21.8.1  IMF International Adjustments (Cont. 2)

21.8.1.11 
Aliens

21.8.1.11.12  (10-01-2013)
Statements Required Under Treas. Reg § 301.7701(b) – Form 8840 and Form 8843

  1. Treas. Reg § 301.7701(b)-8 requires nonresident aliens claiming a closer connection exception to the substantial presence test to file Form 8840, Closer Connection Exception Statement for Aliens, or a statement with IRS.

  2. Generally, these filers are referred to as "snowbirds," that is, foreigners who live in the warmer states such as Florida, Arizona, California, etc. during the winter months and who then return to their own countries for the balance of the year.

  3. Aliens are not eligible for the closer connection exception if:

    • They were present in the United States 183 days or more in the calendar year, or

    • They are a lawful permanent resident of the United States (i.e., green card holder)

      Exception:

      Alien students who will be in the United States over 183 days may become eligible to claim a closer connection exception.

  4. Students, teachers, researchers and visitors who are in the United States with a category "F," "J," "M," or, "Q" type visa and who claim the closer connection exception are required by Treas. Reg § 301.7701(b)-8 to File a Form 8843 Statement for Exempt Individuals and Individual With a Medical Condition, in addition to the Form 8840.

  5. Taxpayers who are required to file a Form 1040NR/1040NR-EZ are instructed to attach the Form 8840 (and, if required, the Form 8843) to their tax return for the tax year in question. Taxpayers who are not required to file a tax return are instructed to send the form 8840 (and, if required, the Form 8843) to the address provided in the instructions to the form.

  6. Research on IDRS any loose Form 8840 or Form 8843 that is received in the International Departments and attach to the latest tax return on file, or push code (TC 930) to the return being processed. See IRM 21.5.1.4.4.2, Inappropriate Use of TC 930 Push Code for cases scanned into the Correspondence Imaging System (CIS). If there is no return on file or no indication that one has been received and is being processed, route the Form 8840 or Form 8843 to the Austin Submission Processing Campus, DP 6055AUSC.

21.8.1.11.13  (10-01-2007)
Claims for Earned Income Tax Credit (EITC)

  1. The following procedures for Earned Income Tax Credit (EITC) must be used in conjunction with the procedures for Earned Income Tax Credit found in IRM 21.6.3.4.2.7, Earned Income Tax Credit (EITC). Publication 519 and Publication 596 also include information on the EITC.

  2. To qualify for the Earned Income Tax Credit (EITC), an alien taxpayer must, among other requirements, have lived in the United States for more than half of the tax year. For this purpose, the United States includes only the 50 states and the District of Columbia. The taxpayer is not required to maintain a residence in the United States. The taxpayer is not required to have a green card or other documentation of alien status.

  3. U.S. military personnel stationed overseas can qualify for the EITC even when their children lived with them abroad the entire year if they meet all other qualifying factors. See Publication 596 for additional information.

  4. Individuals who claim the benefits of §911 (Foreign Earned Income Exclusion) cannot claim the EITC.

  5. Disallow EITC if taxpayers are out of the United States, and not U.S. military personnel on long-term active duty, or have claimed the benefits of IRC § 911.

  6. If the taxpayer is a nonresident alien for any part of the tax year, he/she is not eligible to claim the EITC, unless the taxpayer is married to a U.S. citizen or resident alien and they choose to file a joint return under Code § 6013(g) or (h). See IRM 21.8.1.11.5 or Publication 519 for additional information on the election to be treated as a resident alien.

  7. Taxpayers cannot claim EITC using an ITIN. The taxpayer (and spouse, if filing a joint return) and any qualifying child listed on Schedule EIC must have an SSN. If the social security card says "Not Valid for Employment," correspond with the taxpayer to determine the reason the SSN was issued. If the SSN was issued so that the individual could receive a federally funded benefit, such as Medicaid, disallow the credit.

  8. A taxpayer cannot claim the EITC if the qualifying child has an ITIN or an ATIN, instead of a valid SSN.

    Caution:

    If the taxpayer has two qualifying children, and only one has a valid SSN, then the taxpayer can claim the EITC only for that child, provided they meet all the other qualifying factors.

21.8.1.11.13.1  (01-06-2011)
EITC Erroneously Claimed by Taxpayers with a Puerto Rico or Territory Address

  1. Taxpayers with their primary abode and address in Puerto Rico or one of the other U.S. territories, are filing Form 1040/1040A in error.

  2. They are filing Form 1040/1040A to claim the Earned Income Tax Credit (EITC), but they are not entitled to claim it because of IRC § 32(c)(1)(A)(ii)(I). In order to be eligible for the EITC, the taxpayer must have lived with a qualifying child in the United States for more than one-half of the tax year.

  3. IRC § 7701(a)(9) and Publication 596 define the term "United States," when used in a geographical sense, to include the 50 States and the District of Columbia. This is an important factor when determining EITC residency requirements.

  4. Ways to identify:

    • The W-2 and entity address indicates the taxpayer works and resides in Puerto Rico or another territory.

    • The tax liability is zero but EITC is claimed.

    • There is no indication on the Schedule EITC that the taxpayer lived in the United States for more than six months and has qualifying EITC dependent(s).

      Note:

      Such individuals who lived in one of the territories for more than one-half of the tax year are not eligible for the EITC. The W-2 and possession address invalidates a claim for EITC, unless the condition in (5) is met, or they are a member of the armed forces (explained below).

  5. An individual who lived more than six months in one of the 50 states or the District of Columbia, but moved to one of the territories prior to the end of the year, could be eligible for the EITC if they meet the remaining EITC requirements.

  6. If an inquiry is received questioning the status of a refund, there may be a freeze on the account from initial processing. Do not release this freeze, unless the EITC eligibility requirements are met. If they are not, advise the taxpayer or representative of the ineligibility for EITC, and that they are not to file with IRS, but with their local taxing authority in the Commonwealth of Puerto Rico (Departmento De Hacienda De Puerto Rico). Reverse the EITC posting of credit reference number TC 764 with a TC 765, using CC REQ54.

  7. If a claim is received and the qualifications for EITC are not clear, correspond for the required support.

  8. If a claim is received and it is clear that the qualifications for EITC are not met, follow formal claim disallowance procedures.

21.8.1.11.13.2  (10-01-2009)
Exception for Members of the Armed Forces on Long-Term Active Duty

  1. Members of the United States armed forces stationed in Puerto Rico or one of the territories are considered to live in the United States during their duty period.

  2. IRC § 32(c)(4) states that members of the armed forces of the United States are treated as being in the United States for any period during which the member is stationed outside the United States on active duty in excess of 90 days. Therefore, a member who has an address in a territory meets the residency test for the EITC and is eligible if they meet the other EITC requirements.

  3. If the claim is questionable, research CC IRPTR to determine if the payer is Defense Finance and Accounting Service (DFAS). This will verify that the filer is a member of the armed forces.

  4. Ensure that all requirements are met before allowing the EITC.

21.8.1.11.14  (10-01-2012)
180 Day Interest Free Period for Chapter 3 Withholding

  1. P.L. 111-147, the Hiring Incentives to Restore Employment Act (HIRE) enacted on March 18, 2010, amended IRC 6611(e), Interest on Overpayments by adding new paragraph IRC 6611(e)(4).

  2. IRC 6611(e)(4), "Certain Withholding Taxes," provides that in the case of any overpayment resulting from tax deducted and withheld under chapter 3 or 4 of the Code, Code section 6611(e)(1), (2), and (3) shall be applied by substituting “180 days” for “45 days” each place it appears.

    Note:

    For further information regarding Chapter 4 withholding refer to IRM 20.2.4.7.6, 180 Day Rule

    .

  3. One effect of this change means any refunds issued based on credits from Chapter 3 withholding due to amended returns filed after the date of enactment now carry a 180 day interest free period instead of a 45 day interest free period.

