21.8.1  IMF International Adjustments (Cont. 1)

21.8.1.4 
Territories of the United States

21.8.1.4.4  (10-01-2012)
Form 1040-PR and 1040-SS

  1. Form 1040-PR and Form 1040-SS are filed by taxpayers residing in Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands or the Commonwealth of the Northern Mariana Islands (CNMI) to:

    1. Report net earnings from self-employment and pay self-employment taxes

    2. Pay any household employment taxes (reported on Schedule H or H-PR)

    3. Claim excess social security tax withheld (can be used in lieu of filing Form 843)

    4. Pay any employee social security and Medicare tax on unreported tips or uncollected employee social security and medicare tax on tips or group term insurance

    5. Claim the Additional Child Tax Credit (only qualified bona fide residents of Puerto Rico)

    6. Claim the Health Coverage Tax Credit (only qualified bona fide residents of Puerto Rico)

  2. Form 1040-PR and 1040-SS are 4 page returns with six parts which are:

    • Page 1, Part I (Total Tax and Credits)

    • Page 2, Part II (Bona Fide Residents of Puerto Rico Claiming Additional Child Tax Credit) and Part III (Profit or Loss from Farming Section A and B)

    • Page 3, Part III (Profit or Loss from Farming Section C) and Part IV (Profit or Loss from Business Section A and B)

    • Page 4, Part V (Self-Employment Tax) and Part VI (Optional Method to Figure Net Earnings)

      Note:

      Parts V and VI can be used for either the primary or secondary taxpayer. A separate Part V or VI must be attached for each taxpayer.

  3. Additional child tax credit can be claimed directly on the Form 1040-PR, or Form 1040-SS beginning in tax year 2001.

  4. On the 2002 thru 2012 returns, the Additional Child Tax Credit (ACTC) is entered on Part I, Line 8.

    Note:

    Only bona fide residents of Puerto Rico with qualifying children according to IRC § 24(c) and 152 (b)(3) can claim the Additional Child Tax Credit (ACTC) on either Form 1040-PR or 1040-SS. The qualifying children must be U.S. citizens or U.S. nationals, unless such individuals are residents of the United States. All individuals born in Guam, CNMI, USVI, Puerto Rico, and American Samoa, are either U.S. citizens or Nationals. Effective 01-01-2002, bona fide residents of the other U.S. territories can not claim the ACTC on an income tax return.

  5. When ACTC is claimed, the city and U.S. Territory must be present on the document to verify residency in Puerto Rico. If not in Puerto Rico, disallow the ACTC using letter 105C and formal claim rejection procedures.

  6. The filing status is used to accurately compute the ACTC. Four filing statusus are now available on the Form 1040-PR or 1040-SS. They are:

    • Single, shown as "1" on the IDRS account information

    • Married filing jointly, shown as "2" on IDRS

    • Married filing separately, shown as "3" on IDRS

    • Married filing separately, shown as "6" on IDRS

  7. Dependent information from Part 1, line 2, Qualifying Children, is used to compute additional child tax credit.

  8. Schedule 8812 is not required, but the filer must include the qualifying children's names, SSN and relationship on the Form 1040-SS or 1040-PR.

  9. There must be at least three (3) qualifying children for the ACTC. This is different from domestic tax return rules.

    Note:

    Correspondence may be necessary to perfect a return when the TIN of the dependent is missing.

  10. The instruction booklets for Form 1040-PR and 1040-SS contain the specific guidelines for this credit. Do not use Publication 17.

    Reminder:

    The Telephone Excise Tax Refund (TETR) can be claimed on Form 1040-SS and 1040-PR. Taxpayers are instructed to enter "FTET" on the dotted line next to line 10 and to include the credit on the total on line 10. Form 8913 must be attached if they are claiming the actual amount paid. TETR is only valid for tax year 2006. If it is claimed on any other tax year, it will be deleted by Processing.

  11. Duplicate filing conditions may result from U.S. Virgin Island bona fide resident information returns posting to 1040-SS accounts, or vice versa. Follow procedures in IRM 21.8.1.6.11 for processing resultant CP36 notices.

21.8.1.4.5  (10-01-2013)
Territories and Self-Employment Tax

  1. Nonresident aliens are not subject to self-employment (SE) tax unless an international social security agreement in effect determines that they are covered under the U.S. social security system. If a Nonresident alien return is received claiming to owe SE tax, make the assessment using normal assessment procedures.

  2. Residents of the following territories are subject to SE tax:

    • Puerto Rico

    • Guam

    • American Samoa

    • U.S. Virgin Islands

    • The Commonwealth of the Northern Mariana Islands

  3. Puerto Rican residents liable for SE tax must report it on Form 1040-PR or 1040-SS. Part V or VI on Page 4 of the Form 1040-PR/1040-SS must be completed for SE Tax.

  4. SE tax is reported on Form 1040-SS for residents of:

    • Guam

    • American Samoa

    • U.S. Virgin Islands, and

    • The Commonwealth of the Northern Mariana Islands

  5. Additional information regarding self-employment tax, as applicable to each U.S. territory, is contained in subsequent chapters.

  6. For 1990 through 2010, the self employment tax deduction is 7.65% (1/2 the SE Tax rate).

    • 6.2% is social security

    • 1.45% is hospital insurance (Medicare)

    Formula for Calculating Total Earnings After Self Employment Tax Deduction
    Total Earnings After SE Tax Deduction = Total Earnings X .9235

    Reminder:

    For tax year 2011, PL 111-312, reduced the withholding rates by 2% making the SE tax rate 13.3% which consists of 10.4% Social Security and 2.9% Medicare. For tax year 2011, the self employment tax deduction is not 1/2 the SE tax rate. Refer to the 2011 Schedule SE (Form 1040) for the Deduction for employer-equivalent portion of SE tax calculation.

  7. For 1990 through 2010, the self-employment tax rate is 15.3%;

    • 12.4% for social security tax

    • 2.9% for hospital insurance (Medicare)

    Reminder:

    For tax year 2011, PL 111-312 reduced the withholding rates by 2% making the SE tax rate 13.3% which consists of 10.4% Social Security and 2.9% Medicare. For 2013 the SE tax deduction reverts back to 15.3%.

  8. The maximum net earnings subject to the social security portion remains $113,700 in 2013. The maximum net earnings subject to the Medicare portion remains unlimited.

21.8.1.4.6  (10-01-2013)
Territories and Excess Social Security Tax

  1. Employers in Puerto Rico, the U.S. Virgin Islands and the other U.S. Territories pay their social security tax and Medicare tax to the U.S. Government on Form 941-SS, Form 944-SS, Form 941-PR, or Form 944-PR.

    Note:

    Beginning with tax year 2012 the Form 944-SS and Form 944-PR were discontinued. Taxpayers who previously filed these forms can file Form 944 and Form 944(SP) or request to file Form 941-SS or Form 941-PR.

  2. If the taxpayer is an employee working for two or more employers during the same calendar year and the total social security tax withheld is greater than the maximum amount for the year, the excess social security tax withheld can be claimed on Form 1040-PR or Form 1040-SS. Taxpayers are encouraged to file these returns to claim refund of excess social security tax withheld from two or more employers.

  3. When an individual taxpayer is claiming excess social security tax withheld from two or more employers, but does not have a Form 1040 filing requirement, a Form 843 claim can be filed.

    Note:

    Part I, Line 7 of Form 1040-SS and Form 1040-PR have a provision to enter excess social security tax withheld. Encourage the taxpayer to file a return in lieu of Form 843.

  4. The Form 843 claim or Form 1040-SS or 1040-PR must have a withholding statement attached:

    • Form W-2

    • Form W-2 AS

    • Form W-2 CM

    • Form W-2 VI

    • Form W-2 GU

    • Form W-2 PR

    • Form 499R-2 or

    • A letter to substantiate all credits attached

  5. Please see IRM 21.6.3.4.2.4, Excess Social Security and RRTA Tier I Tax Credits and IRM 21.6.4.4.19, Additional Medicare Tax to calculate the correct amount of excess social security tax withheld.

  6. Excess social security tax claims are processed as "Territory" claims when the taxpayer is not required to file a U.S. tax return, and as "Domestic" claims when they are required to file a U.S. tax return.

  7. Territory Claims:

    1. The majority of taxpayers filing excess social security tax claims are not required to file a U.S. tax return. However, Form 1040-SS or 1040-PR can be used, as there is now a provision to report excess social security tax in Part 1, Line 7 on these returns.

    2. When the taxpayer is not required to file a U.S. return, process the claim as noted in paragraph 10, below.

  8. Processing Territory claims:

    1. Check the Master File, using CC TXMOD or CFOL, for the possible filing of a return.

      If ... Then ...
      A return is on the Master File Verify that the excess social security tax has not been previously refunded.
      The refund has not been previously allowed but a return is on MF Use Reason Code 055 with Source Code 1 to adjust the account. Input TC 290 .00 and Credit Reference Number 252 for the amount of the excess social security tax.
      There is no record of a return on the Master File Check the Automated Non-Master File (ANMF) system to determine if a claim was previously processed. If you do not have access to the ANMF, see your lead or manager for assistance.
      A refund has been previously issued Disallow the claim.
      A refund has not been issued and there is no return posted on Master File Process the claim, by doing the following:
      1. Prepare Form 1040-SS based on the information provided by the claimant. Ensure the proper entity information is entered on the dummy return.

        • Enter the excess FICA on line 7 of the Form 1040-SS

        • On the signature line enter "signature on attached claim, do not detach"

      2. Maintain the signed Form 843, or taxpayer claim in the CIS data base.

      3. Send completed Form 1040-SS for processing, attach the claim containing the taxpayer signature.

  9. Domestic Claims:

    1. Excess FICA claims are processed as domestic when the taxpayer is liable to file a U.S. tax return.

    2. The adjustments are done on the Master File using IDRS.

    3. Normal interest is allowed when processing these claims.

      Note:

      Normal interest includes consideration of IRC § 6611(e)(2) (i.e., amended claims date processing). See IRM 20.2.4, Overpayment Interest.

  10. Processing Domestic claims:
    Research the Master File, using CC TXMOD and/or CFOL, for the tax return consistent with the claim filed.

    If... Then...
    A tax return has been filed Verify that the excess social security tax has not been previously refunded.
    The refund has been previously allowed Advise the taxpayer and return the claim.
    The refund for this credit has not been previously issued Allow the refund, adjust the account using a TC 290 .00 and Credit Reference Number 252 for the amount of the excess social security tax. Use RC 055, SC 1, and FLC 66.

21.8.1.4.7  (10-01-2013)
Military Spouses Residency Relief Act

  1. Public Law No. 111-97, 123 Stat. 3007 (2009) established the Military Spouses Residency Relief Act, (MSRRA).

  2. MSRRA enacted on November 11, 2009 applies to all of taxable year 2009 and subsequent years.

  3. MSRRA applies to certain spouses of active duty service members (civilian spouses) who:

    • Were away from their residence or domicile (tax residence) in one of the 50 States or the District of Columbia solely to be with the service member spouse serving in compliance with military orders at a military duty station in American Samoa, Guam, the Northern Marianna Islands, Puerto Rico or the U.S. Virgin Islands.

    • Maintained their tax residence in one of the 50 States or the District of Columbia.

  4. MSRRA also applies to civilian spouses who:

    • Were away from their tax residence in one of the U.S. territories solely to be with the service member spouse serving in compliance with military orders at a military duty station in one of the 50 States or the District of Columbia.

    • Maintained their tax residence in one of the U.S. territories under MSRRA.

  5. Notice 2010-30 provided certain civilian spouses claiming MSRRA relief with the following:

    • For eligible civilian spouses claiming tax residence in a State or the District of Columbia under MSRRA, an extension of time through October 15, 2010 for paying the amount of tax shown on a federal income tax return for the tax year ending December 31, 2009.

    • For eligible civilian spouses claiming tax residence in a U.S. territory under MSRRA, a refund of federal income taxes paid to the IRS by civilian spouses meeting certain criteria.

    Note:

    Notice 2011-16 dated April 8, 2011, provides eligible civilian spouses an extension of time to pay income taxes until October 17, 2011, for the 2010 tax year.

  6. Notice 2011-6 dated April 8, 2011, extends the relief and procedures under Notice 2010-30 to tax year 2010. Notice 2012–41 further extends the relief set forth in Notice 2010-30 to 2011 and subsequent years.

  7. Under notice 2012-41, such civilian spouses may be eligible for an extension of time to pay their income tax to October 17, 2012 for the 2011 tax year. For subsequent tax years, the same procedures will be adjusted for the appropriate filing date.To receive the extension taxpayers should mark "MSRRA" in red ink at the top of their returns and include the Form W-2, or equivalent that they received from their employers in the U.S. territory where they worked with their returns. Civilian spouses must mail the forms to the IRS Service Center indicated in the Form 1040 instructions.

  8. Civilian spouses filing married filing separately should also attach the following declaration:

    Penalty of Perjury Statement
    "I am claiming ___________________ as my residence or domicile under the Military Spouses Residency Relief Act ( "MSRRA" ). Under penalties of perjury, I declare that I am qualified for relief under MSRRA because I am present in __________________________ solely to accompany my spouse who is a service member serving in compliance with military orders, and my claimed residence or domicile is the same as my spouses residence or domicile."

    Note:

    The signature must be original. Faxed and/or stamped signatures are not acceptable.

  9. Taxpayers present and working in one of the 50 States or the District of Columbia and claiming a tax residence in one of the territories may file a claim for refund. The refunds will be for income tax withheld and remitted by their U.S. employers to IRS, or for estimated tax payments that the taxpayer remitted to the IRS during 2010. Taxpayers claiming a tax residence in one of the territories under MSRRA and seeking a refund should:

    • Complete the appropriate Form 1040 and mark "MSRRA" in red ink on the top of the return.

    • Attach the statement signed under penalties of perjury described in statement 7 above, verifying the taxpayer’s qualifications for relief under MSRRA, and

    • Mail the Form 1040 and attachments to the IRS Service Center indicated in the Form 1040 instructions.

  10. If civilian spouses who qualify under MSRRA call or submit correspondence requesting abatement of Failure to Pay penalties previously assessed for tax year 2010 take the following actions:

    • Research the account to verify a Failure to Pay Tax timely penalty is assessed.

    • Secure an originally signed perjury statement described in paragraph 7, above from the civilian spouse or their authorized representative.

    • When the perjury statement is provided, grant penalty relief for the Failure to Pay Tax Timely penalty for the amount of FTP penalty computed to the original extension date. Input transaction code 271 for the amount of the assessed penalty, use source code 1 and reason code 065.

    Note:

    Interest cannot be adjusted under MSRRA.

21.8.1.4.8  (10-01-2013)
Military Cover Over - U.S. Virgin Islands, CNMI and American Samoa

  1. Pursuant to IRC § 7654, the following guidelines and procedures were established to administer United States cover over of income tax to the governments of bona fide residents serving in the United States Military.

    Note:

    Military cover over procedures for Guam are different than those used for the U.S. Virgin Islands, CNMI and American Samoa. See IRM 21.8.1.4.9. for Guam military cover over instructions.

  2. The United States Defense Finance and Accounting Service (DFAS) and U.S. Coast Guard forward to the Territories Program Manager, a listing of all Active Duty Military Personnel who claim a U.S. territory as their State of Legal Residence, along with a list of reservists whose units are in the territories. This listing includes the name, SSN, tax year, amount of military pay, and amount of tax withheld.

  3. The Territories Program Manager reviews the listings, separates them by territory and forwards them to the PSPC Planning and Analysis Staff. The PSPC Planning and Analysis Staff Analyst then forwards the listings to the International Accounts Management Department for processing.

  4. The International Accounts Management Department researches each account identified on the listing for the presence of a TC 150.

  5. Use the following chart for determining the tax accounts to include in the cover over.

    If... Then...
    The account does not have a TC 150 posted to Master File under the given SSN Research using the Command Codes FINDS, NAMEI, NAMES and INOLE for another SSN.
    No other SSN found No action is required on the account. Annotate on the cover over listing "No return on file."
    Another SSN found Research Master File for a TC 150.
    No TC 150 posted No action is required on the account. Annotate on the cover over listing "No return on file" and reference the other SSN researched.
    TC 150 has posted Verify the amount of tax.
    The account has a TC 150 posted with a zero money amount and no additional tax assessment No action is required on that account. Annotate on the DOD listing "Zero tax liability."
    The account has a TC 150, TC 290 and/or TC 300 with a significant money amount Check for a TC 768 (EIC) and or TC 766.
    No TC 768 and or TC 766 posted in module Abate the amount of the total tax assessment (TC 150, TC 290, TC 300 or a combination).
    The amount of the TC 768 (Total EIC available considering all TC 768, 764, 765 on the module) and/or TC 766 is more than the total tax assessment Input a TC 290 .00 and notate in the remarks section "SD - No cover over available" . (The history sheet is the Source Document.) Also notate DOD listing.
    The amount of the TC 768 (Total EIC available considering all TC 768, TC 764, TC 765 on the module) and/or TC 766 is less than the total tax assessment Abate the amount of the total tax assessment (TC 150 amount minus the EIC TC 768/764 and any TC 766 amount).

    Caution:

    Abate all manually assessed penalty and interest.

  6. If the account shows a jointly filed return of a military employee and his or her non-military spouse, an allocation may be necessary.

    Caution:

    These allocation procedures only apply to American Samoa and the U.S. Virgin Islands cover overs. See IRM 21.8.1.4.9.1 for allocation procedures used for Guam and CNMI military cover over.

  7. Cover over only the portion of the tax on the joint return attributable to the income of the military spouse. Do not cover over the portion of the tax attributable to the non-military spouse. To allocate the tax to be covered over, divide the income attributable to the military spouse by the total income on IMFOLR. Multiply the resulting percentage by the net tax on IMFOLT for the joint account. The result is the amount of tax to be covered over on the joint account.

    Joint Account Tax Cover Over Calculation
    Military Spouse Income X Net Tax on IMFOLT = Amount to Cover Over
     
    Total Income on IMFOLR  

    Note:

    If the non-military spouse was issued a Form W-2AS or W-2VI and it shows income tax withheld, deduct the amount of withholding from the amount of tax to cover over since this was paid to the territory treasury.

  8. Do not cover over tax on income earned that is not for services performed for the armed forces (for example, employment at a retail establishment in the United States prior to or subsequent to the military service in the same year).

  9. If self-employment tax and/or unreported tip income is present, do not abate the self employment tax or unreported tip income portions.

  10. Upon completion of all research, prepare a "Non-Filer Listing" showing the names, SSN's and withholding amounts for accounts where it is determined in step (5) that there is no return on file. Send the completed "Non-Filer Listing" to the Territory Program Manager through the PAMC Planning and Analysis staff prior to the input of any account adjustments.

    Note:

    " Non-Filer Listings" need to be prepared only for Guam, American Samoa and CNMI military cover overs since U.S. Virgin Island non-filers are identified through the regular VI cover over process.

