The economic impact of COVID-19 has resulted in significant legislation and guidance from the IRS interpreting these laws, including how internationally mobile employees are impacted and what relief that is available to mitigate unintended tax consequences arising from travel restrictions.
In recent weeks, the IRS has made announcements impacting internationally mobile employees by providing further clarifications, focus of audits and developments on e-filing that benefit many taxpayers.
FAQ for claiming the medical exception in 2020
The IRS published Revenue Procedure 2020-20 May 27, 2020, providing guidance to taxpayers who normally reside outside the United States but who have had an extended presence here due to international travel restrictions from COVID-19. For individuals who are non-resident aliens, the guidance stated that up to 60 days can be excluded from consideration in determining federal tax residency under the Substantial Presence Test. This was possible under the existing “medical condition” for individuals who intended to leave the United States but were not able, whether from contracting COVID-19 or another reason.
The FAQ provides taxpayers with additional clarification for individuals who had a medical condition and were unable to leave the country, regardless of whether that condition was COVID-19-related. Under the existing provision, a taxpayer can exclude up to 30 days of presence in the United States where a medical condition that is not pre-existing prevents their departure. Given current challenges in obtaining documentation, the IRS outlined what steps should be taken and documentation taxpayers should retain to support a claim on Form 8843, “Statement for Exempt Individuals and Individuals With a Medical Condition.” This includes evidence of consultations, receipts for expenses and evidence of canceled or changed travel reservations. Note that no documentary evidence is required for the COVID-19 60-day exception.
Additionally, the FAQ provides instruction that taxpayers can claim both the 30-day medical exception and 60-day COVID-19 medical condition exception, potentially excluding 90 days from consideration in determining federal tax residency.
Audit focus on the taxation of foreign officials
The IRS Large Business & International (LB&I) practice unit announced an additional campaign focused on individuals working at foreign embassies, consular offices and international organizations. These individuals may face a range of complexities based on the type of visa on which they entered the United States, if they have a U.S. “green card,” or U.S. citizenship. Where income is not subject to federal withholding for income and Social Security taxes, the campaign seeks to highlight complexities and in some cases, audit tax returns to enhance compliance.
For taxpayers working for such organizations, it will be important to review their U.S. tax affairs and where appropriate, take steps to come into compliance.
E-filing of Form 1040-X
The IRS has successfully expanded its e-filing options for taxpayers in recent years with nearly 140 million e-filed individual tax returns for fiscal year 2018. One exception for individual taxpayers has been for those seeking to file an amended federal tax return, Form 1040-X. With more than 3 million amended returns filed each year, to date it has only been possible to paper-file amended individual tax returns, submitting to the IRS in person or in the mail.
The IRS announced on May 28, 2020, that from late summer taxpayers will be able to file Form 1040-X electronically. Additionally, a new service will be launched, called “Where’s My Amended Return?” allowing taxpayers to check the current status of their amended return online. The initial launch will allow for amended 2019 tax returns only, with additional years intended to be added in the future.
The announcement is a welcome development for internationally mobile taxpayers given the complexities in having to file copies of Form 1040-X, both amended and original tax returns. For taxpayers living outside the United States the process will increase the timeframe for filing and more transparency on status after receipt by the IRS.
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