    Reminder:

    The 180 day interest free period also applies to original returns and IRS-initiated adjustments

    .

  4. Chapter 3 refers to withholding agents who pay income to foreign persons, including nonresident aliens, foreign corporations, foreign partnerships, foreign trusts, foreign estates, foreign governments, and international organizations.

  5. Other transactions related to IRC Chapter 3 withholding are dispositions of U.S. real property interests and the withholding by partnerships on income effectively connected with the active conduct of a U.S. trade or business.

  6. Refunds of Chapter 3 withholding can be taken on Income Tax Returns, Partnership Returns where withholding is made under Section 1446, and forms used by withholding agents to report tax withheld at source under sections 1441 through 1443.

  7. Master File programming has been completed to account for the 180 day period on overpayments of Chapter 3 withholding on original returns, amended returns, and IRS-initiated adjustments. For amended returns, Master File will apply the 180 day processing routine of IRC section 6611(e)(2) to an overpayment originating from TC 766 with Credit Reference Number (CRN) 330 through 333. If priority code 3 is also included on the record, the 180 day processing routine of IRC section 6611(e)(3) will be employed. For additional information on the 180 day interest free period, refer to IRM 20.2.4.7.6,180-Day Rule.

21.8.1.11.14.1  (05-30-2013)
Claims for Tax Withheld at Source

  1. If tax is withheld at source, the withholding agent MUST issue a Form 1042-S to the recipient. Use the following chart to handle claims for tax withheld at source.

    If... Then...
    A nonresident alien had tax withheld by a withholding agent who reported this credit on Form 1042 The recipient can only recover this erroneously withheld tax by filing an income tax return.
    The taxpayer files a claim on Form 843 for tax erroneously withheld Return the claim to the taxpayer. Advise the taxpayer that the Form 1120-F or 1040NR must be filed with Form 1042-S attached, even if a return is not normally required.
    The taxpayer files an amended return Process as a normal duplicate filing case, verify that the income on Form 1042-S is reported (request return, if necessary). Research EIN of withholding agent to ensure Form 1042 has been filed to report at least the amount of the credit claimed. If the withholding agent has not submitted the proper Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, disallow the claim. When the income was not considered, adjust the account accordingly.
    The taxpayer files an amended return claiming that the amount withheld on Form 1042-S was incorrect Return the claim to the taxpayer. Advise the taxpayer to resubmit the amended return with a copy of the corrected Form 1042-S or a statement from the withholding agent in support of the amount actually withheld. The statement or document from a withholding agent that is submitted in lieu of a Form 1042-S must include:
    • Name and TIN of the withholding agent

    • Name and TIN (if applicable) of the recipient

    • Recipient's Country of Residence Code

    • Income code

    • Exemption Code (if applicable)

    • Tax rate

    • Gross income and U. S. Federal Income Tax Withheld

    The taxpayer files an amended return with a corrected Form 1042-S or a statement from the withholding agent in support of the amount actually withheld.

    Note:

    The statement or document from a withholding agent which is submitted in lieu of a Form 1042-S must include:

    • Name and TIN of the withholding agent

    • Name and TIN (if applicable) of the recipient

    • Recipient's Country of Residence Code

    • Income code

    • Exemption Code (if applicable)

    • Tax rate

    • Gross income and U. S. Federal Income Tax Withheld

    Research EIN of withholding agent to ensure Form 1042 has been filed to report at least the amount of the credit claimed. If withholding agent has not submitted the proper Form 1042, disallow the claim. Allow the credit with transaction code 766. Input a TC 29X with a Reference Code 330 for the amount of the credit to generate the TC 766. Use Reason Code 051 (Total Federal Income Tax Withheld) on the CC ADJ54 adjustment.

    Note:

    Use of the reference code 330 will cause Master File to use the 180- day interest free calculation on the amount of the Chapter 3 withholding credit.

    Reminder:

    If this adjustment results in a refund to a nonresident alien that includes interest, See IRM 21.8.1.14.

21.8.1.11.15  (10-01-2013)
Refunds of Tax Withheld on Social Security/Railroad Retirement Benefits (RRB) Paid to Nonresident Aliens

  1. A taxpayer requesting a refund of income tax withheld on social security benefits for his/her self, spouse, or as a dependent, must file Form 1040NR with Form SSA 1042-S and/or Form RRB 1042-S attached.

    Note:

    A claim for refund of income tax withheld on social security benefits paid is not the same thing as a claim for refund of social security taxes paid.A Form 843 must be filed to claim a refund of social security taxes paid.

  2. During the part of the year that a taxpayer is a nonresident alien, 85% of any U.S. social security benefits (and the equivalent portion of Tier 1, Railroad Retirement benefits) received is subject to the flat 30% tax, unless:

    • Exempt by treaty, or

    • Subject to a lower treaty rate

  3. The following are the only countries where refunds are allowed for residents/citizens who are exempt or subject to a reduced rate from U.S. tax on their social security income. This information can be found in Publication 915:

    • Canada (in tax years 1996 and 1997, social security and Railroad Retirement Benefits were subject to a 30% withholding tax).

    • Egypt

    • Germany

    • India (Benefits paid to individuals who are both residents and nationals of India are exempt from U.S. tax if the benefits are for services performed for the United States, its subdivisions, or local authorities.)

    • Ireland

    • Israel

    • Italy

    • Japan

    • Romania

    • Switzerland (Effective tax year 1998, withholding rate is 15% of the total benefit)

    • The United Kingdom (Scotland, Wales, England, and Northern Ireland)

    Exception:

    See IRM 21.8.1.11.15.1 for American Samoa exception.

  4. Form 1040NR claiming refund of income tax withheld on social security benefits must contain the following information:

    • Foreign addresses on both Form 1040NR and Form SSA-1042-S

    • U.S. "in care of" addressee on the Form 1040NR and a foreign address on the Form SSA-1042-S

  5. Residents of countries NOT mentioned above are NOT ALLOWED refunds of income tax withheld on social security/RRB benefits withholding unless they are also either a U.S. citizen or a green card holder who does not claim benefits under an income tax treaty as a nonresident alien. Disallow claims in accordance with IRM 21.5.3.4.6, No Consideration and Disallowance of Claims and Amended Returns.

    • Claims are being filed on behalf of Philippine widows who have had the mandatory 30% withheld on 85% of the SSA/RRB income. Do not allow these refunds, unless they reside in the United States.

    • Preparers are filing series 1040 returns using the address of their firm, which is usually in Hawaii or California. Do not allow the refund if the Form 1042 SSA/RRB was issued to a Philippine resident.

    Reminder:

    If a refund was issued in error, follow erroneous refund procedures in IRM 21.4.5, Erroneous Refunds.

  6. Taxpayers filing amended returns claiming a refund of tax erroneously withheld on social security/RRB income must:

    1. Have filed a Form 1040NR tax return or have proof of nonresident alien status, and

    2. Be a resident of one of the countries mentioned above

  7. Nonresident aliens who file jointly with a U.S. citizen or resident and elect under the terms of IRC § 6013 to be treated as resident aliens for tax purposes are subject to regular U.S. tax rates. These taxpayers complete the social security worksheet to determine if they are entitled to a refund of the tax withheld on their social security benefits.

21.8.1.11.15.1  (10-01-2013)
Refund of Incorrectly Withheld Taxes on Social Security Benefits Paid to Resident Aliens and American Samoa Nationals

  1. The Social Security Administration (SSA) may withhold tax from the social security benefits of resident aliens and American Samoa Nationals in error. SSA refunds taxes erroneously withheld if the refund can be processed during the same calendar year in which the tax was withheld.