  11. Input all abatements using FLC 66, IRS Received Date (use current date), Category Code "ISPJ " , Source Code 3, Reason Code 036 (Tax Credits), Hold Code 4, and in remarks notate "SD-Military cover over."

  12. Every account identified on the list must have an annotation on the Department of Defense (DOD) listing:

    1. The amount of the cover over, or

    2. The explanation of why there is no cover over. The key is as follows:

    Cover Over Key
    1 = No return (No TC 150)
    2 = No tax liability

  13. Every account where tax is abated requires a transfer of the credit from the individual's account to the specific territory general ledger account. This transaction requires the preparation of Form 3809.

  14. Request that Accounting number the Form 3809 using the Blocking Series specified for the territory that we are transferring funds for taxes paid. See IRM 21.8.1.4.1 (5).

  15. Complete the Debit Portion of Form 3809 as follows:

    • Name and Address box - The individual's entity information

    • TIN - The individual's SSN

    • MFT - 30

    • Check the MF box

    • Tax period - Tax period being debited

    • Transaction date - Current date

    • 1st TC (Transaction Code) - TC 820

    • Debit Amount - TC 291 amount or available credit

      Reminder:

      Consider previously assessed penalties and interest that will be affected by the adjustment action. Any decrease in penalties or interest, which have been paid, must be added to the overpayment amount. In addition, unassessed accruals of penalty and/or interest may reduce the overpayment amount.

  16. The total amount of the duplicate military cover overs and adjustment corrections (IRM 21.8.1.4.8.2) must be deducted from the amount covered over to the territory.

  17. Complete the Credit Portions of Form 3809 as follows:

    1. Name and address box - specify the territory and "6900 Account"

    2. Check the NMF Box

    3. Transaction date - current date

    4. 1st TC (transaction) -TC 700

    5. Credit amount - TC 291 amount or available credit (which ever is less)

  18. The Explanation Box must read "Military Cover Over - territory name."

  19. The package sent to Accounting must include the following:

    • Forms 3809

    • Adding machine tape showing individual Form 3809 amounts including the total

    • Amount column totaled and noted on the DOD listing

      Note:

      Amounts on the adding machine tape and the DOD listing must match.

    • Clip Forms 3809, DOD listing and adding machine tape together.

  20. When all Forms 3809 are completed and totaled, return all DOD listings and the individual Forms 3809 to the Manager for review.

  21. After review, prepare one master refund and a cover letter listing the amount of the cover over transmittal and any repayments.

    Note:

    A master refund and cover letter are necessary for each territory for each individual tax year.

  22. Each military cover over must include deposit routing information. A sample of this deposit form can be found as an exhibit in revisions to this IRM prior to 1-1-2006. If this information is missing, correspond with the U.S. Territory Program Manager for routing instructions.

    Reminder:

    Information on the Accounting procedures involved in the control and disbursement of the cover over funds can be found in IRM 3.17.79.8, Processing Miscellaneous Refunds.

  23. Place a monitoring control under IDRS profile number 0533311112 on the accounts to await the posting of the TC 820 amounts. Check the weekly CCA/42/43 (ZERO OVERAGE LISTING) to ensure that by scanning the columns, the " -K" freeze is still reflected in the "BOC CLC FREEZE CODES" column, and the "MF MODULE BALANCE AMT" column shows a credit. If these two items are not present on the listing, it is possible that an erroneous refund of the module credit balance occurred prior to the posting of the TC 820 debit. Further research of the account is necessary if the CCA/42/43 zero overage listing items have changed in these columns, see IRM 21.4.5, Erroneous Refunds.

    1. If credit release occurs and the TC 846 has not yet been issued (check 23C date of refund), initiate refund intercept procedures included in IRM 21.4.1.4.10, Refund Intercepts CC NOREF.

    2. If the refund cannot be stopped, send Letter 510C to the taxpayer requesting return of the refund check.

    3. Coordination with the unpostable area is necessary as the TC 820 will not post if the TC 846 is not intercepted. CAUTION: Make sure monitoring is done until the TC 820 is posted.

      Note:

      Local procedural deviations may need to be negotiated if taxpayer does not return the erroneous refund. Bring this to the managers' attention for coordination with the Planning and Analysis Staff for resolution.

21.8.1.4.8.1  (03-03-2011)
Subsequent Adjustments to Military Cover Over Accounts - U.S. Virgin Islands, CNMI and American Samoa

  1. Adjustments may need to be input to accounts after they have been covered over. However, the tax on the account would have been abated and the credit transferred to the territory based on the military cover over procedures.

    Caution:

    Refer all adjustment requests on accounts with prior military cover activity to the IMF International Department of Accounts Management by fax to (267) 941-1055 or by mail to:
    Philadelphia Campus
    2970 Market St
    Mail Stop 3-E17.143
    Philadelphia, Pa 19104.

  2. Tax increases and zero net tax change adjustments can be processed using procedures in IRM Part 21 without cover over consideration.

  3. Tax decreases cannot be input using a TC 291 since there is no tax showing on the module as a result of the cover over. The net refund due the taxpayer as a result of the requested adjustment must be calculated, but the adjustment cannot be input to the account.

  4. Input TC 290 for .00 to file the adjustment request as a source document. Input SD remark "subsequent adjustment to military cover over account - tax decrease per IRM 21.8.1.4.7.1."

  5. Issue a manual refund (TC 840) to the taxpayer for the net refund amount as calculated in step (3) above with any applicable interest. Input a TC 470 to the module to prevent the issuance of any balance due notices. Refer to IRM 21.4.4, Manual Refunds for manual refund instructions.

  6. These cases must be carefully monitored by Accounts Management until the credit is applied to the account from the next cover over for the territory, and TC 470 updated as necessary, to prevent the issuance of balance due notices until the account is resolved.

  7. Apply credit to the taxpayer account from the next cover over to satisfy the balance due situation as follows:

    1. Debit (TC 820) the NMF 6900 account stating the name of the territory.

    2. Credit (TC 700) the taxpayer account where the tax decrease was necessary.

    3. Input a TC 570 on the credit side of the transaction to prevent the release of the credit from the T/P account when necessary.

    4. Indicate in Remarks "Subsequent adjustment to military cover over account" to: (name of territory) from (tax year).

  8. Release the TC 470 notice freeze and input history items on module as follows: "MILCO-ADJ" and "21.8.1.4.7" .

21.8.1.4.8.2  (10-01-2007)
Repayment of Duplicate Military Cover Over and Adjustment Corrections - U.S. Virgin Islands, CNMI, and American Samoa

  1. If a duplicate credit (TC 700) was processed to the military cover over account 6900 from a duplicate Form 3809, or a subsequent adjustment to an account previously covered over necessitates the repayment of credit from the territory, there is a provision to deduct these amounts as a repayment from the next year military cover over total.

    Reminder:

    ONLY use this procedure to correct Unpostable TC 820 transfers that were processed in duplicate or to satisfy a balance due situation in which a refund was issued to a taxpayer for a tax decrease needed on an account that was previously covered over. DO NOT follow this procedure on erroneous refunds.

  2. Notify the Territories Program Manager of the total repayment amount prior to the processing of the cover over disbursement to the territory.

  3. The Territory Program Manager will advise the proper territory contact of the amount of the repayment.

  4. To reduce the repayment amounts from the cover over, prepare Form 3809:

    1. Debit (TC 820) the NMF 6900 account stating the name of the territory.

    2. Credit (TC 700) the taxpayer account where the duplicate credit was transferred from or where the tax decrease was necessary.

    3. Input a TC 570 on the credit side of the transaction to prevent the release of the credit from the T/P account when necessary.

    4. Indicate in Remarks "Repayment of Duplicate Military cover over" to: (name of territory) from (tax year).

    Caution:

    The TC 700 and TC 820 amounts must be for the same amount.

21.8.1.4.9  (10-03-2007)
Military Cover Over - Guam

  1. The United States Defense Finance and Accounting Service (DFAS) and U.S. Coast Guard forward to the Territories Program Manager, a listing of all Active Duty Military Personnel who claim Guam as their State of Legal Residence, along with a list of reservists whose units are in the territories. This listing includes the name, SSN, tax year, amount of military pay, and amount of tax withheld.

  2. Pursuant to IRC § 7654, the Service is required to cover over (transfer) the net withholding on these individuals to the respective territory treasury on an annual basis. After the listing is received, it is reviewed by the Territory Program Manager and forwarded to the International Analyst on the Accounts Management Planning and Analysis Staff at the Philadelphia IRS Campus.

  3. The Department of Defense will transmit the listing of state of legal residence personnel no later than six months following the close of the wage earning year. PAMC will commence research by November 1st with a target completion date of January 31.

  4. The tax amounts shown on the listing are verified against IRS transcripts and the net withholding is calculated. No adjustments are made to the individual taxpayer accounts. The net totals, along with documentation to establish an audit trail, are forwarded to the Deputy Commissioner, International (LBI). Any accounts that are not found on the Master File are reported back to the Deputy Commissioner, International through the Territories Program Manager for forwarding to the Guam Department of Revenue and Taxation (DRT) for matching against their filing records.

  5. DRT provides verification (transcripts) of all taxpayers that they find on their file. The Territory Program Manager will add the gross amount of withholding reported on the DFAS and Coast Guard listings for those TP's who filed with DRT to the net calculated by PSPC. This amount is then reported by the Territory Program Manager to the Chief, Revenue Accounting Systems and will be included in their annual certification to the Department of Interior.

    Note:

    In this instance, the IRS does not transfer the payment to the territory treasury. Payment is made to the territory by the Department of the Interior from appropriated funds.

21.8.1.4.9.1  (01-24-2008)
Military Cover Over - Verification Procedures - Guam

  1. Request IMFOLT for each subject SSN on the listing to verify that a U.S. return was filed.

  2. If a U.S. return was filed, determine the correct amount of the net collections of tax and notate this amount on the listing. Show zero on the listing if the credits exceed the tax amount. The net tax is the TC 150 amount reduced by subtracting the self-employment tax, Earned Income Tax Credit (EITC - TC 768), Additional Child Tax Credit (ACTC), and any other applicable credits.

  3. If the account shows a jointly filed return of a military employee and his or her non-military spouse, an allocation may be necessary depending on whether the threshold amounts of IRC § 7654(a) are met.

    Note:

    These allocation procedures also apply to CNMI military cover over since the income tax rules for CNMI are similar to those of Guam.

    If... Then...
    The AGI on the joint return is less than $50,000.00 and if the gross income derived from sources within Guam is less than $5,000.00 Cover over only the portion of the tax on the joint return attributable to the income of the military spouse. Do not cover over the portion of the tax attributable to the non-military spouse. Use the formula in (4) below to determine the allocation.
    The AGI on the joint return is $50,000.00 or more and if the gross income derived from sources within Guam is $5,000.00 or more The tax on the income is allocated by source. Where both spouses live and work in Guam, an allocation is not necessary. Cover over the total tax shown on the joint return.

    Note:

    If the non-military spouse was issued a Form W-2GU and it shows income tax withheld, deduct the amount of withholding from the amount of tax to cover over since this was paid to the Guam treasury.

    Note:

    Do not cover over tax on income earned that is not for services performed for the armed forces. For example, employment at a retail establishment in the United States prior to or subsequent to the military service in the same year.

  4. To allocate the tax to be covered over, divide the income attributable to the military spouse by the total income on IMFOLR. Multiply the resulting percentage by the net tax on IMFOLT for the joint account. The result is the amount of tax to be covered over on the joint account.

    Cover Over Allocation Calculation
    Military Spouse Income X Net Tax on IMFOLT = Amount to Cover Over
     
    Total Income on IMFOLR  

  5. A separate "non-filer listing" must be prepared by the employee performing the verification to record the name, SSN, and gross withholding as reported on the listing of each individual who did not file a U.S. tax return. Each page of the listing must reflect the verified total net tax amount on that page.

    1. Notate the non-filer listing "No Return" if IDRS research shows that no U.S. tax return, other than a Form 1040-SS, has posted to the account. Do not mark the listing " No Return" if research shows that the taxpayer filed a joint return under the spouses TIN.

      Note:

      If a "-C" freeze (Combat Zone Indicator) is present on the account, notate the non-filing listing with a "C" .

    2. Input a TC 971 Action Code 150 on the account. Use the return due date as the transaction date and indicate "military double non-filer" in the remarks field.

      Note:

      If the entity is not present on Master File, input a TC 000 to establish the entity, monitor for the transaction to post, then input the TC 971 Action Code 150. Use the address of the Philadelphia Accounts Management Campus because no notices should be sent since these are not our taxpayers.

  6. After all accounts on the listing are researched and amounts verified, the annotated and totaled DOD listing, along with the "non-filer listing" prepared in step (5) above, must be sent to the Territory Program Manager through the PAMC Planning and Analysis staff.

21.8.1.4.9.2  (05-30-2013)
Unpostable Code 141 - Reason Code 0

  1. There is an agreement between the IRS and the Guam Department of Revenue and Taxation (GDRT) whereby cover over will be paid to military non-filers with the condition that ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

  2. Returns that attempt to post to an account with a TC 971 Action Code 150 will unpost since these accounts have been covered over and the taxpayer must file with the GDRT. Unpostables will void the DLN and send the returns to Philadelphia Accounts Management, Building Location Number 3.J23.134, to be worked by the international departments.

    Exception:

    Form 1040-SS returns will not unpost.

  3. PAMC must research to ensure that the taxpayer was listed on the cover over record for the tax period in question.

    If ... Then ...
    The taxpayer is not listed on the cover over record
    1. Input TC 972 Action Code 150.

    2. Reinput the return for processing.

    The taxpayer is listed on the cover over record
    1. Close the IDRS unpostable control base.

    2. Line out the DLN and circle out the IRS received date.

    3. Notate on the cover over record the date that the return was sent to GDRT.

    4. Send taxpayer Letter 86C to advise them that their tax return is being sent to the Guam Department of Revenue and Taxation, and not to contact IRS for the status of their refund, if applicable.

    5. Send the return to GDRT using the "international" option on Form 9814, Express Services Routing Form. The shipping information is listed below.

    Guam Department of Revenue and Taxation
    Income Tax Assistance and Processing Branch
    Attn: Paul Terlaje or Lawrence Terlaje
    1240 Route 16
    Barrigada, Guam 96913
    Phone: (671) 635-1842

21.8.1.5  (10-01-2009)
Puerto Rico

  1. Puerto Rico is a self-governing commonwealth in association with the United States. The major difference between Puerto Rico and the 50 states is that bona fide residents of Puerto Rico are generally exempt from U.S. income tax on Puerto Rico source income.

  2. Puerto Rico's tax system is patterned after the U.S. tax system but there are variations in law and tax rates. U.S. citizens who have income derived from Puerto Rican sources may be liable for payment of Puerto Rican taxes. The U.S. citizen may also be liable for filing a U.S. tax return. The source of the income is an important factor in determining the tax liability of the income.

  3. Wages earned by U.S. citizens for services performed in Puerto Rico for the U.S. government or private employers is considered income from Puerto Rico sources.

  4. Specific rules apply to residents of Puerto Rico who are employees of the U.S. government. As explained later, a U.S. return must be filed and Form 1116 used to calculate the Foreign Tax Credit to avoid double taxation.

  5. Form 1040-PR, a Spanish language version of the Form 1040-SS, is used to report self-employment tax which is filed with the IRS in addition to the income tax return filed with Puerto Rico.

    Note:

    Route inquiries concerning Form 1040-PR to the IMF International Department at the Philadelphia Campus via an e-4442 or prepare a paper Form 4442. Do not route non-form specific inquiries, such as installment agreement requests, to Philadelphia. Work these inquiries at the receiving site.

21.8.1.5.1  (10-01-2012)
Filing Requirements and Foreign Tax Credits - Puerto Rico

  1. Use the following chart to determine the taxpayer's filing requirement and foreign tax credit. Publication 570, Tax Guide for Individuals with Income from U.S. Possessions, is also helpful.

    If the taxpayer is... And... Then...
    a bona fide resident of Puerto Rico during the entire tax year has U.S. and Puerto Rico source income
    • a Puerto Rico tax return must be filed reporting income from worldwide sources. Wages for services performed in PR, whether for a private employer, the U.S. Government, or otherwise, is reported on the PR return. A foreign tax credit can be claimed on the PR return for income taxes paid to U.S. on U.S. source income, and U.S. government wages earned in PR.

    • a U.S. tax return must be filed reporting income from worldwide sources, but excluding PR source income.

      Exception:

      Wages earned in PR from U.S. Government or any of its agencies cannot be excluded.

    a bona fide resident of Puerto Rico during the entire tax year
    • has only PR source income, and

    • does not have wages earned in PR from U.S. Government or any of its agencies, and

    • has no U.S. source income.

    • a PR tax return must be filed reporting income from worldwide sources

    • the taxpayer does NOT have a U.S. income tax return filing obligation.

    a U.S. citizen or resident alien, and is NOT a bona fide resident of Puerto Rico during the entire tax year has U.S. and Puerto Rico source income
    • a PR tax return must be filed reporting only PR source income, including wages earned in PR from U.S. Government or any of its agencies.

    • a U.S. tax return must be filed reporting income from worldwide sources. Form 1116 can be used to claim a credit for income taxes paid to Puerto Rico on Puerto Rico source income.

    a U.S. citizen or resident alien, and is NOT a bona fide resident of Puerto Rico during the entire tax year
    • has only PR source income, including wages earned in PR from U.S. Government or any of its agencies, and

    • has no U.S. source income

    • a PR tax return must be filed reporting only PR source income, including wages earned in PR from U.S. Government or any of its agencies.

    • a U.S. tax return must be filed reporting income from worldwide sources. Form 1116 can be used to claim a credit for income taxes paid to Puerto Rico on Puerto Rico source income.

    a non-resident alien, and is NOT a bona fide resident of Puerto Rico during the entire tax year has U.S. and Puerto Rico source income
    • a PR tax return must be filed reporting PR source income.

    • a U.S. tax return (Form 1040NR) reporting U.S. source income and following the rules for a U.S. non-resident alien.

    married filing a joint return but living apart, with one residing in the U.S. and the other a bona fide resident of PR   the taxpayers must report income under the general rules above.
    a member of the U.S. Armed Forces stationed in Puerto Rico, and has a "state of legal residence" in the U.S, or the member’s civilian spouse is eligible for MSRRA benefits.   the military member is not considered a bona fide resident of Puerto Rico, and must file income tax returns based on the rules for U.S. citizens that are not bona fide residents of PR.
    a bona fide resident of Puerto Rico
    • has income from a trade or business, and

    • is not required to file Form 1040 (U.S.)

    a Form 1040-SS, U. S. Self-Employment Tax Return, must be filed to report self-employment income and pay self-employment tax, in addition to the income tax return filed with Puerto Rico.

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , to the IMF Examination Classification unit as CAT A claims. Follow local routing procedures and include CC DDBKD prints for each dependant listed on the Form 1040-PR.

