Care Is Required To Get US Tax Residency Relief, Atty Says

By Natalie Olivo
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Law360 (June 30, 2020, 4:53 PM EDT) -- Foreign individuals stuck in the U.S. because of the novel coronavirus pandemic must be careful to make sure they don't inadvertently fail one of the Internal Revenue Service's tests to qualify for income tax relief, a practitioner said Tuesday.

The IRS and U.S. Treasury Department issued a revenue procedure in April that said so-called nonresident aliens, or NRAs, who are stranded in the U.S. for reasons related to the outbreak wouldn't see their time in the country count toward determining taxable residency. To qualify for this income tax relief, NRAs must satisfy a series of residency tests, noted Alan Granwell, of counsel at Holland & Knight LLP.

"This is very tricky stuff," he said during a webinar hosted by the American Bar Association's Section of Taxation. "You've got to look at this carefully because inadvertently, you might fail one or more of these tests."

According to the revenue procedure, individuals are eligible for income tax relief if they weren't U.S. residents at the close of the 2019 tax year and they weren't holding green cards — making them lawful permanent residents — at any point in 2020. Individuals must also be present in the U.S. during their "emergency period" related to the virus, but they cannot count days outside that time range toward taxable residency in 2020, according to the guidance.  

The IRS and Treasury define someone's emergency period as 60 consecutive days, starting between Feb. 1 and April 1, when that person couldn't leave the U.S. because of travel disruptions aimed at slowing the spread of the virus, which causes the respiratory disease COVID-19. According to the revenue procedure, these 60 days won't count toward the IRS' substantial presence test that's used to determine taxable residency.

Under the substantial presence test, foreign individuals can establish U.S. residency — and therefore owe taxes on their worldwide income — if they spend at least 183 days in the country over three years. People who unknowingly pass this threshold can seek insulation from U.S. income taxes under their home country's treaty with the U.S., but they're still required to submit financial information about their foreign assets or face potentially steep penalties.

During the webinar, Granwell noted that the relief measures outlined in the April revenue procedure don't apply for state and local purposes. His comments echoed similar concerns that Mary Bennett, a partner at Baker McKenzie, raised during the webinar about guidance from the Organization for Economic Cooperation and Development.

Recommendations about how countries should treat tax residency during the pandemic were released in April by the OECD's secretariat, the organization's leadership. In general, people who are temporarily based in a different country because of cross-border travel restrictions probably won't incur new tax obligations for themselves or their employers under international tax treaty rules, according to the guidance.

Bennett noted that "income tax treaty protection generally won't remove concerns about domestic law compliance obligations" or compliance requirements related to state or local taxes. She added that the OECD had encouraged tax administrations to minimize compliance burdens related to the COVID-19 crisis.

Some countries have taken such steps — including Australia, the U.K. and Singapore — by issuing guidance saying they will relax their tax residency rules during the pandemic.

--Editing by Robert Rudinger.

For a reprint of this article, please contact reprints@law360.com.

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