  2. If SSA cannot refund the taxes withheld, the taxpayer must file a Form 1040 or 1040A. To qualify for a refund, the following information/documentation must be submitted with their original tax return:

    • A copy of the Form SSA-1042S Social Security Benefits Statement

    • A copy of the "green card"

    • A signed declaration that includes the following statements (or similar statements):
      "The SSA withheld taxes erroneously because I am a permanent U.S. resident and my green card has been neither revoked nor administratively or judicially determined to have been abandoned. I am filing a U.S. income tax return for the taxable year as a resident alien reporting all of my worldwide income. I have not claimed benefits for the taxable year under an income tax treaty as a nonresident alien."

      Exception:

      The copy of the green card and signed statement requirements above do not apply to bona fide residents of American Samoa. See IRM 21.8.1.9.1.

      Note:

      If the taxpayer filed a complete return, the withholding credit should have been allowed during initial processing.

  3. If the withholding credit was not allowed during initial processing and the taxpayer files a duplicate return creating a CP36, follow instructions below:

    1. Allow the withholding credit if all required information/documentation is attached to the return.

    2. If all required information/documentation is not available, correspond with the taxpayer. Request the missing information/documentation via the appropriate IDRS letter. Follow established guidelines and suspend the case.

    3. If required information/documentation is secured, allow the withholding credit.

    4. If no reply is received within the allotted time frame, follow established procedures to formally disallow the claim. See IRM 21.5.3.4.6, No Consideration and Disallowance of Claims and Amended Returns.

  4. If the withholding credit was not allowed during initial processing and an unnumbered claim is received, follow instructions below:

    1. Allow the withholding credit if all required information/documentation is attached to the claim.

    2. If the claim is incomplete, do not formally disallow the claim. "X" through the received date(s) and return the claim to the taxpayer. Request all missing information using the appropriate IDRS letter.

      Caution:

      Do not return a numbered claim to the taxpayer. Follow instructions in 3 above.

  5. If you need to correspond with the taxpayer, advise them to contact SSA to correct their records.

21.8.1.11.16  (02-23-2010)
Gambling Winnings

  1. Nonresident aliens with income from gambling winnings are subject to tax at the 30% statutory rate, unless covered by a treaty.

  2. Most gambling winnings are subject to reporting on Form 1042-S. However, proceeds from a wager placed in blackjack, baccarat, craps, roulette, or big-6 wheel are not amounts subject to reporting. However, video versions of these games are subject to reporting.

  3. In accordance with the treaties with the countries below, gambling winnings are not subjected to tax on U.S. tax returns. They are:

    • Austria

    • Belgium

    • Bulgaria

    • Czech Republic

    • Denmark

    • Finland

    • France

    • Germany

    • Hungary

    • Iceland

    • Ireland

    • Italy

    • Japan

    • Latvia

    • Lithuania

    • Luxembourg

    • Netherlands

    • Russian Federation

    • Slovak Republic

    • Slovenia

    • South Africa

    • Spain

    • Sweden

    • Tunisia

    • Turkey

    • Ukraine

    • United Kingdom

      Note:

      For more information, see Publication 515 - Withholding of Tax on Nonresident Aliens and Foreign Entities.

  4. Nonresident aliens usually cannot offset incurred gambling losses against gross winnings.

    Exception:

    Residents of Canada may claim gambling losses, but only to the extent of gambling winnings, in order to claim a refund of federal income tax withheld.

  5. Canadian residents must include reportable gambling winnings on line 10a of Form 1040NR, Schedule NEC -Tax on Income Not Effectively Connected with a U.S. Trade or Business. Use TC291 Reason Code 037 (non effectively connected tax), to adjust.

    Note:

    Canadian residents may enter eligible gambling losses on line 10b of Schedule NEC. The remaining net gambling winnings must be included on line 10c of Schedule NEC.

21.8.1.11.17  (11-20-2007)
Scholarships and Fellowships

  1. A scholarship is generally an amount paid for the benefit of a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or graduate.

  2. A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research.

  3. A scholarship or fellowship is tax free only if:

    1. The taxpayer is a candidate for degree at an educational institution (see definitions below), and

    2. The grant is a qualified scholarship or fellowship.

    Scholarship and Fellowship Terms
    Candidate for Degree - A student (full or part-time) who attends a primary or secondary school, or is pursuing a degree at a college or university, or attends an accredited educational institution.

    Note:

    This includes graduate students, but not post-doctoral students.

    Educational Institution - Maintains a regular faculty and curriculum, and has a regularly enrolled body of students in attendance at the place where it carries on its educational activities.
    Accredited Educational Institution - Authorized to provide a fully credited program towards a bachelor's or higher degree, or a program of training to prepare students for gainful employment in a recognized occupation.

  4. A qualified scholarship or fellowship is any amount a taxpayer receives as a scholarship or a fellowship grant that is used under the terms of the grant for:

    1. Tuition and fees paid to enroll in, or to attend, an educational institution, or

    2. Fees, books, supplies, and equipment that are required for the course at the educational institution. These items must be required of all students in the course.

  5. A scholarship or fellowship also qualifies as tax free when the terms of the grant are not specific and the taxpayer uses the grant proceeds for tuition and course related expenses.

  6. A scholarship or fellowship grant that requires the taxpayer to use the grant proceeds for a specific purpose such as those listed below (other than tuition or course related expenses) is considered incidental and is taxable.

    • Room and board

    • Travel

    • Research

    • Clerical help, and

    • Equipment (not required of all students in the course)

    Caution:

    The same scholarship or fellowship may be considered partially qualified and partially non-qualified.

  7. Payment for Services Cannot be Excluded From Income.

    1. Taxpayers may not exclude any portion of their scholarship or fellowship, including any tuition reduction, that represents payment for teaching, research, or other services that the grantor requires as a condition for receiving the grant.

    2. Stipends, tuition waivers, or any other financial aid paid to or on behalf of nonresident aliens that require that the recipient perform services in exchange for the financial aid are taxable as wages and are reported on Form W-2.

  8. The qualified part of a scholarship or fellowship is not taxable for U.S. citizens, resident aliens, and nonresident aliens.

  9. For U.S. citizens and resident aliens, the nonqualifying part of a scholarship/fellowship is generally taxed at the graduated rates (effectively connected income).

  10. For nonresident aliens, the nonqualifying part of a scholarship or fellowship is generally subject to a federal income tax withholding rate of 30% reported to the taxpayer on Form 1042-S.

  11. Recipients of the nonqualifying part of a scholarship or fellowship who are temporarily present in the United States in F-1, J-1, M-1, or Q non-immigrant status, are subject to withholding at 14% of the taxable portion of the grant reported to the taxpayer on Form 1042-S. In these cases:

    1. Even though the Form 1042-S states a tax rate of 14%, the scholarship or fellowship is considered effectively connected income and taxed at the graduated rates.

    2. They are still generally withheld on at a flat 14% rate, but at the withholding agent's option, there is an alternative procedure where they can withhold tax at the same graduated rates that apply to wages (instead of the flat 14%).

      Caution:

      This option must still be reported on Form 1042-S (as effectively connected income).

21.8.1.11.17.1  (10-01-2013)
Treaty Exempt Scholarship And Fellowship Income

  1. If applicable, a tax treaty (per a specific treaty article) can exempt all or part of a scholarship or fellowship (qualified or nonqualifying) if they meet all three provisions below.

    1. The maximum presence in the United States has not been exceeded

    2. They have the appropriate required employer or payor, and

    3. The exempt amount does not exceed the maximum allowable amount of compensation

      Note:

      See Publication 901, U.S. Tax Treaties, Table 2, for available tax treaties.

  2. Any nonresident alien grantee, who claims that part or all of their scholarship or fellowship is exempt from taxation because of a tax treaty, must file Form W-8BEN with the appropriate university office.

  3. When a scholarship or fellowship is paid by a U.S. payor to a nonresident alien in a foreign country, then the income is considered foreign source and is not reportable on Form 1040NR/1040NR-EZ.