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

21.8.1.5.2  (10-01-2012)
Allocation of Deductions and Credits - Puerto Rico

  1. Taxpayers who are required to file both a U.S. income tax return and a Puerto Rico income tax return may not claim deductions or credits applicable to exempt PR income on their U.S. income tax return.

  2. Deductions which do not specifically apply to any particular type of income must be allocated between the PR sources and income from other sources to find the amount of deductions which can be claimed on their U.S. tax return.

  3. The following are examples of deductions which do not definitely apply to a particular type of income:

    • Alimony payments

    • Standard deductions

    • Certain itemized deductions (i.e., medical expenses, charitable contributions, real estate taxes and mortgage interest)

  4. Use the following formula to determine the allowable portion of the deductions.

    Allowable Deduction Calculation
    gross income subject to U.S. tax X deductions = allowable portion of deductions
     
    gross income from all sources  

  5. Personal exemptions are allowed in full.

  6. Any U.S. citizen who is required to report Puerto Rico source income on his U.S. tax return may claim a foreign tax credit on the U.S. return, to the extent computed on Form 1116 for income taxes paid to Puerto Rico on Puerto Rico source income. Form 1116 must be attached to the U.S. tax return, Form 1040.

  7. When computing the foreign tax credit, taxpayers who have both excludable and non-excludable income from Puerto Rican sources must reduce the foreign tax paid or accrued by the taxes allocable to the exempt income. Use the following formula to determine the reduction in foreign taxes.

    Tax Reduction Formula
    Income from PR sources not subject to U.S. tax less deductible expenses allocable to that income X Tax paid or accrued to Puerto Rico = Reduction in Foreign Taxes
    Total income subject to PR tax less deductible expenses allocable to that income

  8. Taxpayers can only claim withholding credits that have been paid to the United States on their U.S. tax return.

    1. The only withholding that is allowed is the withholding on W-2s that have an address in one of the 50 states or the District of Columbia.

    2. If the address of the employer is not in one of the 50 states or the District of Columbia, disallow the credit.

  9. Consider FICA paid on a Puerto Rican W-2 when verifying excess FICA claimed on Form 1040.

21.8.1.5.3  (10-01-2013)
Child Tax Credit (CTC) for U.S. Government Employees in Puerto Rico

  1. A child tax credit is allowed for each qualifying child under the age of 17 at then end of the year. The credit amounts increase according to the following table.

    If the tax year is: Then the credit is:
    1998 $400.00 per child
    1999 and 2000 $500.00 per child
    2001 and 2002 $600.00 per child
    2003 and subsequent $1,000.00 per child
  2. The Child Tax Credit may be both a non-refundable credit and a refundable credit. Refer to IRM 21.6.3.4.2.8, Schedule 8812, Additional Child Tax Credit for information on Schedule 8812, Additional Child Tax Credit.

  3. The Child Tax Credit is phased out by $50.00 for each $1,000.00 that the AGI exceeds:

    • $110,000.00 for married filing jointly

    • $55,000.00 for married filing separately

    • $75,000.00 for single, head of household, and qualifying widow(er)

  4. The Child Tax Credit reduces the amount of tax owed by the taxpayer. In addition, if the credit exceeds the tax liability, U.S. Government employees in Puerto Rico can claim the difference as a refund. Details on how to compute the credit can be found in the Form instructions and in Publication 972, Child Tax Credit.

  5. To claim the Child Tax Credit, the taxpayer must file Form 1040/1040A.

    Note:

    U.S. Government employees need to file their Form 1040/1040A with the IRS and their Form 481/482 with the Department of Hacienda - Puerto Rico. They can also qualify for Child Tax Credit and the Additional Child Tax Credit.

  6. U.S. Government employees in Puerto Rico may be able to reduce their Federal tax liability by the amounts listed in the table in (1) above for each qualifying child under the age of 17. A qualifying child for this credit is someone who :

    • Is claimed as a dependent on the tax return

    • Is a son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew). A foster child is any child placed with you by an authorized placement agency or by a judgment, decree, or other order

    • Is under the age of 17 at the end of the tax year

    • Was a U.S. citizen, U.S. national, or a U.S. resident alienA.

      Caution:

      The Child Tax Credit is not available to bona fide residents of PR who are not U.S. Government employees.

21.8.1.5.3.1  (10-01-2013)
Additional Child Tax Credit (ACTC) for Non U.S. Government Employees in Puerto Rico

  1. Additional Child Tax Credit allows qualifying taxpayers to offset their tax liability or to get a refund if no tax is owed.

  2. Qualified residents of Puerto Rico are encouraged to file Form 1040-PR where the Additional Child Tax Credit can be claimed directly on the tax return by completing Parts I and II. The Schedule 8812 is not necessary when the Form 1040-PR or Form 1040-SS is used.

  3. Qualifying taxpayers are those taxpayers that:

    • Are bona fide residents of Puerto Rico for the tax year

    • Have social security and Medicare taxes withheld from their wages, or the taxpayer paid self-employment tax

    • Have three or more qualifying children with valid taxpayer identification numbers (TIN).

  4. A qualifying child for purposes of the child tax credit for tax years 2005 and subsequent is a child who:

    • Is a son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, half sister, or a descendant of any of them (for example, your grandchild, niece, or nephew). A foster child is any child placed with you by an authorized placement agency or by a judgment, decree, or other order and

    • Is under the age of 17 at the end of the tax year

    • Is younger than the taxpayer (or the taxpayer’s spouse, if filing jointly) or was permanently and totally disabled

    • Did not provide over half of his or her own support for the tax year

    • Lived with the taxpayer for more than half of the tax year or an exception applies

    • Is not filing a joint return for the tax year or is filing a joint return for the tax year only to claim a refund of estimated or withheld taxes

    • Was a U.S. citizen, U.S. national, or a U.S. resident alien

  5. Validate the claim for the Additional Child Tax Credit prior to adjusting the account.

    Note:

    Refer to the current Form 1040-PR/1040-SS instructions for guidance on allowing ACTC.

    Reminder:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  6. Allow claims with Form 1040/Form 1040A or Form 1040X (if TC 150 is present) in lieu of Form 1040-PR or Form 1040-SS when the taxpayer provides documentation. This documentation includes:

    1. Names and SSN's of qualifying children.

    2. The primary, secondary and dependent TIN(s) on Form 1040/1040A must be valid.

    3. Schedule 8812 must be attached to Form 1040/1040A and be completed.

    4. Credit on Schedule 8812 must be recomputed.

    5. Verify that the amount on Schedule 8812 is the same as on Form 1040/1040A.

    6. Form W-2PR must be attached to Form 1040/1040A/1040PR/1040SS/1040X.

    7. Ensure the Additional Child Tax Credit does not exceed the amount of social security, Medicare and Railroad Retirement tax withheld or the allowable percentage of the SE tax paid. If there are both wages and SE tax paid, the ACTC credit cannot exceed the amount of social security, Medicare and Railroad Retirement tax withheld plus the allowable percentage of the SE tax paid.

      Note:

      See the Additional Child Tax Credit Worksheet for the allowable percentage on Page SS-7 of the Instructions for Form 1040–SS.

    8. If the claim is complete and valid, allow the Additional Child Tax Credit using TC 29X, Reference Code 336 to generate a TC 766. Use Reason Code 061 (Payments and/or Credits).

      Note:

      When reversing Reference Code 336, a TC 29X with Reference Code 336 (with - minus) generates a reversal TC 767. Reason Code 061 (Payments and/or Credits) must be used.

  7. When the Form 1040/1040A is a married filing joint return and the original return was other than a married filing joint return, follow the procedures in (6) above with the following considerations:

    1. Check for copies of Form 1040-PR and Form 1040-SS, when applicable.

      Note:

      The only purpose that the Form 1040-PR and Form 1040-SS serve is to validate that the self-employment tax was paid - DO NOT ADJUST THE TAX.

    2. Change the taxpayer's entity to married filing joint under the primary SSN. This allows the issuance of a joint refund check.

      Caution:

      When changing the ENMOD and the spouse has a different name, make sure brackets i.e., ]surname] are placed around the primary taxpayer's surname.

    3. Change the taxpayer's entity back to its original status using a 2 cycle posting delay.

  8. When the Form 1040/1040A is not filed but is needed, or Schedule 8812 is incomplete and cannot be perfected using the information available, proceed as follows:

    1. If the Schedule 8812 is incomplete and Form 1040/1040A was not processed (no TC 150 posted), "X" out the received date and reject the claim using IDRS 916C letter.

    2. If the Schedule 8812 is incomplete and Form 1040/1040A was processed (TC 150 posted), "X" out the received date and reject the claim using IDRS 916C letter. Input a TC 290 for .00 and attach a copy of the Schedule 8812 request. Use the return and Schedule 8812 copy as the Source Document.

      Caution:

      Do not return a numbered TC 150/976 document or a statute year return to the taxpayer.

  9. When the Schedule 8812 is complete (all necessary documentation is attached) and the claim for Additional Child Tax Credit has been verified, allow the credit using Reference Code 336 which generates a TC 766 credit. Follow procedures in (6) when applicable.

  10. Previously allowed Additional Child Tax Credit appears on the tax account screen as a TC 766 with Reference Code 336.

  11. When the credit is partially or fully reversed, the tax account shows a TC 767 with Reference Code 336.

  12. Disallow the credit if it has been previously allowed. See IRM 21.6.3.4.2.8, Schedule 8812, Additional Child Tax Credit, for additional information.

21.8.1.5.3.2  (10-01-2013)
Additional Child Tax Credit (ACTC) for U.S. Government Employees in Puerto Rico

  1. Beginning in 2001, the Additional Child Tax Credit is available to a person with one or two qualifying children. Additional Child Tax Credit is for certain individuals who get less than the full amount of the child tax credit.

  2. The Additional Child Tax Credit for one or two qualifying children is computed based on 15% of the earned income (that is taken into account in computing the taxable income) in excess of:

    Year Amount
    2009 through 2013 $3,000.00
    2008 $8,500

    The total maximum child tax credit is $1,000.00 per child for 2003 through 2013. Follow procedures in IRM 21.6.3.4.2.8, Schedule 8812, Additional Child Tax Credit. There is a different computation for three or more qualifying children.

    Note:

    Schedule 8812, Additional Child Tax Credit, must be used to figure the additional credit and must be attached to Form 1040/1040A. See Publication 17 and Publication 972 for more information on the Additional Child Tax Credit.

21.8.1.5.4  (10-01-2012)
Self-Employment Tax - Puerto Rico

  1. Bona fide residents of Puerto Rico generally do not pay income tax to the U.S. on income earned in Puerto Rico, however they do pay self employment tax on income from a Puerto Rico trade or business.

  2. Residents of Puerto Rico with income from a trade or business from sources within Puerto Rico, who are not required to file Form 1040 (U.S.), must file Form 1040-PR, Planilla Para La Declaracion De La Contribucion Federal Sobre el Trabajo por Cuenta Propia, or Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico), with the United States to report self-employment income and pay self employment tax, in addition to the income tax return filed with the Government of Puerto Rico.

    1. The Form 1040-PR and the Form 1040-SS resemble a combination of Form 1040 Schedules C, F, SE and Schedule 8812. It also has a provision in Part I, line 4 to enter the total tax from Anexo H-PR.

    2. See IRM 21.8.1.4.4. for information on the use of Form 1040-PR and Form 1040-SS.

  3. Bona fide residents of Puerto Rico, who have both U.S. source income and self-employment income of $400 or more, must file Form 1040 to report U.S. source income and attach Schedule SE to report self-employment tax.

    Note:

    When only self-employment income is earned and Form 1040 is not required, the self-employment income is reported on Form 1040-PR or 1040-SS.

  4. When the taxpayer files both Form 1040 and Form 1040-PR,

    1. If the Form 1040 posted first, do not change ENMOD when the account is adjusted to assess the Form 1040-PR.

    2. If the Form 1040-PR posted first, change the ENMOD to the information on the Form 1040, when the 1040 is processed.

  5. The posting of an amended Form 1040-PR generates the following CP notices:

    • CP29, if an original return is not posted

    • CP36, if an original return is posted

  6. Taxpayers who file U.S. Form 1040 and exclude self-employment income reported on either the Form 1040-PR or 1040-SS from their gross income, cannot take the deduction of one-half of the self-employment Tax on Form 1040.

21.8.1.5.5  (10-01-2013)
Household Employment Taxes - IMF Procedures

  1. On January 1, 1995, the Social Security Domestic Employment Reform Act (SSDERA) of 1994 was enacted. As a result, domestic service employment taxes are now collected with income tax rather than employment taxes.

  2. Beginning in 1995, domestic employees under the age of 18 are excluded from coverage if being a "Domestic Employee" is not their principal occupation. This provision is effective regardless of the amount of wages paid to the employee under 18.

    Note:

    A "student" is considered an occupation.

  3. A domestic employee receiving less than $1,800.00 from an employer for tax year 2013 is not subject to Household employment taxes. The thresholds for prior years are as follows:

    1. $1,800.00 for 2012

    2. $1,700.00 for 2009 through 2011

    3. $1,600.00 for 2008

  4. Wages paid after December 31, 1994, are reported on the domestic employers Schedule H/H-PR attached to Form 1040, Form 1040NR, Form 1040-PR, Form 1040-SS, or Form 1041. Domestic employers not liable for a Form 1040, Form 1040NR, Form 1040-PR, or Form 1040-SS must file a "stand-alone" Schedule H/H-PR.

    Note:

    On a "stand-alone" Schedule H/H-PR, Submission Processing prepares a dummy Form 1040, Form 1040NR, Form 1040-PR, or Form 1040-SS with a Return Processing Code of "Y" or Form 1041 for BMF accounts.

  5. Domestic employers reporting the additional tax with their individual taxes report the tax on Line 59b for the Form 1040, Line 58 for the Form 1040NR, Line 4 for Form 1040PR/SS. Employers reporting the additional tax on Form 1041 use line 23.

    1. Include this additional tax with the TC 150 amount.

    2. Use the appropriate Blocking Series and RC 050 to adjust employment taxes from Schedule H/H-PR.

      Caution:

      See IRM 21.6.4.4.8, Schedule H, Household Employment Taxes, for additional instructions.

  6. Social Security Domestic Reform Amendments (SSDERA) of 1994 requires the Schedule H/H-PR be filed for a calendar year.

    Note:

    Fiscal year filers must report wages paid on a calendar year basis.

  7. Domestic employers who pay wages for employment, other than domestic employment, may choose to pay the employment taxes for the domestic employment with the employment taxes for the non-domestic employment (e.g., Form 941).

  8. See IRM 21.7.2.3.4 , Deposits for deposit requirements.

21.8.1.5.6  (10-01-2008)
Schedule H/H–PR

  1. Schedule H/H-PR has four parts:

    1. Part I - Social Security, Medicare, and Federal Income Taxes (Contribuciones al Seguro Social y al Medicare);

    2. Part II - Federal Unemployment (FUTA) Tax (Contribucion Federal para el Desempleo (FUTA);

    3. Part III - Total Household Employment Taxes (Total de Contribuciones sobre el Empleo de Empleados Domesticos); and

    4. Part IV - Address and Signature (Direccion y Firma). Part IV is completed ONLY if the employer is not required to file a tax return or is filing a Form 1041.

  2. A schedule H/H-PR must be present if an amount is present in Part I, Line 4 of the Form 1040-PR/1040-SS.

  3. Schedule H/H-PR may be filed by both the Primary and Secondary taxpayers for International Form 1040 filers.

    Note:

    Use IRM 21.6.4.4.8.5, Schedule H, Household Employment Taxes, - Social Security, Medicare, and Income Taxes Part 1, when adjusting the Schedule H for secondary taxpayers. Schedule H for Form 1040NR and Schedule H-PR may be filed only by the primary taxpayer. The International 1040NR program allows for input and adjusting of the primary employment taxes.

  4. Use the Item Adjustment Code chart below to determine the appropriate reference numbers to use to adjust Part I, Social Security, Medicare, and Federal Income Taxes.

    TITLE ITEM ADJUSTMENT CODES
    Adjusted total of income tax withheld (if requested by employee) 003
    Taxable social security wages 004
    Adjusted total of SSA/Medicare Tax 007
    Taxable Medicare wages 073

  5. FUTA State Codes currently valid with MFT 10 must be input for adjusting the primary taxpayer information. The FUTA State Code is a three character code made up of T (for RN 997) or W (for RN 998) followed by a two character state.

  6. The three character State Code input is systemically converted to the applicable reference number.

    State Code Input Computer Generated Reference Number Reference
    TPR 997 Taxes
    WPR 998 Wages

    Note:

    After "T" or "W" , the appropriate two digit state abbreviation is used.

    Example:

    The taxpayer reports $1,200.00 FUTA tax paid to Puerto Rico. The tax examiner inputs State Code TPR for $1,200.00 and the computer generates a TC 997 for $1,200.00.

21.8.1.5.7  (08-12-2011)
Interest Free Adjustments

  1. The interest-free provisions for adjustments on employment taxes are in effect for errors discovered on the Schedule H/H-PR. The provisions were revised and apply to errors discovered on or after January 1, 2009. See Treas. Reg. §§ 31.6205-1, 31.6413(a)-1, and 31.6413(a)-2. Additional information can also be found in TD 9405 and Publication 926, Household Employer's Tax Guide.

    1. The interest-free provisions may apply to adjusted returns and original returns in certain cases of worker mis-classification. The adjustment to Schedule H is made by filing a Form 1040X with a corrected Schedule H (together being an adjusted return), or just an amended Schedule H if the employer has no Form 1040 filing requirement.

    2. Taxes imposed under the Federal Unemployment Tax Act FUTA (Part II, Schedule H) are not subject to the interest-free provision. As a result, when adjusting Schedule H taxes, it is sometimes necessary to use both TC 298 (for interest free income and FICA adjustments, Part I, Schedule H) and TC 290 for the FUTA portion.

    3. Underpayment adjustments to income tax withholding, social security and Medicare taxes may be made interest-free if reported by the due date of the return for the return period the error is ascertained.

    4. Generally, adjustments to income tax withholding errors may only be made for quarters during the same calendar year. Adjustments to amounts reported as income tax withheld in a prior calendar year may only be made to correct an administrative error. An administrative error occurs if the amount entered on Schedule H/H-PR as income tax withheld is not the amount the employer actually withheld.

      Note:

      Income taxes are only required to be withheld from wages for domestic employment if the employer and employee agree to the withholding.

  2. For Schedule H/H-PR, the due date of the period the error is ascertained is the due date of the income tax return for the period the taxpayer discovered the error.

    1. An error is ascertained when the employer has sufficient knowledge of the error to be able to correct it.

    2. For underpayment errors discovered on or after January 1, 2009, the provisions require that the underpayment be paid at the time the adjusted return is filed or interest will begin to accrue. The interest computation date to be used is the received date of the adjusted return.

    3. Ascertained dates are not needed for tax decreases.

    4. A statement (could be an amended Schedule H) must be attached to the return on which the adjustment is reported explaining the correction and designating the return period in which the error was ascertained and the return period to which the error relates.

