IRS Guidance on Changed Residency During COVID-19

| 5/7/2020
IRS Guidance on Changed Residency During COVID-19

This is the fourth in a series of Tax News Highlights articles covering international taxes and what companies need to consider during and after the current global pandemic.

COVID-19 has disrupted employees’ international assignments as traditionally practiced. Virtual assignments have become the new norm for many organizations with a critical global presence. Employees on current assignments might be required to extend stays as a result of travel restrictions. When employees eventually return home, they should perform a review to determine if and when tax residency has shifted from host countries to home countries. This review should include the original intent of the assignment, the location of the employee’s social and economic ties, and the location of the employee’s family, among other considerations.

If tax residency shifts to the home country location, attendant payroll reporting obligations, including withholding and remittance of income and social taxes, also shift to the home location under local law.

Alternatively, employees on short-term assignments might face travel restrictions, requiring them to stay in their host locations beyond the intended duration. In addition to the increased stress or anxiety for affected employees, extended stays also could result in an additional tax burden under local law for both companies and their employees.

The IRS recognizes the additional tax cost that could be assessed due to U.S. tax provisions inadvertently triggered by current travel restrictions. Consequently, the IRS issued two revenue procedures that provide temporary relief.

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Inbound assignments

Foreign nationals coming into the U.S. are deemed to be U.S. tax residents if they meet the substantial presence test under IRC Section 7701(b)(3). Short-term assignments to the U.S. are often planned to avoid triggering U.S. tax residency under this test. However, current travel restrictions might prevent short-term assignees from leaving the U.S. in a timely manner, resulting in unintended U.S. tax residencies. Revenue Procedure 2020-20 provides relief under the substantial presence test by allowing an individual to exclude up to 60 calendar days of presence in the U.S. during the COVID-19 travel restriction period if the individual meets certain criteria. Taxpayers must file Form 8843, “Statement for Exempt Individuals and Individuals
With a Medical Condition,” with a duly filed Form 1040NR, “U.S. Nonresident Alien Income Tax Return,” to claim this relief.

Revenue Procedure 2020-20 also applies to individuals from countries that have entered into bilateral income tax treaties with the U.S. These treaties generally contain their own tax residency criteria, which typically provide that tax residency is not triggered until an employee is present in the host location for more than 183 days in a 12-month period. Current travel restrictions could prevent foreign nationals from returning home prior to the 183-day limit. Revenue Procedure 2020-20 exempts days present in the U.S. during an emergency period in the 183-day computation provided affected individuals are unable to leave the U.S. during the emergency period. The emergency period is a self-selected 60-calendar-day period beginning on or after Feb. 1, 2020, and on or before April 1, 2020, in which the employee is present in the U.S.

Outbound assignments

Qualified U.S. individuals who are living and working outside the U.S. are eligible to exclude certain foreign earned income and foreign housing costs from U.S. gross income under IRC Section 911(d)(1). The IRC further provides that an individual who normally would qualify for this exclusion as a bona fide resident of the foreign location, but who leaves the location due to war, civil unrest, or similar adverse conditions, continues to qualify for this exclusion. Revenue Procedure 2020-27 has included the COVID-19 medical emergency as an adverse condition for China, with the exception of Hong Kong and Macau, as of Dec. 1, 2019, and for the entire globe as of Feb. 1, 2020.

Under the revenue procedure, an individual who otherwise would have qualified for the foreign earned income exclusion and/or the foreign housing exclusion but left the foreign location on or after Feb. 1, 2020 (Dec. 1, 2019, for China) but on or before July 15, 2020, will be treated as a qualified individual for these two exclusions.

Non-U.S. provisions

Tax authorities outside the U.S. continue to review their tax regulations and consider possible relief that might be made available to mobile employees who are disrupted during this global health emergency, and specific country provisions should be reviewed as appropriate.

International assignments can be an exciting time for an individual, but unplanned stays or emergency evacuations can negatively affect employee welfare. For employees who are trying to conserve cash and reduce costs, adding unexpected tax can create unneeded stress and anxiety and make international assignments even more expensive.

Want more insights on addressing coronavirus-related challenges?
Go to the Crowe COVID-19 resource center for more analysis and updates.

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Brent Felten
Brent Felten
Partner, Washington National Tax
John Kelleher - Large
John Kelleher
Partner, Tax
Chris Pollard
Chris Pollard
Senior Manager, Tax