  4. Scholarships, fellowship grants, prizes, and awards received by a nonresident alien (person other than a U.S. citizen or U.S. resident) from a foreign government, agency, political subdivision, person, or international organization (any foreign entity) for the purpose of study within the United States are treated as foreign source income. This income, being foreign source income, does not have to be claimed or reported.

    Note:

    U.S. Citizens and Residents still must file under IRC § 6012. They must report the income and the basis for exemption.

  5. Cash scholarship prizes won in a contest are not scholarships if they do not have to be used for educational purposes and are taxable regardless of how the money is used. A scholarship prize that can only be used when the recipient is enrolled as a candidate for a degree may be considered a qualified scholarship.

  6. The total amount of the scholarship or fellowship grant (not including amounts exempt by a tax treaty and amounts that are taxed at the 30% statutory rate or reduced tax treaty rate) are claimed for tax years 2007 and 2008:

    • On line 5, Form 1040NR-EZ

    • On line 12, Form 1040NR

  7. The amount of the scholarship or fellowship exempt by a tax treaty is shown for tax years 2007 through 2013:

    • On line 6, Form 1040NR-EZ

    • On line 22, Form 1040NR

  8. The amount excluded by the scholarship or fellowship exclusion is claimed for tax years 2007 through 2009:

    • On line 8, Form 1040NR-EZ

    • On line 30, Form 1040NR

  9. The amount excluded by the scholarship or fellowship exclusion is claimed for tax year 2010 through 2013:

    • On line 8, Form 1040NR-EZ

    • On line 31, Form 1040NR

  10. If on Line 8 (1040NR-EZ) or Line 31 (1040NR), the taxpayer is excluding items as allowed by IRC § 117 (i.e., amounts used as fees, books, supplies, and equipment) that exceed amounts shown on Form 1042-S, then a statement describing these amounts must be attached.

    Note:

    These amounts must be part of the scholarship or fellowship and the amount on line 8 (1040NR-EZ) or line 31 (1040NR) can never exceed the amount on line 5 (1040NR-EZ) or line 12 (1040NR).

  11. If a taxpayer did not receive a Form 1042-S or Form W-2, then a statement from the taxpayer's college or institution showing the details of the scholarship or fellowship must be included.

  12. The following rules went into effect for payments made on or after January 1, 2001:

    1. All amounts paid to U.S. citizens and resident aliens in the form of scholarships, fellowships, grants, and financial aid are income but they are not required to be reported to the IRS by the payers unless they represent payment for services (see paragraph (7) above). This is per IRS Notice 87-31.

      Note:

      The income may still be taxable.

    2. All amounts paid to nonresident aliens in the form of scholarships, fellowships, grants, and financial aid, which are not excludable from gross income as qualified, must be reported to the IRS by the payor on Form 1042 and Form 1042-S regardless of the amounts paid.

    3. Only the taxable amount of the scholarship or fellowship should be reported on Form 1042-S, as well as any amounts exempt or reduced by a tax treaty.

    4. The amount of the qualified scholarship or fellowship that is exempt due to the exclusion no longer has to be reported on Form 1042-S.

    5. No withholding of federal income tax is necessary on grants made to nonresident alien students and trainees that originate from funds paid by the U.S. Agency of International Development (USAID) for the part of the grant that is dedicated to subsistence (i.e., food and lodging). This income is taxable and must be included on Form 1042-S.

  13. The following chart can be used to determine taxable and tax-free amounts:

    Proceeds used for Degree Candidates Non-degree Candidates
    Tuition Tax free Taxable
    Fees Tax free* Taxable
    Books Tax free* Taxable
    Supplies Tax free* Taxable
    Equipment Tax free* Taxable
    Room Taxable Taxable
    Board Taxable Taxable
    Travel Taxable Taxable
    Teaching Taxable Taxable
    Research services Taxable Taxable
    Other services Taxable Taxable

    Note:

    * Fees, books, supplies, and equipment are taxable if not required of ALL students in the course.

  14. When adjusting an account because of a scholarship or fellowship exclusion, use Reason Code 084 (Scholarship or Fellowship Exclusion).

  15. When adjusting an account to exempt a scholarship or fellowship because of a tax treaty, use Reason Code 083 (Income Exempt per Tax Treaty).

21.8.1.11.17.2  (11-20-2007)
Fulbright Grants

  1. A Fulbright grant is generally treated as any other scholarship or fellowship when determining how much of the grant is tax free.

  2. If a Fulbright grant is received for lecturing or teaching, it is payment for services and is taxable.

  3. A Fulbright grant is a grant under the Mutual Education and Cultural Exchange Act of 1961, known as the Fulbright-Hays Act.

  4. If the taxpayer receives a supplemental grant under the U.S. Information and Educational Exchange Act of 1948 (Smith-Mundt Act) for study, research, or teaching abroad, it is treated like a Fulbright grant.

  5. A special rule applies if the grant was paid in non-convertible foreign currency:

    1. All income must be reported in U.S. dollars.

    2. In most cases, the tax must also be paid in U.S. dollars, however,

    3. If at least 70% of the entire Fulbright grant has been paid in non-convertible foreign currency (block income), that currency can be used to pay the U.S. tax, but only the part that is blocked income. Further details are in Publication 970.

21.8.1.11.18  (10-01-2013)
Treaty-Based Return Position Disclosure (Form 8833)

  1. A taxpayer takes a treaty-based return position by maintaining that a treaty of the United States overrules or modifies a provision of the Internal Revenue Code and thereby causes (or potentially causes) a reduction of tax on the taxpayer’s tax return.

    Note:

    For this purpose, a treaty includes, but is not limited to, an income tax treaty; estate and gift tax treaty, or friendship, commerce, and navigation treaty. See Treas. Reg. § 301.6114-1(a) and (b) for additional information.

  2. IRC § 6114 generally requires that a treaty-based return position be disclosed.

    1. Form 8833 is used to disclose the treaty-based return position.

    2. A separate form is required for each treaty-based return position taken by a taxpayer and for which reporting is not expressly waived under Treas. Reg. § 301.6114-1(c).

  3. Taxpayers claiming a treaty-based return position are instructed to:

    1. Attach Form 8833 to their tax return (i.e., Form 1040NR, Form 1040NR-EZ, Form 1120-F, etc.)

    2. If the taxpayer is not otherwise required to file a return, he or she is instructed to file the Form 8833 at the IRS campus where he or she would normally file a return to make a treaty-based return position disclosure as required under IRC § 6114.

      Caution:

      Not all filers claiming a treaty-based return position are required to file a Form 8833. For further information refer to Pub 519, U.S. Tax Guide for Aliens.

  4. Research on IDRS any loose Form 8833 received in the International Departments and attached to the latest tax return on file, or push code (TC 930) to the return being processed. If there is no return on file, or no indication that one has been received and is being processed, send the Form 8833 to the Ogden Campus Files function on a Form 3210 with the remark "For Storage in Alpha File."

  5. In certain circumstances, tax treaty benefits can be claimed on Form 1040, provided:

    1. Form 8833 is attached to the Form 1040 when required, and

    2. The maximum presence allowed in the United States has not been met according to the specific tax treaty article section under which benefits are claimed.

      Note:

      A U.S. citizen may also file a Form 8833 with his/her tax return.

  6. Dual resident taxpayers that choose to claim treaty benefits may elect to be treated as nonresident aliens when computing their U.S. tax liability.

    1. If the taxpayer chooses to take a treaty-based return position, according to Treas. Reg. § 301.7701(b)-7, this position must be disclosed by filing Form 8833.