    5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      If... Then...
      An ascertained date is provided and the amended Schedule H/H-PR is filed by the due date of the return for the return period, in which the error was ascertained Assess the increase using TC 298 with an interest computation date.
      The ascertained date is not provided Contact the taxpayer by telephone to obtain the information.

      Note:

      Do not correspond for the ascertained date unless corresponding for other information.

      The ascertained date is not provided and is unable to be secured Assess the increase using a TC 290.

      Note:

      When contacting taxpayers, follow procedures in IRM 21.1.3.2.3, Required Taxpayer Authentication, for purposes of identification and to prevent unauthorized disclosures of tax information. Also, use caution when leaving information on answering machines or voice mails. (See IRM 11.3.2.6.1, Leaving Information on Answering Machines/Voice Mail.)

  3. Interest-free adjustments provisions.

    If... Then...
    The adjusted Schedule H is filed and the tax paid by the due date of the return for the return period in which the error was ascertained and the underpayment is paid at the same time No interest is due.
    For increases in tax liability, the amended Schedule H is filed by the due date of return for the return period in which the error was ascertained, but the tax is not paid at the same time Interest is computed from the received date of the adjusted Schedule H.

21.8.1.5.8  (10-01-2007)
Loose Schedule H and Anexo H-PR

  1. When processing a loose Schedule H or H-PR, use the procedures in Household Employment Taxes - IMF Procedures (see IRM 21.8.1.5.5) and in Schedule H/H–PR see IRM 21.8.1.5.6) in conjunction with procedures outlined in IRM 21 listed below:

    If... Then...
    The TIN is an SSN Follow the procedures in IRM 21.6.4.4.8.10, Schedule H, Household Employment Taxes Received Without Form 1040, U.S. Individual Income Tax Return. However, if the Schedule H /H-PR is from one of the territories, use Form 1040-PR or 1040-SS as the overlay.
    The TIN is an EIN Follow the procedures in IRM 21.7.4.4.1.11, Social Security Domestic Employment Reform Act (SSDERA) of 1994 and BMF Schedules H, or route to BMF.
    The Schedule H does not have a TIN Research for a TIN using NAMEE and/or NAMES.
    A TIN is located Process according to the instructions in IRM 21.6.4.4.8.10, Schedule H, Household Employment Taxes, Received Without Form 1040, U.S. Individual Income Tax Return. However, if the Schedule H/H-PR is from one of the territories, use Form 1040-PR or 1040-SS as the overlay.

21.8.1.6  (10-01-2013)
U.S. Virgin Islands

  1. This section provides specific tax information as it relates to the U.S. Territory of the U.S. Virgin Islands.

    Caution:

    The British Virgin Islands fall within the jurisdiction of the United Kingdom and are in no way connected with the United States or its political subdivisions or territories. Any returns or inquiries received with addresses from the British Virgin Islands are handled as International cases.

  2. A very important factor in U.S. Virgin Islands taxation is whether the taxpayer is a bona fide resident of the U.S. Virgin Islands. An individual is considered to be a bona fide resident of the U.S. Virgin Islands for the entire year if he or she meets the requirements under IRC § 937(a) and the regulations thereunder. For more information on bona fide residency see IRM 21.8.1.4.2

  3. An individual who is a U.S. citizen or resident alien, and NOT a bona fide resident of the U.S. Virgin Islands, will have a dual filing requirement with the United States and the U.S. Virgin Islands under IRC § 932(a) and IRC § 932(b) if the individual has income derived from sources within the U.S. Virgin Islands, or effectively connected with the conduct of a trade or business within the U.S. Virgin Islands, for the taxable year. The individual files an original return with the IRS and files a copy of the signed U.S. return (including all attachments, forms, and schedules) with the U.S. Virgin Islands Bureau of Internal Revenue (BIR), attaching Form 8689, Allocation of Individual Income Tax to the U.S. Virgin Islands, to both returns. See IRM 21.8.1.6.1.

  4. IRC § 932(c) allows a U.S. citizen, who is a bona fide resident of the U.S. Virgin Islands during the entire tax year, to file his or her tax return with the U.S. Virgin Islands and to pay the entire tax liability to the U.S. Virgin Islands. If the taxpayer fully complies with IRC § 932(c) , there is no requirement to file a U.S. Federal income tax return for any tax year in which the taxpayer is a bona fide resident of the U.S. Virgin Islands during the entire year, except when he or she is required to pay any reportable tax to the United States, such as self-employment tax.

  5. For taxable years ending on or after December 31, 2006, an income tax return filed with the U.S. Virgin Islands under IRC § 932(c) by an individual who takes the position he or she is a bona fide resident of the Virgin Islands (or an individual who files a joint return with someone taking the position that he or she is a bona fide resident) will generally be deemed to be a U.S. income tax return for purposes of IRC § 6501. For taxable years ending before December 31, 2006, see Notice 2007-19, 2007-11 IRB 689.

  6. U.S. citizens who derive income from U.S. Virgin Islands sources and are not bona fide residents of the U.S. Virgin Islands must file identical tax returns with both the U.S. and the U.S. Virgin Islands. This is done by:

    1. Filing the original return, which includes a Form 8689 and all other attachments and schedules, with the United States, and

    2. Filing a copy of the U.S. return (including all attachments) with the U.S. Virgin Islands Bureau of Internal Revenue (BIR) by the due date for filing Form 1040.

  7. In cases where the Form 1040 was processed having U.S. Virgin Islands withholding only and no Form 8689, apply the following:

    If... Then...
    The taxpayer was given a withholding credit in error, but a refund has not been issued Reverse the withholding credit and allow the computer to issue a bill.
    A refund has been issued Follow the erroneous refund procedures in IRM 21.4.5, Erroneous Refunds.

21.8.1.6.1  (10-01-2012)
Form 8689, Allocation of Individual Income Tax to the U.S. Virgin Islands

  1. Form 8689, Allocation of Individual Income Tax to the U.S. Virgin Islands, is used to determine the amount of tax payable to the U.S. Virgin Islands.

    Note:

    Form 8689 is not part of the Virgin Islands cover over process.

  2. The Form 8689 must be attached to each copy of Form 1040. See IRM 21.8.1.6.

  3. The Form 8689 was revised for 2007. The calculation entry from line 35, in Part III, "Allocation of Tax to the U.S. Virgin Islands," is not always brought forward to Form 1040. A comparison to Line 39 in Part IV, "Payments of Income Tax to the U.S. Virgin Islands " , must first be done, and the lesser of the two amounts combined with the entry on line 44, and brought forward to Form 1040 next to line 72 with the notation "Form 8689." This prevents the allocation amount from being more than the amount of payments/credits paid to the U.S. Virgin Islands.

    Note:

    A penalty of $1,000.00 may be assessed for not filing a required Form 8689 or for not providing the required information. For additional information, see IRM 20.1.9.18, IRC § 6688 – Reporting for Residents of U.S. Possessions

    .

  4. The credit for taxes paid to the U.S. Virgin Islands is nonrefundable. Use TC 29X with Reason Code 063 (U.S. Virgin Islands Credit on Form 8689) when applying or adjusting the tax. Do not credit as a TC 766 at any time. (These instructions apply to NON-PIPELINE functions ONLY.)

    Caution:

    If the credit was given during processing with a TC 766, reverse it with a TC 767.

21.8.1.6.2  (10-01-2008)
Individual Tax Liability - U.S. Virgin Islands

  1. Individual taxpayers may claim ES credits or credit elect on the return they are required to file, regardless of the jurisdiction (United States or Virgin Island) in which the return is filed. There is an agreement between the two taxing authorities which provides for the "cover over" of these credits and other credits that may be on the account.

  2. Individual taxpayers that have a U.S. tax liability and request to have credit elect or estimated tax credit held by the U.S. Virgin Islands transferred to the U.S. must:

    1. First file their U.S. tax return, and

    2. Submit a formal (written) request to the United States IRS for credit transfer from the Virgin Islands Bureau Of Internal Revenue (BIR).

    3. Once the taxpayer has complied with (2) a) and b), forward the case to the technician having authorization to contact the U.S. Virgin Islands.

    4. The employee having authorization to contact the U.S. Virgin Islands must follow the instructions in Cover Over of Credits to the U.S. Virgin Islands on Repayment Cases. See IRM 21.8.1.6.6.

  3. Individual taxpayers that do not have a U.S. tax liability, but request to have United States ES credits or a credit elect transferred to satisfy their U.S. Virgin Islands liability, must:

    1. Submit a written request to the Virgin Islands BIR for credit transfer from the U.S. IRS.

    2. The BIR will submit a copy of the U.S. Virgin Islands return to verify filing

    3. Once the documentation in a) and b) above is received, refer the case to the International Unit where the U.S. Virgin Islands cases are worked.

    4. The employee having authorization to contact the U.S. Virgin Islands must follow the instructions in Cover Over of Credits to the U.S. Virgin Islands on Special Cases. See IRM 21.8.1.6.6.

    Note:

    The transfer of credits to satisfy the U.S. Virgin Islands tax liability is permissible even when the U.S. refund statute has expired. A cover over is not a refund.

  4. Requests from taxpayers, their authorized representatives, or claims requesting credit transfers from the U.S. Virgin Islands, must be forwarded to the International Department where the U.S. Virgin Islands cases are worked.

  5. Citizens and residents of the U.S. Virgin Islands with income from a trade or business from sources within the U.S. Virgin Islands, who do not file a U.S. Form 1040, must file Form 1040-SS, U.S. Self-Employment Tax Return.

    1. The Form 1040-SS resembles a combination of Form 1040 Schedules C, F, SE and Schedule 8812. It also has a provision in Part I, line 4 to enter the total tax from Schedule H. The Form 1040-SS is now used for more than just reporting of self-employment income and paying self-employment tax.

    2. Bona fide residents of the U.S. Virgin Islands do not pay income tax to the United States on income earned while in the U.S. Virgin Islands. Their income tax return is filed with the Government of the U.S. Virgin Islands. Their self-employment tax return must be filed with the IRS.

  6. Individual taxpayers claiming the Schedule H tax that are not liable for Form 1040, but file Form 1040-SS, must report the tax on Form 1040-SS.

    Note:

    When adjusting the tax, use the appropriate Blocking Series and RC 50 to adjust employment taxes from Schedule H or Schedule H-PR. See IRM 21.8.1.5.6. and IRM 21.6.4.4.8 for additional instructions.

  7. IRM 21.6.4.4.8.10 contains procedures for processing individual taxpayer's Schedule H tax when the individual is not liable to file the U.S. Form 1040. Also, Part IV of the Schedule H must be completed.

21.8.1.6.3  (10-01-2013)
Self Employment Tax - U.S. Virgin Islands Citizens and Residents

  1. Citizens and residents of the U.S. Virgin Islands with income from a trade or business who do not file a U.S. Form 1040, must file Form 1040-SS, U.S. Self-Employment Tax Return to report self-employment income and pay self-employment tax.

  2. Review the tax module to determine if SE tax has been assessed on U.S. Virgin Island returns that are on the cover over listing with one-half of self-employment tax claimed on Page 1 of Form 1040, or if SE income is shown on the cover over return that indicates a Form 1040-SS should be filed. Use the following table for case resolution guidelines.

    Note:

    "Certification Cases" received from the U.S. Virgin Islands Bureau of Internal Revenue (BIR) address self-employment tax issues and are worked at PAMC using the procedures in this IRM section.

    If... Then...
    The SE tax has been assessed on Master File Continue with IRM 21.8.1.6.5, U.S. Virgin Islands Cover Over Process.
    The SE tax has NOT been assessed on Master File and a Form 1040-SS or Schedule SE is attached Assess the SE tax.
    1. Input TC 290 for the amount of SE tax from Form 1040-SS or Schedule SE.

    2. Use reference code 889 for SE tax; TC 878/879 for SE income; TC 895/896 for Medicare income for primary/secondary taxpayers.

    3. Input TC 806 as appropriate (U.S. withholding only).

    4. Use Source Code 1; Reason Code 044 (and 51 if TC 806 is input); Hold Code 1; FLC 21; Blocking Series 05.

    5. Notate in the remarks section "Self-Employment Tax."

    Note:

    If no return is posted on Master File, process Form 1040-SS or Schedule SE to assess SE tax.

    SE tax is not assessed on Master File, and no Form 1040-SS or Form 1040-SE is attached
    • Correspond with taxpayer for missing Form 1040-SE on cases with questionable self employment of under ≡ ≡ ≡ ≡ ≡ ≡ ≡ . Suspend case for 30 days. If response is received, assess SE tax. If no response is received, release the taxpayer's refund portion of the RT cover over claim.

    • Route cases with questionable self employment income of ≡ ≡ ≡ ≡ ≡ ≡ ≡ or more which may be subject to SE tax to International Compliance at the Philadelphia Campus 2970 Market Street, Mail Stop 2-H08.200, Philadelphia, Pa 19104. Do not correspond for missing Form 1040-SE. Do not release the taxpayer's refund portion of the RT cover over claim.

    Note:

    If a Form 1040 is used by a VI resident to report SE income tax, they cannot take the deduction of one-half if the SE amount is on Page 1 of the Form 1040. When Form 1040-SS is used, this one-half provision is not on the form.

  3. For tax years 2004 and prior, the BIR sent Form 1040-SS and Schedule H tax returns to IRS that it processed in error. We processed these returns and credited the amount of applicable tax held by the BIR to the taxpayer's account. If full payment was not forwarded with a return, the BIR attached a calculation as to the amount of the credit that it held with respect to such a return. This credit was deducted from the next VI cover over following the procedures. See IRM 21.8.1.6.7.

  4. For tax periods 2005 and subsequent, payments for SE tax made to the BIR in error are returned to the taxpayer and the taxpayer is advised by the BIR that the Form 1040-SS must be filed with and paid to the IRS. Do not deduct these credits from the cover over.

  5. There are certain statute issues to consider when assessing SE tax on Virgin Island filers.

    • The filing of an income tax return with the Virgin Islands starts the running of the ASED for tax periods 2006 and later, as well as for covered persons for tax periods 2005 and prior.

    • The filing of an income tax return with the Virgin Islands DOES NOT start the running of the ASED for non-covered persons for tax periods 2005 and prior.

    • The filing of a Form 1040-SS does not start the running of the ASED for Form 1040 income tax.

      Note:

      See IRM 21.8.1.6.11. for definitions of covered and non-covered persons.

21.8.1.6.4  (10-01-2010)
U.S. Virgin Islands Cover Over Processing - Phase One

  1. Under IRC § 932(c)(2), a bona fide resident of the U.S. Virgin Islands is generally required to report worldwide income to the U.S. Virgin Islands. A bona fide resident of the U.S. Virgin Islands, who fully reports and pays tax on his worldwide income to the U.S. Virgin Islands, and identifies the source of each item shown on the U.S. Virgin Islands return is not required to file a return with the IRS under IRC § 932(c)(4).

  2. A bona fide resident of the U.S. Virgin Islands who has U.S. income tax withheld can file a U.S. Virgin Islands tax return and claim a credit on his U.S. Virgin Islands return for the tax withheld and paid to the IRS.

  3. The cover over of U.S. withholding that the U.S. Virgin Islands has allowed their taxpayers as a credit is accomplished through the cover over process. This process is performed in two phases.

  4. Pursuant to IRC § 7654(a), the following guidelines and procedures were established to administer United States cover over of income tax to the government of the U.S. Virgin Islands in respect of U.S. Virgin Islands bona fide residents.

  5. In phase I, the Virgin Islands Bureau of Internal Revenue (BIR) sends a listing containing taxpayer identification information and amounts for cover over and, in some cases, amounts to be refunded directly to the taxpayers and/or transferred to the BIR, and a tax return. These items are sent to the Austin Submission Processing (SP) International Analyst in Planning and Analysis.

  6. The listing and tax returns are hand carried by the Austin Submission Processing International Analyst to the pipeline coordinators/designees for processing. The U.S. Virgin Island received date should be stamped on the return. If it is not present, the IRS received date is entered.

  7. A copy of the list is made by the Submission Processing analyst and given to the Austin Accounts Management International Analyst.

    Note:

    Do not send for processing any VI cover over, or copies of VI cover over returns sent directly by taxpayers to IRS. All U.S. Virgin Islands cover over requests must be made by the BIR.

  8. Austin Accounts Management receives a computerized U.S. Virgin Islands residents listing identifying bona fide residents of the U.S. Virgin Islands who have U.S. withholding, credit elects and/or estimated tax credits. The listing will contain two types of claims:

    • Refund to Taxpayer (RT) Claims - These claims involve refunds that are paid directly to the taxpayer. These claims are processed first to reduce interest paid.

    • Refund to Virgin Islands (RV) Claims - These claims involve cover over to the Virgin Islands.

      Note:

      RV claims may involve splitting a portion of the withholding to the taxpayer and a portion to the BIR.

  9. U.S. Virgin Islands returns having U.S. withholding credits submitted to the IRS for processing are worked under the "U.S. Virgin Islands cover over" agreement. VI cover over returns processed in Philadelphia prior to processing year 2007 can be identified by a 66221 DLN. Beginning in 2007, VI cover over returns are processed at the Austin Submission Processing Campus and can be identified by a 21221 DLN.

    1. The return is posted as a TC 150 .00.

    2. No amounts are transcribed from the return.

    3. The withholding credit is entered by Accounts Management prior to the preparation of the credit transfer Form 3809.

    4. The TC 820 that actually transfers the tax credit from the individual taxpayer's account to the U.S. Virgin Islands via the U.S. Virgin Islands account is entered on Form 3809 and is numbered as 21258 with 050-059 Blocking Series.

      Note:

      In the Explanation Box on Form 3809, note the VI transmittal number and date of the transmittal. This notation is helpful if a duplicate TC 820 is posted and is covered over to the VI. See IRM 21.8.1.6.7 for repayment procedures if a duplicate credit goes to the VI.

  10. Tax Examiners trained on VI Cover Over are not to adjust the taxpayer's account until:

    1. The copies of the returns are received from Submission Processing.

    2. A TC 150 .00 is posted in the account.

    3. The credits in the tax module have been verified against the U.S. credits on the U.S. Virgin Islands listing.

    4. The refund statute expiration date has been calculated.

    Note:

    Do not allow Earned Income Tax Credit shown on a tax return filed with the BIR. In the unlikely event that the EITC was allowed during processing of the cover over return, reverse it.

  11. Do not assess or cover over an account when the taxpayer filed directly with the IRS. Maintain a spreadsheet listing the name, TIN, tax period, and refund amount of all cover over requests that show a United States income tax filing. Submit the spreadsheet to the U.S. Territories Program Manager on a quarterly basis.

    Note:

    Reverse all U.S. Virgin Islands withholding that was erroneously granted. Follow procedures in IRM 21.4.5.4.3, Category B Erroneous Refunds, for VI withholding that was refunded to the taxpayer.

