040-NR are also not required to file Form 8843, but they should retain all relevant documentation to support the reliance on Revenue Procedure 2020-20, and present the same to the IRS upon the latter’s request.

The relief for Medical Condition Travel Exception under the issuance may be claimed in addition to, or instead of, other exceptions from the substantial presence test for which the individual is otherwise eligible. In other words, an Eligible Individual may pick and choose what exceptions he or she wants to avail of, or claim all exceptions including the benefits under Revenue Procedure 2020-20. The Eligible Individual may also avail of the Medical Condition Exception if he or she suffers actual medical conditions related to COVID-19 virus with respect to any period during 2020, but if that period is outside of the individual’s COVID-19 Emergency Period, Form 8843 is required to be filed.

2. Benefits Under Tax Treaty

Similar to the Medical Condition Exception discussed above, under U.S. income tax treaties, days spent in the U.S. due to illness are not taken into account in determining the availability of treaty benefits with respect to income from dependent personal services performed in the U.S.

Therefore, for purposes of determining an individual’s (whether or not an Eligible Individual) eligibility for treaty benefits with respect to the aforementioned income, any days of presence in the U.S. during the individual’s COVID-19 Emergency Period in which the individual was unable to leave the U.S. due to COVID-19 Emergency Travel disruptions will not be counted. There is likewise a presumption of inability to leave the U.S. during this period.

To claim an exemption from withholding on income under this issuance, an individual should provide the employer or withholding agent a Form 8233, Exemption from Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, certifying that the income is exempt, and by writing on line 14 the words “COVID-19 Medical Condition Travel Exception” and the individual’s COVID-19 Emergency Period. Such Form does not have to be filed if the income is already treated as exempt under a previously submitted Form 8233. In case a new Form 8233 was not provided to the withholding agent, or the withholding agent already withheld income that is otherwise exempt under this issuance, the individual should file Form 1040-NR and attach the Form 8233 with the information as described earlier, plus the applicable tax treaty and the tax treaty article.

Revenue Procedure 2020-27: Foreign Earned Income Exclusion Benefits

U.S. Tax Code Section 911(a) allows a “Qualified Individual” to elect from gross income his or her foreign earned income and the housing cost amount. A “Qualified Individual” is an individual whose tax home is in a foreign country and who is (1) a citizen of the U.S. and establishes to the satisfaction of the Secretary of the Department of Treasury that the individual has been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire taxable year (“Group A”); or (2) a citizen or resident of the U.S. who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days (“Group B”). Under U.S. Tax Code Section 911(d)(4), an individual is considered as a “Qualified Individual” if such individual was forced to leave the foreign country because of war, civil unrest, or similar adverse conditions that precluded the normal conduct of business, if he or she establishes that, but for those conditions, he or she could reasonably have been expected to meet the eligibility requirements.

Revenue Procedure 2020-27 states that for the years 2019 and 2020, for purposes of Section 911(d)(4), the COVID-19 Emergency is an adverse condition that precluded the normal conduct of businesses as follows:

• In the People’s Republic of China (excluding Hong Kong and Macau), as of December 1, 2019; and
• Globally, as of February 1, 2020.

Therefore, for individuals under “Group A,” if an individual who left China on or after December 1, 2019, or another foreign country on or after February 1, 2020, but on or before July 15, 2020 (the date that the period covered by Revenue Procedure 2020-27 ends, unless an extension is announced by the Treasury Department and the IRS), such individual will be treated as a Qualified Individual with respect to the period during which he or she was present in, or was a bona fide resident of, that foreign country, as long as the individual establishes a reasonable expectation that he or she would have met the requirements to avail of the income exclusion, but for the COVID-19 Emergency.

For “Group B” individuals, assuming they have met all the other requirements to qualify for income exclusion, they may use any 12-month period to meet the Qualified Individual requirement. Two examples were provided to illustrate this rule:

• Example 1: An individual arrives in Country X on September 1, 2019, and establishes that he or she reasonably expected to work there until September 1, 2020, but departed on January 10, 2020 due to the COVID-19 Emergency. The individual would be a Qualified Individual for the period from September 1 through December 31, 2019, and for the period January 1 through January 9, 2020.
• Example 2: An individual was present in Country Y on January 1 through March 1, 2020 and was able to establish that he or she was reasonably expected to work in Country Y for the entire calendar year. However, such individual departed Country Y on March 2, 2020 due to the COVID-19 Emergency, and returns to Country Y on August 25, 2020 for the remainder of the year. This individual would be a Qualified Individual for 2020 with respect to the period between January 1 through March 1, 2020, and August 25 through December 31, 2020.