    2. As a nonresident alien, the taxpayer must file a Form 1040NR or 1040NR-EZ and attach the Form 8833.

21.8.1.11.19  (10-01-2013)
Child Tax Credits for 1040NR Filers

  1. Effective tax year 1998, there are two parts of Child Tax Credits.

    • The child tax credit - A nonrefundable credit

    • The additional child tax credit, Schedule 8812 - A refundable credit

  2. Use the following information in conjunction with the procedures in IRM 21.6.3.4.1.26, Child Tax Credit, and IRM 21.6.3.4.2.8, Additional Child Tax Credit (ACTC). See IRM 21.8.1.5.4, Self-Employment Tax - Puerto Rico.

  3. Nonresident taxpayers may be able to claim one or both child tax credits provided their qualifying children are:

    • U.S. citizens

    • Nationals, or

    • Resident aliens, and

    • Meet all of the other qualifying child requirements and the qualifications for the credit. (See IRM 21.6.3.)

      Note:

      The qualifying child was required to be the taxpayer's dependent for tax years 2004 and prior. For tax years 2005 to 2008, the law was changed and the qualifying child was no longer required to be the taxpayer's dependent and Form 8901, Information on Qualifying Children Who Are Not Dependents, was required. However, Form 8901 is obsolete beginning with the 2009 tax year because the child must again be a dependent to be a qualifying child for the child tax credit for 2009 and later tax years.

  4. Taxpayers indicate the dependent(s) qualifying for the child tax credit by checking the boxes in column 7c (4), located in the exemption area of the return.

    1. When the taxpayer failed to check the boxes on the original 1040NR and the credit was disallowed:

    If... Then...
    The number of exemptions on Form 1040NR, line 7c, is consistent with the amount of credit being claimed and all qualifications are met Allow the credit.
    The number of exemptions on Form 1040NR, line 7c, is more than the amount of credit claimed and the exemptions all meet the child tax credit qualifications Allow the credit.
    The number of exemptions claimed on line 7c, Form 1040NR is less than the amount of credit claimed Research the return and attachments for additional exemptions.
    Additional exemptions found Verify qualifications.
    Qualifications met Allow the credit.
    Additional exemptions not found Request additional exemption information from the taxpayer.
    Additional exemptions provided and all qualifications are met Allow the credit.

  5. When math verifying or figuring the child tax credit worksheet, ensure that the modified adjusted gross income includes the amount from Form 1040, line 37 combined with the total of:

    • Exclusion of income from Puerto Rico

    • Form 2555, lines 45 and 50

    • Form 2555-EZ, line 18, and

    • Form 4563, line 15

21.8.1.11.20  (10-01-2013)
IRC § 877A - Mark-To-Market Exit Tax

  1. Section 301 of the Heroes Earnings Assistance and Relief Tax Act of 2008 (the "Act" ) added a new IRC § 877A to the Internal Revenue Code which applies to individuals who on or after June 17, 2008, relinquish U.S. citizenship and long-term residents who cease to be lawful permanent residents of the United States.

  2. See Notice 2009-85 for complete guidance for expatriation under IRC § 877A.

  3. See Form 8854, Initial and Annual Expatriation Statement, and Form W-8CE, Notice of Expatriation and Waiver of Treaty Benefits, for reporting responsibilities of former U.S. citizens or long-term residents who are subject to the provisions of IRC § 877A.

  4. IRC § 877A(a) generally imposes a mark-to-market regime on expatriates who are covered by section 877A, providing that all property of a covered expatriate is treated as sold on the day before the expatriation date for its fair market value. IRC § 887A further provides that any gain arising from the deemed sale is taken into account for the taxable year of the deemed sale notwithstanding any other provisions of the Code. Any loss from the deemed sale is taken into account for the taxable year of the deemed sale to the extent otherwise provided in the Code, except that the wash sale rules of section 1091 do not apply. Under IRC § 877A(a)(3), the amount that would otherwise be includible in gross income by reason of the deemed sale rule is reduced (but not to below zero) by $668,000 for 2013 ($651,000 for 2012). This amount is adjusted for inflation annually. The amount of any gain or loss subsequently realized will be adjusted for gain and loss taken into account under the mark-to-market regime without regard to the amount excluded. Pursuant to IRC § 877A(b), a taxpayer may elect to defer payment of tax attributable to property deemed sold until the due date for the return when the property is sold.

  5. IRC § 877A(c) provides that the mark-to-market regime does not apply to deferred compensation items, specified tax deferred accounts, and interests in a nongrantor trust of which the covered expatriate was a beneficiary on the day before the expatriation date. If the covered expatriate is treated as the owner of any portion of a trust under the grantor trust rules (sections 671 through 679) on the day before the expatriation date, the assets held by that portion of the trust are subject to the mark-to-market regime (but see section 4 of this notice concerning coordination with section 684).

  6. IRC § 877A(d) provides alternative tax regimes that apply to “eligible deferred compensation items” and to other deferred compensation items (“ineligible deferred compensation items”). In the case of “eligible deferred compensation items,” IRC § 877A(d)(1)(A) provides generally that the payor must deduct and withhold from any taxable payments to a covered expatriate with respect to such items a tax equal to 30 percent of the amount of those taxable payments. In the case of “ineligible deferred compensation items,” IRC § 877A(d)(2)(A) provides that a covered expatriate generally is treated as having received an amount equal to the present value of the covered expatriate’s accrued benefit on the day before the expatriation date.

  7. IRC § 877A(e)(1)(A) provides that if a covered expatriate holds any interest in a specified tax deferred account on the day before the expatriation date, such covered expatriate is treated as having received a distribution of the covered expatriate’s entire interest in such account on the day before the expatriation date.

  8. IRC § 877A(f) provides that in the case of any direct or indirect distribution of property to a covered expatriate from a nongrantor trust of which the covered expatriate was a beneficiary on the day before the expatriation date, the trustee must deduct and withhold from the distribution an amount equal to 30 percent of the taxable portion of the distribution. If the fair market value of the property distributed exceeds its adjusted basis in the hands of the trust, gain shall be recognized to the trust as if the property had been sold by the trust and the proceeds distributed to the covered expatriate.

  9. IRC § 877A(g)(2) provides that the term “expatriate” means:

    1. any U.S. citizen who relinquishes his or her citizenship and

    2. any long-term resident of the United States who ceases to be a lawful permanent resident of the United States (within the meaning of section 7701(b)(6), as amended).

    Pursuant to IRC § 877A(g)(5), a long-term resident is an individual who is a lawful permanent resident of the United States in at least 8 taxable years during the period of 15 taxable years ending with the taxable year that includes the expatriation date.

21.8.1.11.20.1  (10-01-2013)
Covered Expatriate

  1. 877A(g)(1)(A) defines the term “covered expatriate” to mean an expatriate who:

    1. has an average annual net income tax liability for the five preceding taxable years ending before the expatriation date that exceeds a specified amount that is adjusted for inflation; for 2013 the amount is $155,000 ( $151,000 in 2012, $147,000 in 2011, $145,000 in 2009 and 2010) (the “tax liability test”);

    2. has a net worth of $2 million or more as of the expatriation date (the “net worth test”); or

    3. fails to certify, under penalties of perjury, compliance with all U.S. Federal tax obligations for the five taxable years preceding the taxable year that includes the expatriation date, including, but not limited to, obligations to file income tax, employment tax, gift tax, and information returns, if applicable, and obligations to pay all relevant tax liabilities, interest, and penalties (the “certification test”). This certification must be made on Form 8854 and must be filed by the due date of the taxpayer’s Federal income tax return for the taxable year that includes the day before the expatriation date. See section 8 of Notice 2009-85 for information concerning Form 8854.

  2. IRC § 877A(g)(1)(B) provides that an expatriate will not be treated as meeting the tax liability test or the net worth test of section 877(a)(2)(A) or (B) if:

    1. the expatriate became at birth a U.S. citizen and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and is taxed as a resident of, such other country, and has been a U.S. resident for not more than 10 taxable years during the 15 taxable year period ending with the taxable year during which the expatriation date occurs; or

    2. the expatriate relinquishes U.S. citizenship before the age of 18 ½ and has been a U.S. resident for not more than 10 taxable years before the date of relinquishment.