21.8.1.6.5  (01-20-2012)
U.S. Virgin Islands Cover Over Processing - Phase Two

  1. Phase II begins when the returns are received in Accounts Management International from Submission Processing and the returns have posted to Master File. Control all cases on IDRS using Category Code ISPJ with the date the case was received in Accounts Management.

  2. Before processing cover over cases, check for outstanding balances (OBLs) on the taxpayer's other accounts. Only offset credit available for refund to a taxpayer to pay OBLs on that taxpayer's account(s). Do not offset any amount from the cover over payment to the Virgin Islands to cover outstanding taxpayer balances.

    Caution:

    Do not correspond for missing signatures on any VI cover over cases since these are not our taxpayers.

  3. RT claims are processed with one adjustment.

    1. Input TC 290 .00 and TC 806 for the withholding credit amount. Withholding WILL NOT be posted to these accounts on IDRS during pipeline processing.

    2. Use Blocking Series 63, Reason Code 51 and a Hold Code 3.

  4. The processing of RV claims requires two adjustments.

    1. First adjustment: Input TC 290 .00 and a TC 806 for the amount of credit to be refunded to the taxpayer. Use Blocking Series 05, Reason Code 51, and a Hold Code 3 to prevent the issuance of a notice.

    2. Second adjustment: Input a TC 290 .00 and a TC 806 for the cover over amount. Use Blocking Series 63, Priority Code 8, Posting Delay Code 1, and a Hold Code 4, to prevent the issuance of a notice or refund. The transfer will post as a TC 820.

    3. Close the IDRS control base.

      Note:

      Use withholding documents received from the BIR to validate the U.S. withholding amount. CC IRPTR can be used to verify withholding for which paper documents are not available and as a tool to assist in researching payment documents. You DO NOT need to verify withholding using CC IRPTR.

  5. Prepare Form 3809 to transfer the cover over amount to U.S. Virgin Islands 6900 account. Note the VI transmittal number in the explanation box of the Form 3809 and complete the form as follows:

    Debit portion Credit Portion
    Name and address box - Enter the taxpayer's entity information Name and address box - specify the U.S. Virgin Islands - 6900 Account.
    TIN box - Enter taxpayer's SSN  
    MFT box - Enter 30  
    Tax period - Enter the period being debited  
    Check the MF box Check the NMF box.
    Transaction date - Enter the current date. Transaction date - Enter the current date.
    1st TC (Transaction) - Enter TC 820. 1st TC (Transaction) - TC 700.
    Debit amount - Enter the amount to be covered over to the VI from the listing. Make sure TC 820 amount does not exceed the credit in the account or an unpostable condition will result. Credit amount - available credit amount (usually the TC 806 amount) must match the TC 820 amount from the debit portion of the Form 3809.

    Note:

    TC 570 is not needed for a credit going to a Non-Master File account, such as 6900.

  6. Maintain an IDRS control on the account in "M" monitoring status under the designated IDRS profile number xxxxx11111 (i.e., 0635311111). Monitor weekly CCA/42/43 (Zero Overage Listing) for holding of the credit freeze until the posting of TC 820 to ensure that erroneous refunds are not issued to the taxpayer. Monitor IDRS until the TC 820 posts.

  7. In the event that the account freeze is released prior to the posting of the TC 820:

    If ... Then ...
    Credit release occurs and the TC 846 has not yet been issued (check 23C date of refund) Initiate refund intercept procedures included in IRM 21.4.1.4.10, Refund Intercept CC NOREF.
    Refund cannot be stopped Follow Category D erroneous refund procedures in IRM 21.4.5.5, Account Actions for Category D Erroneous Refunds. Notify the BIR that an erroneous refund has been issued using the contact information listed below.

    Note:

    Since these are USVI taxpayers, and NOT IRS TAXPAYERS, IRS personnel cannot discuss the issue with the USVI taxpayer. Direct questions about the erroneous refund related to the VI cover over activity to the contact information below.

    USVI Bureau of Internal Revenue
    Attn: Marcella M. Somersall, Disclosure Officer
    6115 Estate Smith Bay , St. Thomas, VI 00802
    Phone (340) 715–1040 extension 2240
    Fax (340) 714-9336

  8. Once the TC 820 posts, check to see if listing indicates an amount due the taxpayer.

    1. Check again for OBL’s before releasing and allow the computer to offset if the remaining credit in the account is to be refunded to the taxpayer.

    2. Input TC 290 .00, Priority Code 8, Blocking Series 63, Hold Code 3 to release the remaining credit, if applicable.

    3. Once all actions have posted, prepare cover over letter for the VI.

    4. Close IDRS control.

    Note:

    There is a provision for the charge-back of interest to the BIR for interest paid on returns received later than 45 days from the date the return was originally received from the BIR. This charge back applies only to returns received after October 1, 2002. Accounts Management processes the charge-back when instructed to do so by the Deputy Commissioner International, Overseas Operations, TAAS Division.

  9. If there is already a posted return, a CP 36 generates:

    1. The CP 36 is worked only by those designated to process cover over cases.

    2. Check to see if TC 150 on the posted return reflects SE Tax.

      If ... Then ...
      The taxpayer is amending SE tax amount Adjust accordingly and reduce cover over amount to cover this balance before proceeding with cover over procedures.
      SE tax has NOT been assessed Take into account SE tax or any tax due to the U.S. and any EITC credits erroneously allowed on this return. Once net is calculated, only this amount is covered over to the VI. Notate difference on the listing. See IRM 21.8.1.6.3

      Note:

      Do not offset any amount from the cover over payment to the Virgin Islands to cover outstanding taxpayer balances. However, Virgin Island credit can be applied to SE tax assessments in the same module. Notate the transmittal accordingly.

    Note:

    Duplicate filing conditions may result from U.S. Virgin Island bona fide resident information returns posting to cover over modules, or vice versa. See IRM 21.8.1.6.11 for instructions for processing resultant CP36 notices.

  10. Verify that there are no outstanding accounts which require either a cover over payment from the U.S. Virgin Islands or a repayment of an erroneous amount sent to the U.S. Virgin Islands. If either of these situations exist, continue with Cover Over Payments or Repayments from the U.S. Virgin Islands. See IRM 21.8.1.6.7.

  11. Prepare the letter to the U.S. Virgin Islands informing them of:

    1. The amount of the cover over check

    2. The Transmittal or Special number along with the credits being added to the current cover over listing (in accordance with procedures in Cover Over Payments or Repayments from the U.S. Virgin Islands). See IRM 21.8.1.6.7.

    3. The amounts deducted for the agreed outstanding balances (in accordance with procedures in Cover Over Payments or Repayments from the U.S. Virgin Islands.) See IRM 21.8.1.6.7, and

    4. Any discrepancies found with the return or listing

  12. Forward the cases and all documentation to the manager for review. After managerial review, forward the VI letter, along with copies of the listings, to the Refund Unit in the Accounting Branch. Also fax a copy of the VI letter to the Program Manager, U.S. Insular Area, Deputy Commissioner (International), LBI, U.S. Competent Authority at (202) 435-5130.

21.8.1.6.6  (10-01-2008)
Cover Over of Credits to the U.S. Virgin Islands on Special Cases

  1. When handling a request to transfer estimated credits or credit elects to the U.S. Virgin Islands, the technicians who have authorization to contact the U.S. Virgin Islands must:

    1. Secure a written agreement from the U.S. Virgin Islands indicating the amount of each account in question to confirm tax liability.

    2. Once the U.S. Virgin Islands confirms the tax liability, prepare Form 3809 to transfer the credits to the U.S. Virgin Islands account, 6900 Account. If a transmittal is available from the V.I., enter the transmittal number and date in the Explanation Box of Form 3809.

    3. List the Virgin Islands case reference number and credit amount on the memo/letter.

    4. Input TC 590 CC 21 to the taxpayer's account after the TC 820 posts.

    5. These procedure must be used in conjunction with the instructions in U.S. Virgin Islands Cover Over Process. See IRM 21.8.1.6.5.

21.8.1.6.7  (10-01-2009)
Cover Over Payments or Repayments from the U.S. Virgin Islands

  1. Situations may arise that require the use of the following procedures to deduct credits from the cover over of tax to the U.S. Virgin Islands such as, but not limited to, taxes filed and erroneously paid to the U.S. Virgin Islands on the:

    • Form 1040-SS

    • Schedule H

    • Duplicate amount covered over

  2. When notified by the U.S. Virgin Islands tax authority of a taxpayer having erroneously filed and/or paid their Schedule H or Form 1040-SS tax in the U.S. Virgin Islands:

    1. The U.S. Virgin Islands informs the taxpayer of their requirement to file these forms in the United States.

    2. Research to determine if the taxpayer has also filed the Form 1040-SS and/or Schedule H with IRS.

    3. When the taxpayer has also filed with the U.S. and is in debit status, input a STAUP and coordinate the forwarding of the case to the person(s) working the U.S. Virgin Islands cover over. The instructions in (4) below explain how authorized personnel will credit the taxpayer's account.

    4. When the taxpayer hasn't filed in the United States, request that the U.S. Virgin Islands forward the original Schedule H and/or Form 1040-SS to the Austin Internal Revenue Campus immediately and contact the authorized personnel to have the taxpayer's account credited.

  3. Situations or cases which require a cover over payment or a repayment from the U.S. Virgin Islands must be handled by employees having the disclosure authorization to contact the U.S. Virgin Islands. This authorization list is maintained by Disclosure Office 4 in Chicago and is updated yearly via a memorandum from that office.

  4. Authorized employees then:

    1. Contact the U.S. Virgin Islands government to inform them of the situation

    2. Retain copies of the listing or secure a print of the account containing the amount outstanding

    3. Secure a written agreement from the U.S. Virgin Islands, identifying the amount of each account in question

  5. Once an agreement has been reached, perform the following:

    1. Maintain a list of the cases containing outstanding balances due until there is a cover over payment from which to deduct the outstanding balance.

      Note:

      It may not be possible to handle all of the cases having an outstanding balance with one cover over payment, but resolve as many cases as possible with each subsequent cover over.

    2. Prior to the posting of the U.S. Virgin Islands credit to the balance due accounts, ensure that the credits weren't previously substantiated. If so, reverse the substantiation prior to posting the credit.

      Note:

      Credits that were substantiated by other IRS offices are posted as a TC 766, but may be a TC 760 posted by Accounting.

    3. Prepare a Form 3809 for each account being credited. The credit (TC 700 with a TC 570) section of the Form 3809 must reflect the taxpayer's account information and the agreed upon amount. Stamp the name and address portion with the name and address of the appropriate territory along with a matching amount for the debit (TC 820).

  6. Deduct the total of the Forms 3809 crediting the taxpayer's accounts from the total of the individual Forms 3809, debiting the taxpayer's account. The difference, when the debit portion is higher, is the amount of the consolidated Form 3753.

  7. These procedures must be used in conjunction with the instructions in U.S. Virgin Islands Cover Over Process. See IRM 21.8.1.6.5.

21.8.1.6.8  (10-01-2012)
≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  6. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  7. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  8. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  9. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Caution:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

21.8.1.6.9  (10-01-2012)
Miscellaneous U.S. Virgin Islands Return Processing and VI Cover Over Considerations

  1. There are situations that may require the back-out of IRS returns. These can be claims requesting a change of bona fide residency from the United States to the Virgin Islands or where a copy of a VI return has posted to IDRS in error. These requests may also be in the form of "Certifications of Filings" received from the BIR. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Exception:

    If ALL of the income shown on the return is from Virgin Islands sources and it is clear that they are not our taxpayer, back out the return. Follow appropriate erroneous refund procedures in IRM 21.4.5, Erroneous Refunds.

    1. DO NOT zero out accounts where there is any United States income shown on the return. Forward these cases to:
      Philadelphia Accounts Management
      2970 Market Street
      Mail Stop 3-E17.143
      Philadelphia, Pa 19104
      Employees authorized to contact the BIR for information will prepare these claims for Examination consideration. If within 90 days of the ASED, first send the case to the Statute function for prompt assessment.

      Note:

      Austin Accounts Management will process requests involving cover over.

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    3. In cases where there is a Taxpayer Delinquency Investigation (TDI) or Underreporter Program (URP) activity on the account, do not refer the case to Examination or input a TC 590. Coordinate with the appropriate area.

  2. If there is a TIN mismatch when the cover over return is processed, use the following table for case processing:

    If... Then...
    The TIN does not match a valid TIN on INOLE or the return posts to the invalid segment of a TIN that clearly belongs to another taxpayer Do not process the cover over and notate "SSN Mismatch" on the cover over transmittal document.
    The TIN posts to the invalid segment because of a name control mismatch and it is apparent that the cause is that the taxpayer has failed to notify SSA of a name change Process the cover over and notate on the transmittal document that the BIR will advise the taxpayer to contact SSA to correct their records.

  3. Returns filed with IRS in addition to cover over activity:

    1. Send Transcript Delivery System (TDS) prints or copies of returns filed by taxpayers with the IRS prior to or subsequent to the posting of cover over returns to the BIR. Include these return copies or transcripts with the cover over transmittals that are returned to the BIR through the U.S. Territories Manager after the cover over has been processed.

      Note:

      Input a TC 290 .00 to refile the return to release the duplicate filing freeze for any subsequent return that posts as a TC 976/977.

    2. Do not cover over accounts where there is a return already posted on Master File for the tax period in question, other than a Form 1040-SS.

    3. On copies of returns sent to the BIR, notate on the transmittal whether or not a refund has been issued.

  4. Credit Discrepancies: In the case of credit discrepancies, only cover over to the amount available in the module and notate the cover over transmittal document accordingly.

  5. U.S. Virgin Islands cover over cases with an open TC 420

    1. Returns submitted by the BIR for cover over may post to an account with an open TC 420 AIMS indicator. Follow instructions in Exhibit 21.5.10-1, AIMS Status Code Guide, for case disposition.

      Note:

      Instructions in Exhibit 21.5.10-1 stating "advise the taxpayer" need to be substituted with "notate on the cover over transmittal."

    2. For cases that need to be routed to International Compliance in Philadelphia, notate on the transmittal document that the return is a U.S. Virgin Islands cover over return. Include instructions for the exam classifier to contact the person sending the case for information concerning the cover over process and refer them to IRM 21.8.1.6.

  6. If there is a Criminal Investigation (-Z) freeze on the account, do not cover. Notate the listing "CI."

  7. Refunds by the BIR based on United States Credits

    1. The BIR may, on occasion, refund overpayments to a taxpayer that have already been refunded by the IRS. The BIR forwards these returns in separate groupings clearly marked as to the special processing necessary.

    2. If instructions are unclear, have an individual authorized to contact the VI obtain clarification.

21.8.1.6.10  (04-17-2009)
Covering Over Net Collections of Tax When the Period of Limitations Has Expired - U.S. Virgin Islands

  1. In accordance with IRC § 7654(a) and (b)(1) and Significant Service Center Advice, WTA-N-112721-99, the following procedures are being written to assist in covering over net collections of tax to the U.S. Virgin Islands Bureau of Internal Revenue when the U.S. period of limitations has expired.

  2. When the U.S. Virgin Islands tax authority requests a cover over of the U.S. withholding and the statute has expired, follow the instructions below:

    1. Use the instructions in U.S. Virgin Islands Cover Over Process. See IRM 21.8.1.6.5.

    2. Edit the received date on the return to reflect the date the return was received by IRS.

      Note:

      There is no statute of expiration for covering over credits to the U.S. Virgin Islands.

    3. Circle out the U.S. Virgin Islands received date. It is used only when determining if the refund request was received timely in the U.S. Virgin Islands.

    4. If the taxpayer filed timely with the U.S. Virgin Islands, the taxpayer is entitled to a refund of any overpayment after the cover over amount.

      Note:

      Per Significant Service Center Advice WTA-N-111044-00, dated October 26, 2000, if the taxpayer submitted the tax return to the U.S. Virgin Islands Bureau of Internal Revenue (BIR) within the Refund Statute Expiration Date (RSED), and part of the TC 806 is to be refunded to the taxpayer, the request is considered timely. Clear the refund request with the Statute Function and add the remarks on the document, "refund request was timely received in the U.S. Virgin Islands." Allow credit interest from the day the return was received in the U.S. Virgin Islands.

    5. If the taxpayer submitted the request in the VI past the Statute date, they are not entitled to a refund. Cover over the entire credit to the V.I.

      Note:

      This is per a Memorandum of Understanding Between the Internal Revenue Service and U.S. Virgin Islands Bureau of Internal Revenue signed in 2002.

    6. If a subsequent adjustment 54 document is necessary, the OVERRIDE-CD and RFSCDT fields may need to be addressed.

      Note:

      See chart below:

      If... Then...
      The current date is more than one year past the RSED Enter override code "S" and use the RSED shown on TXMOD in MMDDYYYY format as the RFSCDT.
      The current date is less than one year from the RSED Enter override code "R" and use the RSED shown on TXMOD in MMDDYYYY format as the RFSCDT.

    7. The Form 3809 transfers the credit from the taxpayer's account into the 6900 account used for the U.S. Virgin Islands cover over. The 1st TC is a TC 820 for the amount of withholding tax being transferred and the 2nd TC is a TC 570. The credit portion (TC 700 amount) must specify the U.S. Virgin Islands - 6900 Account (same as TC 820 amount).

      Note:

      Remember that Business Operating Division (BOD) codes must be on all Non-Master File documents.

    8. Follow monitoring steps for the TC 820 posting shown in U.S. Virgin Islands Cover Over Process. See IRM 21.8.1.6.5.

    9. If the withholding credits are less than the total tax, reduce the total tax to the amount of the withholding and only prepare the Form 3809. Follow the instructions in U.S. Virgin Islands Cover Over Process. See IRM 21.8.1.6.5.

  3. When notified by the BIR of a taxpayer for whom the BIR is requesting a cover over of the net collections of tax where the statute has expired and the credits have been moved to Excess Collections, follow the instructions below:

    1. Follow the instructions in U.S. Virgin Islands Cover Over Process. See IRM 21.8.1.6.5.

    2. Request the original excess collection transfer document, Form 8758, from Files.

    3. If the credit for the tax has been moved to Excess, it must be located and reapplied to Master File.

    4. Determine the amount of credit requiring transfer to the taxpayer's account.

    5. Research Excess Collections Files using CC XSINQ. Be sure to have the amount of the remittance, the name control, and DLN.

    6. When the needed credits are found, prepare the Form 8765, IDRS Control File Credit Application, to have credits applied to the taxpayer's account.

    7. Once Form 8765 is prepared, route the Form and supporting evidence to the Unidentified Remittance Function located in the Accounting Branch. Restore the credit to the taxpayer's account to offset the balance due resulting from the cover over.

      Note:

      Form 8765 does not require statute approval when all credit will be covered over to the VI.

21.8.1.6.11  (08-12-2011)
Statute of Limitations for Individuals Claiming to be Bona Fide Residents of the U.S. Virgin Islands

  1. For tax periods ending before December 31, 2006, Notice 2007-19 provides that a U.S. citizen or resident alien with gross income of $75,000.00 or more who took the position that he or she was a bona fide resident of the U.S. Virgin Islands (referred to in the notice as a "non-covered" person) and who filed an income tax return with the U.S. Virgin Islands in accordance with §932(c)(2), may start the statute of limitations for U.S. federal income tax purposes by filing a U.S. Form 1040 with the IRS, reporting no gross income and no taxable income for that taxable year.

