COVID-19 has caused global consternation for many reasons, including the fact that the rapid global shutdown of travel and imposition of lockdowns and other restrictions has stranded travelers often when they had no intention of staying indefinitely. While stories of those stuck in Hawaii, Florida and other sought-after destinations might at first blush appear amusing, for the foreigner stuck in the United States, the risk arises of potential unwanted U.S. tax residency being created as a result of the unplanned extension of their U.S. stay. U.S. tax resident status brings with it taxation and reporting of worldwide income, as well as the risk of a potential U.S. tax bill for (otherwise non-U.S.) employer earnings or for foreign, non-U.S. companies controlled by these potential “accidental” U.S. tax residents.
Initially, foreigners stuck in the United States had no U.S. guidance with respect to how the Internal Revenue Service would treat specifically the time they were stuck in the United States due to COVID-19. Thankfully, on April 21, 2020, the Treasury Department and the IRS issued guidance that provides relief to individuals and businesses impacted by travel disruptions arising from the COVID-19 pandemic. For many stuck foreigners, this guidance means that they have an extra 60 days they can be in the United States in 2020 without becoming globally taxed resident aliens.
Revenue Procedure 2020-20 provides relief to nonresident individuals who, but for COVID-19 Emergency Travel Disruptions (defined for these purposes as the global outbreak of the COVID-19 virus), wouldn’t have been in the United States long enough during 2020 to be deemed resident aliens under the “substantial presence test” or to be ineligible for treaty benefits with respect to determining their tax residency status.
Relief Provided
Addressing this tax residency issue for such foreigners stuck in the United States, Rev. Proc. 2020-20 creates a new exclusion, the “COVID-19 Medical Condition Travel Condition.” This exclusion allows a qualifying alien (an “Eligible Individual” as defined in Section 3.04 of Rev. Pro. 2020-20) who intended to leave the United States during the individual’s “COVID-19 Emergency Period,” but was unable to do so due to the current “COVID-19 Emergency Travel Disruptions,” to exclude the individual’s COVID-19 Emergency Period from their day count under the substantial presence test. This excluded COVID-19 Emergency Period extends for a period of up to 60 calendar days of continuous presence in the United States, which commences between Feb. 1 and April 1, 2020. Further, “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.” The COVID-19 Emergency itself is considered a medical condition, but not a preexisting one.
Thus, the date on which the alien must leave the United States in 2020 is extended up to 60 consecutive days, beyond the date he would otherwise have to leave, to avoid resident alien status for the year (assuming no disqualifying return to the United States for the alien in the balance of 2020 or that he’s applied or otherwise taken steps to become a lawful permanent resident of the United States). Thus, for aliens with a full 60-day COVID-19 Emergency Period and who are entitled to use the closer connection exception, this means they may be able to stay up to a total of 242 days, not just 182 days in 2020. The revenue procedure specifically confirms that an alien individual can combine his excluded days of U.S. presence under the COVID-19 Medical Condition Travel Exception with the closer connection exception. Still, given that 112 days (as of April 21) have passed since Jan. 1, the day count is mounting, so foreigners stranded in the United States in 2020 must remain vigilant with their day counts based on their own individual circumstances and personal arrival dates in the United States.
Importantly, for those foreigners who must file a nonresident tax return—Form 1040NR (for example, filing is required to report U.S. business income)—to claim this new medical condition exception, the procedure requires proper filing of Form 8843—Statement for Exempt Individuals and Individuals with a Medical Condition, as detailed in the procedure. For those who aren’t otherwise required to file Form 1040NR, there’s no form filing requirement to get the relief under the revenue procedure. Those not required to file currently can later file Form 8843 if the IRS challenges the individual’s nonresident status for tax years 2020, 2021 or 2022. Complete and accurate records related to the COVID-19 Emergency Period must be kept by all regardless whether or not the current filing of Form 8843 is required.
Second Revenue Procedure
In addition to addressing the issue of foreigners stuck in the United States due to the Covid-19 emergency and the potential impact of their extended stay on their U.S. tax residency status, the IRS concurrently issued a second revenue procedure, Rev. Proc. 2020-27, to address the separate issue of U.S. taxpayers residing abroad and claiming the exclusion from income for “foreign earned income” under IRC Section 911, when they have had to return early to the United States due to the pandemic, thereby jeopardizing their qualification to claim to the Section 911 exclusion.
Rev. Proc. 2020-27 allows that the Secretary of the Treasury has determined that the global health emergency caused by the outbreak of COVID-19 is an adverse condition that disrupts the normal conduct of business globally. Therefore, relief is provided to any U.S. individual who reasonably expected to become a “qualified individual” to claim the foreign earned income exclusion under Section 911 but left the foreign jurisdiction during the period described in this revenue procedure. And, while being stuck in the United States doesn’t prevent someone from having a bona fide residence in another country for Section 911 purposes, only earned income attributable to the time actually spent outside the U.S. can be excluded under this guidance. Thus, if an individual was receiving earned income from a foreign employer while stranded in the United States, U.S. tax must be paid on this U.S. portion of earned income.
Additionally, online “Frequently Asked Questions” provide that certain U.S. business activities carried on by a nonresident alien or foreign corporation won’t be counted for up to 60 consecutive calendar days for purposes of determining whether the (foreign) individual or entity has a U.S. permanent establishment or is engaged in a U.S. trade or business, but only if those activities wouldn’t have been conducted in the United States except for travel disruptions arising from the COVID-19 Emergency.
Some Certainty and Relief
The Treasury Department and the IRS basically gave foreigners up to 60 days of U.S. physical presence when the individual is treated as not in the United States. These extra days apply not only for IRC Section 7701(b) residence, but for time stranded working in the United States that might otherwise cause a business to have a permanent establishment here, as well as for time stranded in the United States that might prevent someone from qualifying for Section 911 relief. Most important, this guidance provides some certainty and limited relief to those caught unaware and unexpectedly in the United States due to COVID-19.
*This article has been edited for length from its original version, which can be found here.