  3. The determination as to whether an individual is a covered expatriate is made as of the expatriation date.

  4. IRC § 877A(g)(3) defines the term “expatriation date” as the date an individual relinquishes U.S. citizenship or, in the case of a long-term resident of the United States, the date on which the individual ceases to be a lawful permanent resident of the United States within the meaning of IRC § 7701(b)(6).

  5. 877A(g)(4) provides that a citizen will be treated as relinquishing his or her U. S. citizenship on the earliest of four possible dates:

    1. The date the individual renounces his or her U.S. nationality before a diplomatic or consular officer of the United States pursuant to paragraph (5) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(5)), provided the renunciation is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State

    2. The date the individual furnishes to the United States Department of State a signed statement of voluntary relinquishment of U.S. nationality confirming the performance of an act of expatriation specified in paragraph (1), (2), (3), or (4) of section 349(a) of the Immigration and Nationality Act (8 U.S.C. 1481(a)(1)-(4)), provided the voluntary relinquishment is subsequently approved by the issuance to the individual of a certificate of loss of nationality by the United States Department of State

    3. The date the United States Department of State issues to the individual a certificate of loss of nationality, or

    4. The date a court of the United States cancels a naturalized citizen’s certificate of naturalization.

  6. Under IRC § 7701(b)(6), a long-term resident ceases to be a lawful permanent resident if:

    1. the individual’s status of having been lawfully accorded the privilege of residing permanently in the United States as an immigrant in accordance with immigration laws has been revoked or has been administratively or judicially determined to have been abandoned, or

    2. if the individual (1) commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, (2) does not waive the benefits of the treaty applicable to residents of the foreign country, and (3) notifies the Secretary of such treatment on Form 8833 and Form 8854.

21.8.1.11.20.2  (01-06-2011)
Covered Expatriate-Deferral Election

  1. IRC § 877A(b) provides that a covered expatriate may make an irrevocable election (“deferral election”) with respect to any property deemed sold by reason of IRC § 877A(a) to defer the payment of the additional tax attributable to any such property (“deferral assets”). The deferral election is made on an asset-by-asset basis. In order to make the election with respect to any asset, the covered expatriate must provide adequate security (defined below) and must irrevocably waive any right under any U.S. treaty that would preclude assessment or collection of any tax imposed by reason of IRC § 877A. If the IRS subsequently determines that the security provided for the deferred tax no longer qualifies as adequate security, the deferred tax and interest will become due immediately, unless the covered expatriate corrects such failure within 30 days after the IRS mails notification of such failure to the last known addresses of the covered expatriate and the covered expatriate’s U.S. agent.

  2. Subject to the preceding sentence, the time for payment of the tax attributable to a particular deferral asset under the mark-to-market regime is extended until the earlier of the due date (without extensions) of the covered expatriate’s income tax return for (a) the taxable year in which the asset is disposed of by sale, non-recognition transaction, gift, or other means, or (b) the taxable year that includes the date of death of the covered expatriate. However, a covered expatriate may pay any tax deferred under IRC § 877A(b) , together with accrued interest, at any time.

  3. IRC § 877A(b)(7) provides that for purposes of section 6601, the last date for the payment of tax will be determined without regard to the deferral election. Interest will be computed at the underpayment rate established under IRC § 6621 from the due date of the return (without extensions) for the taxable year that includes the day before the expatriation date and will compound daily under IRC § 6622 until the date the tax is paid.

  4. IRC § 877A(b)(5) provides that a covered expatriate may not make a deferral election with respect to a particular asset unless the covered expatriate makes an irrevocable waiver of any right under any U.S. treaty that would preclude the assessment or collection of any tax imposed by reason of IRC § 877A. The covered expatriate must make the waiver on Form 8854, which must be filed with the covered expatriate's Federal income tax return for the taxable year that includes the day before the expatriation date. Additionally, acknowledgment of such waiver must be noted in the agreement to defer tax with respect to a particular property (“tax deferral agreement”) as described below.

  5. IRC § 877A(b)(4)(A) provides that, in order to make a deferral election with respect to any asset, the covered expatriate must provide adequate security with respect to such asset. IRC § 877A(b)(4)(B) defines the term “adequate security” as

    1. a bond that is furnished to, and accepted by, the Secretary, that is conditioned on the payment of the tax (and interest thereon), and that meets the requirements of section 6325, or

    2. another form of security for such payment (including letters of credit) that meets such requirements as the Secretary may prescribe.

  6. Each covered expatriate who makes a deferral election must enter into a tax deferral agreement with the IRS. Execution of the agreement by the IRS will constitute acceptance by the Secretary of the security as adequate security. A template of a tax deferral agreement is provided in Appendix A of Notice 2009-85. Any covered expatriate who wishes to enter into a tax deferral agreement under this notice must submit to the following address a request to enter into a tax deferral agreement (“deferral request”) by the due date of his or her return for the taxable year that includes the day before the expatriation date:


    Internal Revenue Service
    4-E08.142
    2970 Market Street
    Philadelphia, PA 19104

  7. The deferral request must include:

    • two signed copies of the template agreement provided in Appendix A of Notice 2009-85

    • a description of the asset(s) with respect to which the covered expatriate is electing to defer tax

    • an attachment showing the calculation of the tax attributable to such asset(s) under the method set forth below

    • documentation of the proposed security offered to secure the deferral of tax

    • a copy of an agreement with a U.S. agent, as described below, and

    • a copy of the covered expatriate’s return for the taxable year that includes the day before the expatriation date.

    Provided that the security offered by the covered expatriate is determined to be adequate to secure the tax being deferred, the IRS will sign the tax deferral agreement and provide one copy to the covered expatriate.

  8. Additionally the covered expatriate must attach a copy of the deferral request to his or her return for the taxable year that includes the day before the expatriation date. The covered expatriate may file the deferral request simultaneously with his or her tax return.

  9. The tax deferral agreement must be periodically renewed according to the terms provided in the agreement. If the agreement is not renewed within the time frame specified in the agreement, the collateral will be applied to the tax liability and interest.

  10. In order to make a deferral election, a covered expatriate must appoint a U.S. person to act as the covered expatriate’s limited agent for purposes of accepting communication related to the tax deferral agreement from the IRS on behalf of the covered expatriate, the timely enforcement of the terms of the tax deferral agreement between the covered expatriate and the IRS, and applying IRC § 7602 and all related procedural provisions of the Code with respect to a request by the IRS to examine records, for the production of testimony, or for a summons by the IRS for such records or testimony related to the enforcement of the tax deferral agreement.

  11. In order to authorize a U.S. person to act as an agent, the covered expatriate and the agent must enter into a binding agreement that is substantially similar in form to the agreement provided in Appendix B of Notice 2009-85. The agreement must be executed by the covered expatriate and the agent and must be submitted as part of the deferral request. The authorization must remain in effect for as long as the tax deferral agreement remains in effect.

  12. If the U.S. agent resigns, liquidates, or terminates its responsibility as an agent of the covered expatriate, the covered expatriate must, within 90 days, notify IRS-Advisory in writing at the following address:


    IRS Advisory
    7850 SW 6th Court
    Mail Stop 5780
    Plantation, FL 33324-3202

  13. The telephone contact for IRS Advisory is 954–423–7344 and the fax contact number is 954–423–7809.

  14. This notification must contain the name, address, and TIN of the new U.S. agent (if any). If no new agent is appointed, then the tax deferral agreement will be in default and the collateral will be applied to the deferred tax and interest attributable to all of the deferral assets.