    Note:

    "Covered" persons are U.S. citizens and resident aliens with gross income of less than $75,000.00 who took the position that they were bona fide residents of the U.S. Virgin Islands and filed their income tax return with the U.S. Virgin Islands under §932(c)(2). Covered persons need only provide this documentation upon examination because their U.S. Virgin Islands income tax return is deemed to be their U.S. income tax return for purposes of §6501.

  2. For tax periods ending on or after December 31, 2006, Treasury Reg. §1.932 1(c)(2)(ii) provides that income tax returns filed with the U.S. Virgin Islands Bureau of Internal Revenue (BIR) under §932(c)(2) by U.S. citizens or resident aliens who take the position that they are U.S. Virgin Islands bona fide residents for the entire year will be deemed to be U.S. income tax returns. Therefore, the U.S. federal statute of limitations for all U.S. citizens and residents claiming to be bona fide residents of the U.S. Virgin Islands generally commences upon the filing of an income tax return with the U.S. Virgin Islands. These taxpayers are generally not required to filed income tax returns with the IRS.

    Note:

    The final regulations incorporate the updated interim rules of Notice 2007-31, which amends and supplements Notice 2007-19. Notice 2007-31 also announces that the competent authorities of the United States and U.S. Virgin Islands entered into an agreement for the exchange of information for certain taxpayers who have an income tax return with the U.S. Virgin Islands under §932(c)(2) for tax periods ending on or after December 31, 2006, whereby the BIR will provide electronic files of income tax returns to the IRS.

  3. These income tax returns are processed to Master File and can be identified by a 21211 or 21221 DLN with a TC 150 .00. The return will have "Filed Due to VI Notice 2007-31" stamped across the top of the return. Code and Edit will "X" all entries on the returns except:

    • Entity information

    • CCC and RPC edits

    • Received date

  4. The posting of these returns to Master File results in duplicate filing conditions if the module contains a previously posted 1040-SS or U.S. Virgin Islands cover over return. Input TC 290 .00 to release the -A freeze with a Hold Code 2 to stop the issuance of a notice to the taxpayer and to prevent erroneous refunds of cover over credits. Update the ASED to 3 years from the U.S. Virgin Islands Bureau of Internal Revenue (BIR) received date stamped on the return, or return due date, whichever is later. Use CC FRM77 to update the ASED date when necessary.

  5. Bona fide residents of the Virgin Islands who fail to meet their USVI filing and payment requirements will have a Federal income tax return liability. However, such individuals are allowed a credit for amounts already paid to the U.S. Virgin Islands. Their "residual" Federal tax liability will be equal to the difference between their entire income tax liability and the amount of income tax already paid to the U.S. Virgin Islands.

21.8.1.7  (10-01-2013)
Guam

  1. This section provides specific tax information as it relates to the U.S. Territory, Guam.

  2. Guam has its own separate and independent tax system, based on the same tax laws and tax rates that apply in the United States. See Publication 570 for additional information.

  3. U.S. citizens who derive income from Guam and United States sources are no longer required to file income tax returns with both jurisdictions. They must file with either Guam or the United States, but not both. An important factor in the Guam tax system in determining where a return must be filed is whether or not the taxpayer is a bona fide resident of Guam. For more information on bona fide residency see IRM 21.8.1.4.2.

  4. If a U.S. citizen's adjusted gross income from all sources is at least $50,000.00, their gross income consists of at least $5,000.00 from sources in Guam, and they file a U.S. income tax return, they must attach Form 5074 to Form 1040.

    Note:

    A penalty of $1,000.00 may be assessed for not filing the required information. See IRM 20.1.9.18, IRC § 6688 – Reporting for Residents of U.S. Territories. A Penalty Reason Code (PRC) is required with a penalty abatement See IRM 20.1.1–3, Penalty Reason Code Chart.

21.8.1.7.1  (10-01-2013)
Filing Requirement Chart - Guam

  1. Use the chart below for assistance in determining the jurisdiction (Guam or U.S.) with whom the taxpayers are required to file a tax return:

    If... Then...
    The taxpayer is a bona fide resident of Guam during the entire tax year A tax return must be filed and tax paid on income derived from all sources to Guam.
    The taxpayer is a U.S. citizen or a resident who is not a bona file resident of Guam during the entire tax year A U.S. tax return must be filed and tax paid on income derived from all sources to the United States.
    A citizen of Guam is not a resident of the U.S. or Guam A return must be filed with Guam.
    A joint return is being filed by taxpayers who are living apart The return must be filed with the jurisdiction where the spouse who has the greater adjusted gross income is required to file.

    Note:

    For this purpose, income is determined without regard to community property laws.

    The taxpayer is a member of the U.S. Armed Forces stationed on Guam and is paid by the U.S. Government but has a state of legal residence (see IRM 3.21.3.64, Guam -- General Information), in one of the 50 United States or DC The taxpayer is not considered a resident of Guam and therefore files an income tax return with the United States.
    A citizen or resident of Guam has income from a trade or business and is not required to file Form 1040 (U.S.) Form 1040-SS, U. S. Self-Employment Tax Return, must be filed to report self-employment Income and pay self-employment tax, in addition to the income tax return filed with the Government of Guam.
    The taxpayer is a member of the U.S. Armed Forces stationed in one of the 50 United States or DC or is a spouse of such service member and qualifies for benefits under MSRRA, and is paid by the U.S. Government but has a state of legal residence in Guam or is a spouse of such service member and qualifies for benefits under MSRRA. See Notice 2012-41 The taxpayer files an income tax return with Guam.

    Reminder:

    The Form 1040-SS is a combination of Form 1040 Schedules C, F, SE, and consists of self-employment tax only.

  2. Use the following addresses once the filing jurisdiction is determined:

    • GUAM

      Department of Revenue and Taxation,
      Government of Guam
      P.O. Box 23607
      GMF, GU 96921

    • UNITED STATES

      Internal Revenue Service Center
      Austin, TX 73301-0215

21.8.1.7.2  (10-01-2012)
Credits and Payments - Guam

  1. A U.S. citizen earning income from Guam must make an ES declaration with Guam if residing there on the declaration due date.

  2. If the taxpayer moves to the U.S. before the year is over, ES payments must be made to the jurisdiction where the taxpayer is residing at the time when the ES declaration is due. However, at the end of the year, the taxpayer must file a return with the United States if not considered a bona fide resident of Guam for that year. For more information on bona fide residency see IRM 21.8.1.4.2

  3. Liability for underpayment of estimated tax is payable to the jurisdiction (United States or Guam) where the taxpayer files their return.

  4. Estimated tax payments, credit elect amounts, and/or income taxes withheld in the United States or Guam are taken into account to determine if the return results in a balance of tax due or an overpayment. Consider these credits regardless of where the withholding or payments were received or where the return will be filed.

    Caution:

    Do not allow credit when the employer's address is outside of the United States, Guam, Commonwealth of Northern Marianna Islands (CNMI), U.S. Virgin Islands, Puerto Rico or American Samoa.

  5. U.S. taxpayers may claim full credit on their Form 1040 for ES payments made to Guam and for credit elect amounts that were processed on returns filed in Guam for the prior year.

  6. When a CP 23, 24, or 25 generates indicating an ES payment or credit discrepancy due to the posting of a return claiming ES credits paid to Guam, we can grant the taxpayer a substantiated credit (TC 760).

    1. Substantiated credits require that the taxpayer responds to the discrepancy notice with adequate proof, such as cancelled checks, that the payments claimed were paid to Guam.

    2. Substantiated credit elect amounts claimed require a completed Form 8796, Request for Return/Information (Federal/State Tax Exchange Program) , verifying the amount of Guam credit elect claimed on the Form 1040. The completed Form 8796 must be faxed to the attention of Disclosure Office 4 at (312) 566-3526 for credit verification to allow substantiation of the credit.

    3. Route requests for substantiation of Guam estimated payments and credit elect amounts substantiated by Disclosure Area 2 to the Austin Submission Processing Accounting Branch using Form 4446, as hard-core payment tracer cases. See IRM 3.17.63.15.42, Account 6570 Substantiated Credits Allowed (Nominal Account, DR Normal Balance )

      Note:

      This procedure is different than the procedure used for the U.S. Virgin Islands and CNMI.

21.8.1.8  (10-01-2008)
Commonwealth of the Northern Mariana Islands (CNMI)

  1. All information in this section pertains to the Commonwealth of the Northern Mariana Islands.

  2. The Commonwealth of the Northern Mariana Islands (CNMI) has its own separate and independent tax system based partly on the same laws and tax rates that apply to the United States and partly on local taxes imposed by the CNMI government. This change occurred on January 1, 1979. U.S. citizens who are bona fide residents of the Commonwealth of the Northern Mariana Islands during the entire tax year must report their gross income from worldwide sources on their Northern Mariana Islands tax return.

  3. If a U.S. citizen's adjusted gross income from all sources is at least $50,000.00, their gross income consists of at least $5,000.00 from sources in the CNMI, and they file a U.S. income tax return, they must attach Form 5074 to Form 1040.

    Note:

    A penalty of $1,000.00 may be assessed for not filing the required information. See IRM 20.1.9.18, IRC § 6688 - Reporting for Residents of U.S. Possessions.

21.8.1.8.1  (10-01-2013)
Filing Requirement Chart - CNMI

  1. Use the following chart to determine a U.S. or CNMI resident or citizen filing requirement. A return is not filed with both.

    If... Then...
    The taxpayer is a bona fide resident of CNMI during the entire tax year A tax return must be filed and tax paid on income derived from all sources to CNMI.
    The taxpayer is a U.S. citizen or a resident who is not a bona fide resident of CNMI during the entire tax year A U.S. tax return must be filed and tax paid on income derived from all sources to the United States.
    A citizen of CNMI is not a resident of the U.S. or CNMI A return must be filed with CNMI.
    A joint return is being filed by taxpayers who are living apart The return must be filed with the jurisdiction where the spouse who has the greater adjusted gross income is required to file.

    Note:

    For this purpose, income is determined without regard to community property laws.

    The taxpayer is a member of the U.S. Armed Forces stationed on CNMI and is paid by the U.S. Government but has a state of legal residence (see IRM 3.21.3.64, Guam -- General Information), in one of the 50 United States or DC or a spouse of such service member and is eligible for benefits under MSRRA The taxpayer is not considered a resident of CNMI and therefore files an income tax return with the United States.
    A citizen or resident of CNMI has income from a trade or business and is not required to file Form 1040 (U.S.) Form 1040-SS, U. S. Self-Employment Tax Return, must be filed to report self-employment Income and pay self-employment tax, in addition to the income tax return filed with the Government of CNMI.

    Note:

    When the Form 1040-SS is filed, it resembles a combination of Form 1040 Schedules C, F, and SE. They are only required to have self-employment tax calculated and paid with the return.

21.8.1.8.2  (10-01-2012)
Credits and Payments - CNMI

  1. Take into account credit for income taxes withheld at the source, estimated tax payments and withholding credits in determining if the return results in a balance of tax due or overpayment, regardless of the jurisdiction (U.S. or CNMI) in which they were received.

    Caution:

    Do not allow credit when the employer's address is outside of the U.S., Guam, CNMI, U.S. Virgin Islands, Puerto Rico, or American Samoa.

  2. The taxpayer can take credit for these payments regardless of the jurisdiction to which they are liable. However, a taxpayer claiming credits other than U.S. credits, which cannot be verified via IDRS, must supply adequate documentation for the payments such as W-2 CNMI.

    • A W-2, (CNMI W-2C allow box 2a only)

    • A copy of a canceled check, or

    • A dated receipt stamped by the jurisdiction that received the payment(s)

  3. Once proof of payment is received, credit the taxpayer's account for the substantiated amount using TC 766.

21.8.1.9  (10-01-2013)
American Samoa

  1. The following section has specific tax information as it relates to the U.S. Territory, American Samoa.

  2. Individuals born in American Samoa are considered U.S. Nationals but are not U.S. citizens. However, for tax purposes, they are generally treated the same as U.S. citizens

  3. American Samoa has its own separate and independent tax system.

21.8.1.9.1  (10-01-2007)
Filing Requirements - American Samoa

  1. U.S. citizens and residents who are bona fide residents of American Samoa must report their gross income from world-wide sources on their Samoan tax return. For more information on bona fide residency see IRM 21.8.1.4.2.

  2. Wages and salaries paid by the U.S. government to U.S. citizens and residents are subject to U.S. federal income tax and are not eligible to be excluded from gross income per IRC § 931(d). These U.S. citizens and residents must file both U.S. and American Samoan tax returns.

  3. U.S. citizens and residents who are bona fide residents of American Samoa are required to file a U.S. return and pay taxes on a net basis if they receive income from sources outside American Samoa (either U.S. or foreign source income).

  4. U.S. citizens and residents who are bona fide residents of American Samoa may qualify to exclude income from sources in American Samoa, and income effectively connected with a trade or business in American Samoa, on their U.S. income tax return. See IRM 21.8.1.9.2. and Form 4563 for information on the territory exclusion.

  5. U.S. citizens and residents, who are bona fide residents of American Samoa, are not required to file a U.S. tax return, provided their income is derived solely from sources in American Samoa and does not include wages or salary received from the U.S. government.

  6. U.S. citizens and residents who are not bona fide residents of American Samoa report income from American Samoan sources on their American Samoan tax return. These taxpayers:

    1. Must report world-wide income on their U.S. tax return

    2. Can take credit on Form 1116 for taxes paid to the Government of American Samoa

  7. Those who report U.S. government wages on both U.S. and American Samoan tax returns may take a credit on their U.S. tax return for income taxes paid or accrued to American Samoa. They compute that credit on Form 1116 and attach that form to the U.S. tax return, Form 1040. Wages paid for services rendered in American Samoa are shown on Form 1116 as income from sources in a territory.

  8. A mutual agreement procedure exists to settle cases of double taxation between the U.S. and American Samoa. See IRM 21.8.1.4.1, Double Taxation.

  9. Social security benefit payments to citizens of American Samoa (if they are not otherwise U.S. citizens and if they are not U.S. residents) are exempt from U.S. income tax, provided that American Samoa taxes those payments in a way equivalent to the manner of U.S. taxation of social security benefit payments to U.S. individuals. Therefore, SSA does not withhold tax on such payments.

  10. Citizens and residents of American Samoa with income from a trade or business , who do not file Form 1040 (U.S.), must file Form 1040-SS, U.S. Self-Employment Tax Return, with the IRS to report self-employment tax, in addition to the income tax return filed with the Government of American Samoa.

    1. Citizens of American Samoa do not pay income tax to the U.S. on income earned in American Samoa, only SE tax. They are considered U.S. Nationals, not U.S. citizens.

    2. The Form 1040-SS resembles a combination of Form 1040 Schedules C, F, and SE. Only self-employment tax is calculated and paid with the return.

21.8.1.9.2  (10-01-2013)
IRC § 931 Territory Exclusion (Form 4563)

  1. The Tax Reform Act of 1986 amended IRC § 931 and therefore affected the previously known "territory exemption" for tax years after 1986. Formerly, a U.S. citizen had the option to exclude gross income received from sources in certain U.S.Territories. The § 931 exclusion applies only to individuals who are bona fide residents of American Samoa.

    Note:

    Individuals in the other territories do not qualify for the exclusion under IRC § 931. Note, however, that the tax systems of the other U.S. territories are also coordinated with the U.S. tax system

  2. See Publication 570 for a complete list of U.S. territories that are not eligible for the § 931 territory exclusion via §932, §933, §934, and §935.

    Caution:

    Johnston Islands is not a specified U.S. Territory for purposes of IRC § 931. DO NOT allow claims for a Territory Exclusion.

  3. To claim the exclusion, taxpayers prepare Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, and attach it to their return.

  4. When the exclusion is taken, taxpayers are not allowed any deductions or credits on Form 1040 that are definitely related to the excluded income. This includes:

    1. The standard deduction, and

    2. Certain itemized deductions such as medical and dental expenses, gifts to charity and real estate taxes and mortgage interest on personal residence.

  5. Employees of the United States Government, including its agencies, do not qualify for the §931 exclusion on wages earned from that employment.

21.8.1.10  (10-01-2012)
Visa Information

  1. A visa is assigned to an individual by the U.S. Citizenship and Immigration Service (USCIS) based on the individual’s U.S. immigrant or non-immigrant status. Visas are assigned to non-immigrant aliens who are admitted temporarily to the United States for specific reasons and periods of time.

  2. The USCIS Web site at http://www.uscis.gov contains specific information on the various visas available.

  3. See IRM 21.8.1.18 for procedures to gather proper documentation to process a claim for FICA taxes.

  4. The following is a list of immigration forms and descriptions:

    Form Description Citizenship Field Permanent Resident Alien
    AR-3 and AR-3a Alien Registration Receipt Card. Evidence of lawful admission for permanent residence. Legal alien allowed to work Y
    DSP-150 B-1/B-2 Visa and Border Crossing Card.

    Note:

    Form DFP-150 replaces Form I-186 and Form I-586.

       
    DS-2019 Certificate of Eligibility for Exchange Visitor (J-1) Status. Evidence the alien is an exchange visitor. Must also show an I-94 with J-1 alien classification.    
    I-20 Certificate of Eligibility for Nonimmigrant Student Status. Must also show an I-94 showing either F-1 or M-1 alien classification.    
    I-94 or I-94A Arrival/Departure Record. Evidence the alien is a non-immigrant. There are different versions of the form.    
    I-94W Non-immigrant Visa Waiver Arrival/ Departure Form. Evidence that the alien is a visitor from a visa waiver country.    
    I-95 or I-95A Crewman's Landing Permit. Issued to foreign crewman. Legal alien not allowed to work N
    I-184 Alien Crewman Landing Permit and Identification Card. Issued to foreign crewmen. Legal alien not allowed to work N
    I-185 Nonresident Alien Canadian Border Crossing Card. Issued to Canadian citizens. Legal alien not allowed to work N
    I-194 Notice of Approval of Advance Permission to Enter the United States as a Nonimmigrant.    
    I-508 Waiver of Rights, Privileges, Exemptions and Immunities. This Form includes an "IRS COPY" . Route all IRS COPIES received to:
    IRS
    Large Business and International
    1111 Constitution Ave-NW
    Washington, DC 20224
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . This name is for internal use only.
    I-551 Alien Registration Receipt Card (Green Card). Evidence of lawful admission for permanent residence. Legal alien allowed to work Y
    I-551 STAMP Temporary I-551. Evidence of lawful admission for permanent residence until the I-551 card is received. Legal alien allowed to work Y
    I-688 Temporary Resident Identification Card. Issued to legalization applicants. Legal alien allowed to work N
    I-688A Employment Authorization Card. Evidence of work authorization. Legal alien allowed to work N
    I-688 EXT Extended Temporary Resident Card. Evidence of lawful admission for permanent residence until the I-551 card is received. Legal alien allowed to work N
    I-766 Employment Authorization Document. Evidence of work authorization. Legal alien allowed to work N
    I-797 Notice of Action. Accept only for Family Unity program aliens. Legal alien N

    Note:

    Forms that begin with "I" (such as Form I-551) come from the United States Citizenship and Immigration Services (See the USCIS Web site at http://www.uscis.gov). Forms that begin with "DS" (such as DS-2019) come from the U. S. Department of State (See the State Department Web site at http://state.gov).

  5. The following table lists the various types of visas with a description of each:

    Visa Symbol Class (Description) Section of the Law
    A-1 Ambassador, public minister, career diplomat or consular officer, and immediate family 101(a)(15)(A)(i)
    A-2 Other foreign government official or employee, and immediate family 101(a)(15)(A)(ii)
    A-3 Attendant, servant or personal employee of principal A-1 or A-2, and immediate family 101(a)(15)(A)(iii)
    B-1 Temporary visitor for business 101(a)(15)(B)
    B-2 Temporary visitor for pleasure 101(a)(15)(B)
    C-1 Alien in transit directly through U.S. 101(a)(15)(C)
    C-1D Combined transit and crewman visa 101(a)(15)(C)(D)
    C-2 Alien in transit to United Nations Headquarters district under Section 11.(3), (4), or (5) of the Headquarters Agreement 101(a)(15)(C)
    C-3 Foreign government official, immediate family attendant, servant or personal employee, in transit 212(d)(8)
    C-4 Transit without Visa, see TWOV 212(d)(3) ; 212(d)(5)
    D-1 Crew member departing on same vessel of arrival 101(a)(15)(D)
    D-2 Crew member departing by means other than vessel of arrival 101(a)(15)(D)
    E-1 Treaty trader spouse and children 101(a)(15)(E)(i)
    E-2 Treaty investor, spouse and children 101(a)(15)(E)(ii)
    E-3 Australian Specialty Occupation Workers 101(a)(15)(E)(iii)
    F-1 Academic student 101(a)(15)(F)(i)
    F-2 Spouse or child of F-1 101(a)(15)(F)(ii)
    G-1 Principal resident representative of recognized foreign member government to international organization, staff and immediate family 101(a)(15)(G)(i)
    G-2 Other representative of recognized foreign member government to international organization and immediate family 101(a)(15)(G)(ii)
    G-3 Representative of non-recognized or nonmember government to international organization, and immediate family 101(a)(15)(G)(iii)
    G-4 International organization officer or employee, and immediate family 101(a)(15)(G)(iv)
    G-5 Attendant, servant, or personal employee of G-1, through G-4 and immediate family 101(a)(15)(G)(v)
    H-1B Specialty Occupations, Department of Defense (DOD) workers, fashion models 101(a)(15)(H)(i)(b)
    H-1B1 Free traded nonimmigrant professional from Chile or Singapore 101(a)(15)(H)(i)(b)(1)
    H-1C Nurses going to work up to three years in health professional shortage areas 101(a)(15)(H)(i)(c)
    H-2A Temporary Agricultural Worker 101(a)(15)(H)(ii)(a)
    H-2B Temporary worker: skilled and unskilled 101(a)(15)(H)(ii)(b)
    H-3 Trainee 101(a)(15)(H)(iii)
    H-4 Spouse or child of an alien classified H-1, H-2, or H-3 101(a)(15)(H)(iv)
    I Foreign media Representatives 101(a)(15)(I)
    J-1 Exchange visitor 101(a)(15)(J)(i)
    J-2 Spouse or child J-1 101(a)(15)(J)(ii)
    K-1 Fiance(e) 101(a)(15)(K)
    K-2 Minor child of K-1 101(a)(15)(K)
    K-3 Spouse of a U.S. Citizen (LIFE Act) 101(a)(15)(K)(ii)
    K-4 Child of K-3 (LIFE Act) 101(a)(15)(K)(iii)
    L-1A Executive, managerial 101(a)(15)(L)
    L-1B Specialized knowledge 101(a)(15)(L)
    L-2 Spouse or child L-1 101(a)(15)(L)
    M-1 Vocational student or other nonacademic student 101(a)(15)(M)(i)
    M-2 Spouse or child of M-1 101(a)(15)(M)(ii)
    M-3 Canadian or Mexican national commuter students –vocational/non academic institutions 104(a)(15)(M)(iii)
    N-8 Parent of an alien classified SK-3 "Special Immigrant " 101(a)(15)(N)(i)
    N-9 Child of N-8 or of an SK-1, SK-2 or SK-4 "Special immigrant " 101(a)(15)(N)(ii) through (iv)
    NATO-1 Principal Permanent Representative of Member State to NATO and resident members of official staff or immediate family Art. 12, 5 U.S.T. 1094, Art. 20, 5, U.S.T. 1098
    NATO-2 Other representatives of member State; Dependents of members of a force entering in accordance with the provisions of the NATO Status-of-Forces agreement; Members of such a Force if issued visas Art. 13, 5 U.S.T. 1094, Art. 1, 4 U.S.T. 1794, Art. 3, 4 U.S.T. 1796
    NATO-3 Official clerical staff accompanying a representative of member state NATO and immediate family Art. 14, 5 U.S.T. 1096
    NATO-4 Official of NATO other than those qualified as NATO-1 and immediate family Art. 18, 5 U.S.T. 1096
    NATO-5 Expert other than NATO officials qualified under NATO-4, employed on behalf of NATO and immediate family Art. 21, 5 U.S.T. 1100
    NATO-6 Member of a civilian component who is either accompanying a Force entering in accordance with the provisions of the NATO Status-of-Forces agreement; attached to an Allied headquarters under the protocol on the Status of International Military headquarters set up pursuant to the North Atlantic Treaty; and their dependents Art. 1, 4 U.S.T. 1794, Art. 3, 5 U.S.T. 877
    NATO-7 Servant, or other personal employee of NATO-1 through NATO-6 classes or immediate family Arts. 12-20, 5 U.S.T. 1094-1098
    O-1 Extraordinary ability in sciences, arts, education, business or athletics 101(a)(15(O)(i)
    O-2 Alien's (support) accompanying O-1 101(a)(15(O)(ii)
    O-3 Spouse/child of O-1 or O-2 101(a)(15(O)(iii)
    P-1 Entertainment groups 101(a)(15)(P)(i)
    P-2 Artist and entertainers in reciprocal Exchange programs 101(a)(15(P)(ii)
    P-3 Artists and entertainers in culturally unique programs 101(a)(15(P)(iii)
    P-4 Spouse or child of P-1, 2, or 3 101(a)(15(P)(iv)
    Q-1 International cultural exchange visitors 101(a)(15(Q)(i)
    Q-2 Irish Peace Process Cultural and Training Program (Walsh Visas) 101(a)(15(Q)(ii)(I)
    Q-3 Spouse or child Q-2 101(a)(15(Q)(ii)(II)
    R-1 Religious workers 101(a)(15)(R)
    R-2 Spouse/child of R-1 101(a)(15)(R)
    S-5 Informant of criminal organization information 101(a)(15)(S)(i)
    S-6 Informant of terrorism information 101(a)(15)(S)(ii)
    T-1 Victim of a severe form of trafficking in persons 101(a)(15)(T)(i)
    T-2 Spouse of a victim of severe form of trafficking in persons 101(a)(15)(T)(ii)
    T-3 Child of victim of a severe form of trafficking in persons 101(a)(15)(T)(ii)
    T-4 Parent of a victim of severe form of trafficking in persons (If victim is under 21 years of age) 101(a)(15)(T)(ii)
    TN Trade visas for Canadians and Mexicans 214(e)(2)
    TD Spouse or child accompanying TN 214(e)(2)
    TWOV Passenger 212(d)(3);(5)
    TWOV Crew 212(d)(3);(5)
    U-1 Victim of Certain Criminal Activity 101(a)(15)(U)
    U-2 Spouse of U-1 101(a)(15)(U)
    U-3 Child of U-1 101(a)(15)(U)
    U-4 Parent of U-1, if U-1 is under the age of 21 101(a)(15)(U)
    V-1 Spouse of an LPR who is the principal beneficiary of a family-based petition (Form I-130) which was filed prior to December 21, 2000, and has been pending for at least three years 101(a)(15)(V)
    V-2 Child of an LPR who is the principal beneficiary of a family-based visa petition (Form I-130) that was filed prior to December 21, 2000, and has been pending for at least three years 101(a)(15)(V)
    V-3 The derivative child of a V-1 or V-2 101(a)(15)(V)
    TPS Temporary Protected Status INA Section 244

21.8.1.11  (10-01-2007)
Aliens

  1. The following IRM sections provide specific tax information as it relates to aliens. Publication 519, U.S. Tax Guide for Aliens, contains additional information.

  2. Under U.S. tax laws, resident aliens are generally taxed in the same manner as U.S. citizens. Resident aliens are subject to U.S. tax on income from all sources, both within and outside the United States. Nonresident aliens are generally only taxed on their income from sources within the United States. However, nonresident aliens are subject to U.S. tax on certain foreign source income that is effectively connected with the conduct of a trade or business within the United States.

  3. Special rules apply to the taxing of the income of nonresident aliens. This depends on whether the income is from investments or from business activities, such as the performance of personal services in the United States.

21.8.1.11.1  (05-25-2012)
U.S. Departing Alien U.S. Income Tax Return (Form 1040-C)

  1. Most aliens must obtain a Certificate of Compliance (also known as a departure, exit, or sailing permit) signed by the Field Assistance Area Director before departing the United States or any territory.

  2. This Certificate of Compliance is obtained by filing:

    • Form 2063, U.S. Departing Alien Income Tax Statement, or

    • Form 1040-C, U.S. Departing Alien Income Tax Return.

  3. The Form 2063 is not processed, and does not involve a tax computation. Route loose Forms 2063 to Files at the Austin Campus - Stop 6722.

  4. The Form 2063 can be filed by the following departing aliens:

    1. Aliens, resident or nonresident, who have no taxable income for the tax year, up to and including the date of departure, nor for the preceding year, if the period for filing the income tax return for that year has not expired

    2. Resident aliens who have received taxable income during the tax year or preceding year, and whose departure will not hinder the collection of any tax.

    Caution:

    If the IRS has information indicating that the alien is leaving to avoid paying his or her income tax, the alien must file a Form 1040-C.

  5. Form 1040-C is used to report all income received and reasonably expected to be received during the tax year up to and including the departure date. This is not a final return, as the taxpayer must file Form 1040 or Form 1040NR at the close of the tax year.

  6. The following taxpayers must file Form 1040-C:

    • Nonresidents having taxable income

    • Residents having taxable income who do not intend to return to the United States

    • Aliens involved in situations requiring a tax year termination

  7. Taxpayers in the following categories do not have to obtain a sailing or departure permit before leaving the United States, but must be able to support the claim for exemption with proper identification.

    Categories Departure Permit Exemptions
    Category 1 Representatives of foreign governments with diplomatic passports, whether accredited to the United States or other countries, members of their households, and, servants accompanying them. Servants who are leaving, but not with a person with a diplomatic passport, must get a sailing or departure permit. See Publication 519 .
    Category 2 Employees of international organizations and foreign governments, and members of their households

    Note:

    An alien in category 1 or 2, who filed a USCIS waiver under IRC § 247(b), must obtain a sailing or departure permit.

    Category 3 Alien students, industrial trainees, and exchange visitors, including their spouses and children, who enter on an F-1, F-2, H-3, H-4, J-1, J-2 or Q visa only, and who receive no income other than from U.S. sources while in the United States on those visas

    Note:

    A sailing/departure permit is not needed if the income is from: allowances to cover expenses incident to study or training (travel, maintenance, tuition); value of services, food, lodging; interest on deposits that are not effectively connected with the United States; or USCIS authorized employment compensation.

    Category 4 Alien students, including their spouses and children, who enter on an M-1 or M-2 visa only and who receive no income from U.S. sources other than income from USCIS authorized employment or interest income on deposits that are not effectively connected with the United States.
    Category 5 Certain other aliens temporarily in the United States who have received no taxable income during the tax year, up to and including the date of departure, or preceding tax year. Aliens covered by this paragraph are:
    • Alien military trainees in the United States for training sponsored by the DOD, and who leave the U.S. on official military travel orders

    • Alien visitors for business on a B-1, or on both a B-1 and B-2 visa, who do not remain in the United States or a U.S. territory for more than 90 days during the tax year

    • Alien visitors for pleasure on a B-2 visa

    • Aliens in transit through the United States or any of its territories on a C-1 visa, or under a contract such as a bond agreement, between a transportation line and the Attorney General

    • Aliens who enter the United States on a border-crossing identification card or for whom passports, visas, and border-crossing identification cards are not required, if they are: visitors for pleasure, visitors for business who do not remain in the United States or a territory for more than 90 days during the tax year, or in transit through the United States or any of its territories

    Category 6 Alien residents of Canada or Mexico who frequently commute between that country and the United States for employment, and whose wages are subject to the withholding of U.S. taxes

  8. Form 1040-C:

    1. It is posted as a Transaction Code 430, using Doc Code 61.

    2. Credit remains on the account until a Form 1040 or Form 1040NR return posts.

    3. Send loose forms to the Files at the Austin Campus - Stop 6722.

  9. Joint Return on Form 1040-C: Generally, departing husbands and wives who are nonresident aliens cannot file joint returns. However, if both spouses are resident aliens, they can file a joint return on Form 1040-C if:

    • Both spouses can reasonably be expected to qualify to file a joint return at the normal close of their tax year, and

    • The tax years of the spouses end at the same time

21.8.1.11.2  (10-01-2013)
Test for Resident Alien and Nonresident Alien Status

  1. An alien individual is considered a resident for U.S. income tax purposes during a year, and thus liable for taxes on income from world-wide sources during that year, if he or she:

    1. Has been lawfully admitted to the United States for permanent residence (the "green card test" ) including a taxpayer that holds a green card (Alien Registration Card) as a commuter from Canada or Mexico (see SCA-199950009), or

    2. Is in the United States for at least 31 days in the current year and meets the substantial presence test. This test is met if the total number of days present in the year in question, plus 1/3 of the days present in the preceding year, plus 1/6 of the days present in the second preceding year add up to 183 days or more, or

    3. Makes an election under § 7701(b)(4) to be treated as a resident alien. See IRM 21.8.1.11.5, or Publication 519 for additional information on this election.

  2. For purposes of the substantial presence test, an individual is treated as present in the United States every day that he or she is physically present in the country at any time during the day with the following exceptions:

    1. Days he or she regularly commutes to work in the United States from a residence in Canada or Mexico

    2. Days he or she was in the United States for less than 24 hours when he or she was in transit between two places outside the United States

    3. Days he or she planned to be out of the United States, but was unable to leave because of a medical condition that originated while he or she was in the United States - Form 8843 or similar statement

    4. Days he or she was an exempt individual

    5. Days he or she was in the United States as a crew member of a foreign vessel. See the Exemption Chart below for exempt individuals:

    Exemption Chart
    An individual temporarily present in the United States because of diplomatic status
    An individual temporarily present in the United States because of a visa that the Secretary of the Treasury determines to represent full-time diplomatic or consular status Individuals present in the U.S. under an “A” or “G” Visa are considered to have full-time diplomatic or consular status
    An individual temporarily present in the United States because of full-time employment with an international organization
    An individual temporarily present in the United States because of membership in the immediate family of a person described in the preceding 3 blocks in this chart (a foreign government-related individual)
    A teacher or trainee, temporarily present in the United States under a "J" or "Q" visa (other than as a student), who substantially complies with the requirements of the visa, (usually limited to 2 years during the last 6 calendar years)
    A student, temporarily present in the United States under an "F" , "J" , "M" or "Q" visa, who substantially complies with the requirements of the visa (usually limited to 5 years)
    A professional athlete temporarily in the United States to compete in a charitable sports event
    Immediate family members of exempt teachers and trainees

  3. An exception to the substantial presence test can be made by showing a closer connection (Form 8840) to a foreign country. Even though an alien would otherwise meet the substantial presence test, they do not meet the test for the current year, if:

    1. The alien is present in the United States for less than 183 days during the current year, and

    2. It is established that for the current year the alien has a tax home in a foreign country, and has a closer connection to that country than to the United States.

  4. This exception to the substantial presence test does not apply for any year during which the alien has an application for adjustment of status pending or takes other steps to apply for status as a lawful permanent resident of the United States.

  5. A resident alien is subject to tax under a special rule if his or her period of residence in the United States is interrupted with a period of nonresidence. The special rule applies if the resident alien meets all of the following conditions.

    • He or she was a U.S. resident for a period that includes at least 3 consecutive calendar years

    • He or she was a U.S. resident for at least 183 days in each of those years

    • He or she ceased to be treated as a U.S. resident

    • He or she then again became a U.S. resident before the end of the third calendar year after the period described in (1) above.

    Under this special rule, the individual is subject to tax on his or her U.S. source gross income and gains on a net basis at the graduated rates applicable to individuals (with allowance deductions) for the period during which the individual was a nonresident alien, unless the individual would be subject to a higher tax under the 30% tax on income not connected with a U.S. trade or business. See Pub 519, for more details.

21.8.1.11.3  (10-01-2012)
Resident Aliens

  1. Generally, resident aliens are those persons who have been admitted for permanent residence in the United States (the "green card test" ) or meet the substantial presence test.

  2. A resident alien taxpayer is entitled to all deductions, exclusions, and credits under the same rules as a U.S. citizen.

  3. All individuals are required to include a social security number or individual taxpayer identification number with their federal income tax return. Once an alien begins to earn income subject to federal taxes, an application for this identification number can be made using a Form SS-5,Application for a Social Security Number Card (Original, Replacement or Correction ). A Form W-7, Application for IRS Individual Taxpayer Identification Number, must be filed with an income tax return unless the person qualifies for one of the listed exemptions.

  4. An individual who is a U.S. resident alien for an entire taxable year must generally file Form 1040. U.S. resident aliens have the same filing requirements as U.S. citizens. Like U.S. citizens, U.S. resident aliens generally are not eligible to claim benefits provided by the United States under a tax treaty.

    Caution:

    In some circumstances, an individual who is a resident under either the green card test or the substantial presence test may also be a resident of a treaty country under that country’s law. If the individual would be a resident of the other country under the tiebreaker rules in the treaty, the individual may choose to file Form 1040NR as a nonresident alien. An individual who makes this election must notify the Service on a Form 8833,Treaty -Based Return Position Disclosure, under § 6114 or § 7701(b) . This form is filed with his or her Form 1040NR

  5. A U.S. citizen or resident living outside the United States on the regular due date for filing an income tax return, is allowed an automatic 2 month extension for filing the return and paying tax if filing a calendar year return.