21.8.1.11.20.3  (10-01-2013)
Determination of Tax Attributable to Particular Assets

  1. Deferral of tax is made on an asset-by-asset basis, and a covered expatriate who elects to defer the tax attributable to one or more assets must determine the amount of tax imposed by reason of IRC § 877A(a) attributable to each asset deemed sold pursuant to IRC § 877A(a). The tax imposed by reason of IRC § 877A(a) is the difference between:

    1. the covered expatriate’s tax liability for the portion of the taxable year that includes the day before the expatriation date as reflected on a Form 1040 with respect to that portion of the taxable year and that includes the net taxable gain resulting from all deemed sales under IRC § 877A(a) and

    2. the covered expatriate’s tax liability for the portion of the taxable year that includes the day before the expatriation date as reflected on a Form 1040 with respect to that portion of the taxable year but that does not include the net taxable gain resulting from all deemed sales under IRC § 877A(a).

  2. The amount of tax imposed by reason of IRC § 877A(a) that is attributable to each asset is determined by multiplying the amount of tax imposed by reason of IRC § 877A(a) by the ratio of

    • the gain, if any, includible in gross income under IRC § 877A(a) with respect to that particular asset to

    • the gain includible in gross income by reason of IRC § 877A(a) with respect to all gain assets deemed sold pursuant to IRC § 877A(a).

  3. The tax attributable to that particular asset, computed as described in the preceding sentence, is the amount of tax that a covered expatriate may elect to defer under IRC § 877A(b) with respect to that asset. The effect of such election is to reduce the amount of tax currently due and payable by the amount of the tax attributable to the asset with respect to which the election is made.

  4. In addition to IRC § 877A , the Heroes Act also added new IRC § 2801 to the Code. Under IRC § 2801, a transfer tax is imposed on any U.S. citizen or resident who receives gifts or bequests from a Covered Expatriate with an aggregate fair market value of more that $12,000 in any taxable year. The rate of tax imposed is equal to the greater of:

    • the highest applicable U.S. federal estate tax rate, or

    • the highest applicable U.S. federal gift tax rate in effect in the year that the gift or bequest is made.

    Note:

    The aggregate fair market value of the gift, or bequest is adjusted annually for inflation.

  5. Certain charitable gifts and bequests, and certain gifts and bequests to spouses of Covered Expatriates, are exempt from this transfer tax. The transfer tax is also reduced by the amount of any gift or estate tax paid to another country.

21.8.1.12  (10-01-2009)
Dual-Status Aliens

  1. Dual-status aliens are those, who during the tax year, have been both:

    • A nonresident alien, and

    • A resident alien

  2. The portion of the tax year before an alien arrives in the United States is a period of nonresidence. The portion of the year after arriving in the United States can be a period of residence or nonresidence, depending on the circumstances.

  3. A similar situation arises in the year of departure. An alien who was a resident alien during the first part of the year maintains that status until the date of final departure. After departure, the alien becomes a nonresident.

    Exception:

    An alien lawfully admitted to the United States for permanent residence, i.e., green card holder, who leaves the United States temporarily, and does not abandon his or her green card, retains a resident alien status even while abroad.

  4. It is also possible to have a dual-status tax year in other than the years of arrival or departure. This usually occurs when an alien comes to the United States for a very short stay and then, because of changed circumstances, remains here for a lengthy period. Each case must be considered on the basis of the facts obtained.

  5. Dual Status taxpayers may claim the Foreign Earned Income Exclusion, Housing Deduction and Housing Exclusion on the Form 1040 portion of their income by using a valid Form 2555/2555-EZ. Income earned during the Form 1040NR period cannot not be excluded with Form 2555/2555-EZ.

21.8.1.12.1  (10-01-2007)
Choosing to be Treated as a U.S. Resident

  1. Dual-status aliens that are married can choose to be treated as U.S. residents for the entire year, if they are:

    1. A nonresident alien at the beginning of the year

    2. A resident alien or U.S. citizen at the end of the year, and

    3. Their spouse is a U.S. citizen or resident alien at the end of the year

    Note:

    See IRM 21.8.1.11.5. and Publication 519 for additional information.

21.8.1.12.2  (10-01-2007)
Taxation of Dual-Status Aliens

  1. A Dual-status alien is taxed on income from:

    1. All sources for the portion of the year the taxpayer is a resident alien, and

    2. U.S. sources (only) for the portion of the year the taxpayer is a nonresident alien.

      Note:

      When adjusting a dual-status return, use Reason Code 34 (Dual Status Tax).

21.8.1.12.3  (10-01-2013)
Filing Restrictions

  1. Dual-status taxpayers:

    1. Cannot use the standard deduction or zero bracket amount

      Exception:

      Taxpayers who are students and business apprentices from India are eligible to claim the standard deduction under Article 21 of the United States - India Treaty.

    2. Cannot use head of household tax rates

    3. Cannot file jointly, but may claim exemptions for their spouse and children for the part of the year the taxpayer is a resident alien. Special rules apply to residents of Canada, Mexico, India, Japan (for tax periods 2005 and prior), South Korea and U.S. Nationals. For additional information see Publication 19.

  2. Below is a chart for determining the income subject to tax for dual-status taxpayers.

    SOURCE OF INCOME TAXABLE OR NON-TAXABLE
    Income from all sources for the part of the year the taxpayer is a resident alien TAXABLE
    Income from U.S. sources, and certain foreign source income that is treated as effectively connected with a U.S. trade or business for the part of the year the taxpayer is a nonresident alien TAXABLE
    Income from sources outside the United States, that is not effectively connected with a trade or business in the United States, if the taxpayer received it while they were a nonresident alien NON-TAXABLE
    Income from U.S. sources whether the taxpayer received it while a nonresident alien or a resident, unless specifically exempt under the Internal Revenue Code or a tax treaty provision TAXABLE
  3. Dual-status taxpayers who are married at the end of the tax year:

    1. Are required to use the tax rate schedules for married individuals filing separately when determining the tax on income effectively connected with a U.S. trade or business

    2. Cannot use the tax rate schedules for married individuals filing jointly or for single individuals

    3. Considered residents of Canada, Mexico, India, Japan, or Republic of Korea, or who are nationals of the United States, cannot file jointly, but may claim exemptions for their spouse and children

21.8.1.12.4  (10-01-2007)
Filing Requirements of Dual-Status Aliens

  1. Dual-status aliens who are residents of the United States on the last day of the tax year must:

    1. File Form 1040

    2. Attach a separate schedule (may use Form 1040NR) marked "Dual-Status Statement" on top, and

    3. Show the tax computation for the part of the year the taxpayer was a nonresident

  2. Dual-status aliens who are nonresidents of the United States on the last day of the tax year must:

    1. File a Form 1040NR

    2. Attach separate schedule (may use Form 1040) marked "Dual-Status Statement" on top, and

    3. Show the tax computation for the part of the year the taxpayer was a U.S. resident

21.8.1.12.5  (10-01-2007)
Duplicate Filing Situation (Both Return and Statement are Processed)

  1. During processing, the Dual-status return and the statement may become separated. When both are processed, a duplicate filing condition is created.

  2. Request both documents from Files and determine which return posted to the Master File.

    If... Then...
    The controlling return posted and income is reported correctly Input 290 .00 to satisfy the duplicate filing condition, attach the statement to the return, and refile.
    Either the "statement" or the return has posted reporting the income incorrectly Adjust the account to reflect the correct tax, credits, withholding, filing status and exemptions. Attach the statement to the return and refile. Advise the taxpayer.
    It appears the same income is reported as effectively connected and non-effectively connected, and the correct classification cannot be determined Correspond with the taxpayer for clarification.
    Response received to correspondence Adjust the return according to the response.
    Response not received to correspondence Consider the income as non-effectively connected and tax it at the 30% statutory rate.

21.8.1.13  (10-01-2007)
Joint Returns with a Nonresident Alien Spouse

  1. IRC § 6013(g) allows a U.S. citizen or resident married to a nonresident alien to file a joint return, provided an election is made by both individuals to be taxed on their worldwide income.