    Note:

    The 2 month extension applies if, on the due date of the return, the U.S. citizen or resident:

    • Was living outside the United States or Puerto Rico, and

    • Had a main place of business or post of duty outside the United States or Puerto Rico, or

    • Was in the military or naval service on duty outside the United States or Puerto Rico

  6. A resident alien must report all gross income from world-wide sources.

  7. An alien is a U.S. resident, for tax purposes, if he/she:

    1. Is lawfully admitted to the United States for permanent residence as the holder of a green card at any time during the year, including a taxpayer that holds the green card as a Canadian/Mexican commuter (see SCA-199950009)

    2. Meets the substantial presence test, or

    3. Makes an election to be considered a U.S. resident. See IRM 21.8.1.11.5.

21.8.1.11.4  (02-27-2008)
Nonresident Aliens

  1. Public Law 98-369 effectively changed the criteria used by the IRS in determining the definition of a nonresident alien by creating IRC § 7701(b).

  2. IRC § 7701(b)(1)(B) defines a nonresident alien as an individual who is neither a citizen nor a resident (for tax purposes) of the United States.

  3. An alien is considered a nonresident if he is neither a U.S. resident, for tax purposes, within the meaning of IRC § 7701(b)(1)(A), nor a U.S. citizen. See IRM 21.8.1.11.3, Resident Aliens.

  4. The following are unique definitions of aliens where special residency rules apply:

    Type Special Residency Rules
    Alien seamen Alien seamen are not considered residents of the United States just because they are on a U.S. vessel. A residence can be established in the United States by acquiring a hotel or boarding house room, even if their work requires absence from the United States for long periods.
    Alien crewmen Alien crewmen of a foreign vessel engaged in transportation between the United States and a foreign country, or territory of the United States, are not treated as present in the United States on those days unless the individual otherwise engages in any trade or business in the United States on such day.
    Cuban refugees Certain Cuban refugees are transient nonresident aliens for tax purposes, even though they have immigrant visas covering permanent residences.
    Philippine nationals Philippine nationals are considered nonresident aliens if they are in the United States for a short time to work, and return to their ship when the work tour is over.

21.8.1.11.5  (10-01-2012)
Electing to be Treated as a Resident Alien

  1. An alien individual may elect to be treated as a U.S. resident for tax purposes if he or she:

    • Meets the substantial presence test in the year following the election,

    • Is present in the United States for at least 31 consecutive days in the year of the election, and

    • Is present in the United States for at least 75% of the number of days during the period beginning with the first day of the 31-day period (described above) and ending with the last day of the year of election

  2. A nonresident alien can also make an election under IRC § 6013(g) or (h) to be treated as a U.S. resident.

  3. To qualify as a resident under §6013(g), the nonresident alien at the close of the tax year for which the election was made:

    • Must be married to a U.S. citizen or resident, and

    • Both must elect to have the benefits of this subsection apply to them

      Note:

      The election may be made on an originally filed return or an amended return.

    Note:

    The § 6013(g) election applies to all subsequent years until such time as the election is terminated.

  4. To qualify for treatment as a resident and file a joint return under §6013(h), the alien must, at the close of the tax year in which the alien becomes a resident of the United States:

    • Make the election under 6013(h)

    • Be married to a U.S. citizen or resident at the close of the tax year in which the alien becomes a resident of the U.S., and

    • Both spouses must make the election under 6013(h) on an originally field return or an amended return.

  5. For additional information, see Publication 519.

21.8.1.11.6  (03-01-2013)
Nonresident Alien Filing Requirements - Form 1040NR/NR-EZ

  1. Nonresident alien individuals engaged or considered to be engaged in a trade or business in the United States must file a return, even if:

    • Their income did not come from a trade or business conducted in the United States

    • Their income did not come from U.S. sources

    • Their income is tax exempt

  2. Nonresident alien individuals not engaged or considered to be engaged in a trade or business in the United States must file a return when their tax liability is not satisfied by withholding at source.

  3. Nonresident alien students and trainees who are temporarily present in the United States under an F, J, M, or Q visa, are considered engaged in trade or business in the United States.

  4. A nonresident alien liable for filing a U.S. income tax return generally must file a Form 1040NR/NR-EZ.

    Note:

    There is a restriction that does not allow taxpayers who filed a joint return in most instances to change to married filing separate returns after the return due date. However, this restriction does not apply in cases where taxpayers request a change from an erroneous 1040 series joint filing to 1040NR separate filings.

  5. Form 1040NR/NR–EZ is due:

    1. On or before April 15, if using a calendar year, or the 15th day of the 4th month after the end of the tax year if a fiscal filer, who has earned wages that are subject to U.S. withholding tax under chapter 24. Generally, this is effectively connected income and is processed with Document Code 73.

    2. On or before June 15, if using a calendar year, or the 15th day of the 6th month after the close of the tax year, if a fiscal filer who has income that is not subject to U.S. withholding. Generally, this is not effectively connected income and is processed with Document Code 72.

      Note:

      If the taxpayer has both earned wages that are subject to U.S. withholding tax, as well as non-U.S. earned income, the due date is on or before April 15th if using a calendar year, or the 15th day of the 4th month after the end of the tax year, if a fiscal filer.

  6. For tax years beginning on or after January 1, 2006, the requirement to file a return has been eliminated for nonresident aliens who earn wages effectively connected with a U.S. trade or business that are less than the amount of one personal exemption. The nonresident alien also must have no other income in the U.S. that would trigger a filing requirement and would not otherwise be required to file a return. See Notice 2005-77 for additional information.

  7. The following Reason Codes were established for changes from 1040 to 1040NR filings and vice versa.

    • RC 100 - Form 1040NR filing requirement

    • RC 101 - Form 1040 filing requirement

  8. The Telephone Excise Tax Refund (TETR) can be claimed on line 69 of the 2006 Form 1040NR and on line 21 of 2006 Form 1040NR-EZ. A nonresident alien who is not required to file a United States federal income tax return, but who is eligible for a refund of the telephone excise tax, may claim the refund using Form 1040EZ-T, Request for Refund of Telephone Excise Tax.

    Note:

    TETR refunds can only be claimed on 2006 tax returns.

  9. Facsimile signatures may be used on Form 1040NR/1040NR-EZ in situations where a substantial number of returns are filed by preparers, subject to the following conditions:

    • Each group of returns must be accompanied by a letter signed by the person authorized to sign such returns declaring, under penalty of perjury, that the facsimile signature appearing on the returns is the signature adopted by him to sign the returns filed and that such signature was affixed to the returns by him or at his direction.

    • A signed copy of the letter must be retained by the person filing the returns and must be available for inspection by the IRS.

    • The facsimile signature must be affixed subsequent to the reproductive process if the income tax returns are reproduced by photocopying or similar method for filing with IRS.

21.8.1.11.6.1  (08-12-2011)
Filing Status - Form 1040NR/NR-EZ

  1. The filing status choices shown on the Form 1040NR are:

    • 1 = Single resident of Canada or Mexico, or a single U.S. national

    • 2 = Other single nonresident alien

    • 3 = Married resident of Canada or Mexico, or a married U.S. national

    • 4 = Married resident of the South Korea

    • 5 = Other married nonresident alien

    • 6 = Qualifying widow(er) with qualifying

  2. The filing status choices shown on the Form 1040NR-EZ are:

    • 1 = Single nonresident alien

    • 2 = Married nonresident alien

  3. These choices result in the following filing status on IDRS.

      1040NR-EZ 1040NR
    If Then FS is: Then FS is:
    Box 1 is checked 1 1
    Box 2 is checked 3 1
    Box 3 is checked (no spouse claimed)   3
    Box 3 is checked (spouse claimed)   6
    Box 4 is checked (no spouse claimed)   3
    Box 4 is checked (spouse claimed)   6
    Box 5 is checked
    Exception: Qualifying entry - if box 5 is checked and spouse is claimed then FS is 6
      3
    Box 6 is checked
    Exception: Date of death is more than 2 years prior to tax year FS is 1
      5

    Note:

    A nonresident alien may elect under IRC § 6013(g) or (h) to be treated as a resident alien and use married filing joint filing status and report worldwide income. To qualify under IRC § 6013(g), the nonresident alien at the close of the tax year for which the election is made must be married to a U.S. citizen or resident, and both spouses must elect to have the benefits of this subsection apply to them. IRC § 6013(h) applies to an individual who was a nonresident alien at the beginning of any taxable year but is a resident of the United States at the close of the year, is married to a U.S. citizen or resident at the close of the year, and who makes the election under IRC § 6013(h) together with his or her spouse.

21.8.1.11.6.2  (10-01-2007)
Exemptions - Form 1040NR

  1. Residents of South Korea (and Japan for tax periods 2005 and prior) can claim exemptions for self, spouse or children. On the Form 1040NR, they check box 4 to claim their spouse and box 7c to claim dependents. However, the children must live with the parents in the United States to qualify for an exemption.

    If... Then...
    The taxpayer is a resident of South Korea (or Japan for tax periods 2005 and prior) and claimed an exemption for other than self, spouse, or child(ren) who lived in the United States Disallow claim and send Letter 105C with the following paragraph: "You cannot claim an exemption for other than self, spouse, or child(ren) who lived with you in the United States."
  2. Beginning in 2005, nonresident aliens who are residents of Japan generally cannot claim these exemptions as a result of the new U.S. - Japan tax treaty which became effective on January 1, 2005. However, residents of Japan, who elect to have the old U.S. - Japan income tax treaty apply in its entirety for 2005, may claim exemptions for a spouse and children in 2005.

  3. Residents of Canada, Mexico, and U.S. Nationals can claim exemptions for self, spouse, and/or other dependents on the same basis as U.S. citizens. On the Form 1040NR, they check box 3 to claim their spouse and box 7c to claim dependents.

  4. Residents of India who are students or business apprentices may be able to claim exemptions for self, spouse, and/or other dependents on the same basis as U.S. citizens.

  5. All others are allowed only one exemption for self only (Box 1, 2, or 5). If more than one exemption is claimed, disallow the exemption(s) and send Letter 105C with the following fill-in: "As a nonresident alien filer, you are only allowed an exemption for yourself."

21.8.1.11.6.3  (05-18-2011)
Nonresident Aliens and Self-Employment Tax

  1. Some nonresident aliens may be required to pay self-employment (SE) tax and be eligible to claim the deduction for one-half of SE tax on Form 1040NR.

  2. A nonresident alien reporting SE tax must be subject to an international social security agreement in effect that determines that they are covered under the U.S. social security system.

  3. Refer to the following chart to process amended Form 1040NR returns which report SE tax.

    If ... And ... Then ...
    Taxpayer claims to owe SE tax and takes the deduction for one-half of SE tax paid There is no country noted in the address portion of Form 1040NR Make the assessment using normal procedures. Issue appropriate IDRS letter to explain that we assessed their SE tax and encourage them to confirm with the Social Security Administration (SSA) that they are subject to an international social security agreement in effect that determines that they are covered under the U.S. social security system. They can visit the SSA website at http://www.ssa.gov/international/ for more information. If they determine that they paid SE tax in error, they should file an amended return to claim a refund within 3 years from the due date of the return, or 2 years from the date of payment.
    Taxpayer claim to owe SE tax and takes the deduction for one-half of SE tax paid There is a country noted in the address portion of Form 1040NR that has a bilateral social security agreement with the United States (totalization agreement). Refer to Publication 54 for a list of countries. Make the assessment using normal procedures.
    Taxpayer claims to owe SE tax and takes the deduction for one-half of SE tax paid, There is a country noted in the address portion of Form 1040NR that does not have a bilateral social security agreement with the United States (totalization agreement). Make the assessment using normal procedures. Issue appropriate IDRS letter to explain that we assessed their SE tax and encourage them to confirm with the Social Security Administration (SSA) that they are subject to an international social security agreement in effect that determines that they are covered under the U.S. social security system. They can visit the SSA website at http://www.ssa.gov/international/ for more information. If they determine that they paid SE tax in error, they should file an amended return to claim a refund within 3 years from the due date of the return, or 2 years from the date of payment.

21.8.1.11.7  (10-01-2007)
Filing Deadlines for First Time Filers

  1. For taxable years ending after July 31, 1990, first time filing deadlines for nonresident aliens and foreign corporations that were engaged in a trade or business or had a permanent establishment in the United States were revised.

  2. Failure to file timely U.S. returns by the revised deadlines could result in the loss of certain deductions and credits for taxes paid or accrued.

  3. First time filing deadlines:

    1. Nonresident aliens who are required to file a Form 1040NR for the first time, or who filed one for the immediately preceding tax year, must file no later than 16 months after the due date of their current year's return.

    2. Nonresident aliens not filing for the first time, and who did not file for the preceding year, must file their returns no later than the date specified by the IRS, or 16 months after the current year due date, whichever is earlier.

    3. Foreign corporations must follow the same rules when filing Form 1120-F, except that they have 18 months in which to file before losing deductions or credits.

    4. Nonresident aliens and foreign corporations unsure about their status may file protective returns no later than the new deadline.

21.8.1.11.8  (10-01-2007)
Extensions of Time

  1. IRC § 6081(a) permits the Service to use its discretion to grant reasonable extensions of time to file.

  2. Both individuals and corporations are allowed an automatic six-month extension of time to file by filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, or Form 7004, Application for Automatic 6 Month Extension of Time To File Certain Business Income Tax, Information, and Other Returns, respectively.

    1. U.S. citizens and resident aliens: Original due date is April 15th. The 6 month automatic extension is an extended due date of October 15th.

      Note:

      A two-month extension of time to file and pay is granted to U.S. citizens and residents whose tax homes and abodes are located outside the United States and Puerto Rico, or who are in military or naval service on duty outside the United States and Puerto Rico, pursuant to Treas. Reg. § 1.6081-5, resulting in an extended due date of June 15th. If the taxpayer requires additional time to file beyond June 15th, he/she may file Form 4868 to obtain an automatic extension of an additional four months to October 15th. This form must be filed on or before June 15th.

    2. Nonresident aliens with wages, line 8, Form 1040NR: Original due date is April 15th. The 6 month automatic extension is an extended due date of October 15th.

    3. Nonresident aliens with income other than wages, line 8, Form 1040NR: Original due date is June 15th. Nonresident aliens requiring additional time to file beyond June 15, may file Form 4868 to obtain an automatic extension of an additional six months to December 15th. This form must be filed on or before June 15th.

      Note:

      All dates in a, b, and c above assume taxpayers file income tax returns on a calendar-year basis.

  3. Generally, taxpayers are eligible for a 6 month extension of time to file from the original due date of the return. However, taxpayers considered to be abroad may receive an extension beyond 6 months. See IRM 3.11.212.1.3, Letter Requests.

  4. These extensions of time apply to fiscal as well as calendar year filers, and also must be adjusted when weekends and holidays are involved.

21.8.1.11.9  (03-01-2013)
Form 2350, Application for Extension of Time to File U.S. Income Tax Return

  1. Form 2350, Application for Extension of Time to File U.S. Income Tax Return, is for U.S. citizens and resident aliens abroad who are expected to qualify for special tax treatment (i.e., foreign earned income exclusion). The taxpayer must:

    1. Expect to qualify for the foreign earned income exclusion and/or the foreign housing exclusion or deduction by meeting either the bona fide residence test or the physical presence test but not until after the tax return is due, and

    2. Their tax home must be in a foreign country (or countries) throughout the period of bona fide residence or physical presence, whichever applies.

  2. Form 2350, Application for Extension of Time To File U.S. Income Tax Return must be filed before the return due date (including the two month automatic extension).

  3. This form extends the due date of the return generally to 30 days after the initial qualifying period ends.

    Note:

    Form 2350 can be filed without using another extension form first.

  4. Overlay ULC field on CC FRM77 with 98 when inputting a Form 2350.

21.8.1.11.10  (08-12-2011)
Effectively Connected Income

  1. Effectively connected income is all income, gain, or loss that is derived in connection with the conduct of a trade or business within the United States.

  2. The following chart has examples of U.S. source income that are considered effectively connected with a trade or business in the United States.

    Effectively Connected Income
    Income earned or received for personal services, wages, tips, commissions, fees, business, or other compensation (subject to a de minimis exception that rarely applies).
    Profit and loss derived from the operation of a business in the United States involving the buying and selling of merchandise by self-employed individuals, members of unincorporated companies, or partnerships
    Community property income from a community property state
    Certain interest, dividends, capital gains, rents, royalties, etc. (see Publication 519)
    Fellowships and scholarships (although frequently withheld at 14% or lower treaty rate)
    Pensions and annuities

  3. A nonresident aliens foreign source income is sometimes treated as effectively connected income. Foreign source income described in the chart below is treated as effectively connected income if:

    • the foreign source income is attributable to an office or other fixed place of business within the United States

    • The office or fixed place of business is a material factor in the production of such income, and

    • The office or fixed place of business regularly carries on activities of the type from which such income is derived.

    Note:

    Certain foreign source income may be effectively connected income. See IRC § 864(c)(4).

  4. The following chart identifies three types of effectively connected foreign source income.

    Effectively Connected Foreign Source Income
    Rents and royalties from the use outside the United States of intangible property (e.g., patents, copyrights, trademarks, etc.) derived in the active conduct of a U.S. trade or business
    Dividends or interest derived from banking, financing, or similar business in the United States
    Income, gains, or losses from sales or exchanges of inventory or property outside the United States through a U.S. office or fixed place of business (but not if the property is sold for use outside the United States and a fixed place of business of the taxpayer in a foreign country materially participated in such sale)

21.8.1.11.11  (10-01-2009)
Non-Effectively Connected Income

  1. Non-effectively connected income is income not effectively connected with a trade or business in the United States.

  2. Non-effectively connected income of nonresident aliens is taxed at 30% or a lower treaty rate but there are exceptions for certain types of income (e.g., portfolio interest).

    Note:

    It is taxable to nonresident aliens only when it is from U.S. sources.

  3. Foreign source non-effectively connected income does not have to be claimed or reported on a Form 1040NR.

  4. Foreign source income includes (if paid by a foreign payer or received for activities performed outside of the United States):

    • Scholarships

    • Fellowship grants

    • Grants

    • Prizes

    • Awards

  5. The income received by a nonresident alien (individuals other that a U.S. individual) is treated as income from sources outside the United States, i.e., foreign source income when it is received from a foreign:

    • Government

    • Agency

    • Political subdivision

    • Person, or

    • International organization (any foreign entity) for the purpose of study within the United States

  6. Exempt from taxes: nonresident aliens present in the United States less than 183 days during the tax year are exempt from taxes on gains from sales or exchanges of capital assets, unless such gains are effectively connected with a U.S. trade or business.

    Exception:

    Gains from the disposition of U.S. real property (including stock of a U.S. real property holding corporation) are treated as effectively connected income under §897 .

    1. Determining whether or not the alien is engaged in trade or business in the United States depends on the nature of the aliens activities.

    2. A nonresident alien performing special personal services in the United States at any time during the tax year is considered engaged in trade or business in the United States and the income is therefore not exempt.

    Note:

    The only exception to this rule is for employees of foreign persons, organizations, or offices.


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