  2. The nonresident alien is treated, in effect, as a resident of the United States for purposes of the income tax laws.

    Caution:

    On the jointly filed tax return, the nonresident alien can be the primary or secondary taxpayer. The nonresident alien spouse must have either a valid SSN or an ITIN.

  3. A requirement of the election is that the husband and wife agree to keep and supply all the necessary books and records and other information pertinent to the determination of their tax liability. Failure to do so could result in termination of the election by the Internal Revenue Service.

  4. The election applies to the taxable year for which it was made and to all subsequent tax years until terminated.

  5. The election is not applicable if at any time during the taxable year neither spouse is a U.S. citizen or resident.

  6. Either spouse may revoke the election for any taxable year so long as the revocation is made prior to the due date for the filing of the income tax return for such year.

  7. The election automatically terminates upon legal separation, divorce or the death of either spouse.

    Note:

    The above rules apply in the case of alien individuals who do not become residents of the United States during the taxable year.

  8. If correspondence is received revoking the joint election:

    1. Research to determine if a separate return has been filed for the resident spouse, using CC TXMOD and/or CFOL Command Codes.

    2. When the return has been correctly filed, associate the correspondence with the return.

    3. When the return has not been filed, push code the correspondence to the primary SSN account. See IRM 21.5.1.4.4.1,TC 930 Push Codes.

    4. When the 150 posts and the document is received, verify that the correct filing status was used.

    5. When a joint return is filed, forward it to Examination for classification.

  9. IRC § 6013(h) provides that a nonresident alien individual, who is a resident of the United States at the close of the taxable year, and is married to a citizen or resident of the United States at the close of the taxable year, may file a joint return if both spouses make an election to file a joint return.

  10. If an election is made under IRC § 6013(h), the spouse who was a nonresident alien for the first part of the year is treated as a resident of the United States for the entire taxable year for purposes of the income tax law, and is thus taxed on world-wide income.

  11. Advise taxpayers corresponding in reference to an SSN for nonresident aliens to apply for an ITIN using Form W-7. All taxpayers must have a valid SSN or ITIN.

21.8.1.14  (10-01-2010)
Manual Refunds to Nonresident Aliens That Include Interest

  1. When the Service issues a refund to a nonresident alien taxpayer that includes interest, the Service is required to withhold tax on the interest. Do not withhold when the amount of tax required to be withheld on the interest is less than ≡ ≡ ≡ .

  2. Determine the correct amount of tax to be withheld (30%) per IRC § 1441, or the applicable tax treaty rate. See Publication 901 for additional information.

  3. Prepare four-part Form 5205.

  4. Prepare Form 1042-S and Form 3809 when transferring tax withheld on interest to 4610 Account.

    Reminder:

    Do not prepare Form 3809 to transfer the amount of interest withheld to the 4610 account when withholding tax on interest is less than ≡ ≡ .

  5. Input the adjustment to IDRS.

    1. On the same REQ54, input TC 29X for the amount of tax decrease and/or refundable credit.

    2. Input TC 770 for the amount of tax withheld on the interest.

    3. Use Blocking Series 18, SC1, FLC98, and the appropriate Reason Code.

    4. Input a 2 cycle posting delay and Hold Code 4.

    5. Attach Part 4 of Form 5205 and Copy E of Form 1042-S with the TC 29X adjustment.

  6. Submit the refund document, Form 5792 and related forms, along with the case itself, to the manager for review. For further information see IRM 21.4.4, Manual Refunds.

  7. Forward Form 5205, Form 1042-S, the refund document, Form 3809, and a copy of (interest computation) COMPAC or COMPAD to Accounting.

21.8.1.15  (06-29-2012)
Community Property

  1. Community property laws can relate to U.S. taxation.

  2. Special tax rules for property apply to a U.S. citizen who is married to a nonresident alien spouse and domiciled in a community property state of the United States, Guam, Puerto Rico or a foreign country. In addition, nonresident aliens are subject to these special rules if they earn community property income and are domiciled in a community property state or country. See IRM 25.15.5.2, Community Property States.

21.8.1.15.1  (10-01-2007)
Domicile vs. Residence

  1. The words residence and domicile are often confused. A person may have several residences, but only one domicile.

  2. Any temporary place of abode may be a residence. A domicile is a place of abode that is fixed and permanent or, at least, of indefinite duration.

  3. It is not necessary for the tax examiner to determine the state or country in which the taxpayer is domiciled. In all cases, the taxpayer's intent controls.

  4. A spouses domicile is generally the domicile of the primary spouse. The community property rules apply if one spouse is in one of the above states, even if the other spouse resides outside the state.

21.8.1.15.2  (10-01-2010)
Community Property of Nonresident Aliens (IRC § 879)

  1. Special tax rules for community property income apply to a U.S. citizen who is married to a nonresident alien spouse and domiciled in a community property state of the United States, Guam, Puerto Rico or a foreign country. In addition, nonresident aliens are subject to these special rules if they earn community property income and are domiciled in a community property state or country.

    Exception:

    If an election is made under IRC § 6013(g) or (h). See IRM 21.8.1.11.5.

  2. IRC § 879 establishes rules to allocate community income between spouses regardless of local community property law if at least one spouse is a nonresident alien.

    Note:

    IRC § 879 does not apply if an election under IRC § 6013(g) or (h) is made. See IRM 21.8.1.11.5.

  3. Income earned by either spouse through wages, business, or a partnership must be treated as income of the spouse who earned it, regardless of community property laws.

  4. Self-employment tax:

    1. If any of the income from a business is community income under state foreign community property laws, all the gross income and related deductions are generally treated as gross income and deductions of the spouse who earned it.

    2. However, if the other spouse exercises substantially all the management and control over the business, all the gross income and related deductions are treated as income and deductions of that spouse.

      Note:

      A person is not a self-employed person, unless they have their own business, or unless the person is a member of a personal services partnership.

21.8.1.16  (10-01-2007)
Self-Employment Tax - U.S. Citizens and Aliens Living Abroad

  1. The following section provides information on self-employment tax as it relates to U.S. citizens and aliens living abroad.

  2. Under IRC § 1402(a), U.S. citizens and resident aliens living abroad are subject to the same self-employment tax imposed on U.S. citizens residing within the United States.

  3. U.S. citizens and resident aliens living abroad are required to compute their "net earnings from self-employment" as U.S. citizens and resident aliens residing within the United States, without regard to the foreign earned income exclusion (IRC § 1402(a)(11)).

21.8.1.16.1  (10-01-2007)
Exempt and Taxable Income

  1. The following U.S. citizens and resident aliens are subject to self-employment tax on their exempt and taxable income earned abroad (within limitations), unless they receive exemption from coverage on the grounds that they are opposed to coverage by reasons of conscience or religious principles:

    • Clergymen paid by a U.S. employer

    • Members of a religious order paid by a U.S. employer

  2. IRC § 1401(c) provides that the United States may enter into agreements with foreign countries to eliminate dual coverage and dual contributions to social security systems for the same work. These agreements are commonly referred to as "totalization agreements."

  3. As a general rule, self-employed persons who are subject to dual taxation are only covered by the social security system of the country in which they reside.

  4. To establish exemption from U.S. self-employment tax, the taxpayer must obtain a statement from the authorized official or agency of the foreign country containing the following information:

    • Name of taxpayer

    • Address

    • Taxpayer identification number

    • The fact that the self-employment earnings (or employment earnings in the case of employed clergymen) are covered by an agreement between that country and the United States, and are subject to the taxes or contributions of that country's social security system, and

    • The effective date of the agreement

  5. The taxpayer must attach a copy of the statement to the tax return for each year exemption from self-employment tax is claimed.

  6. The taxpayer must also enter "Exempt" on the line for self-employment tax on the return and attach statements.

21.8.1.17  (10-01-2007)
Retirement Withholding: Survivor Benefit Annuities (SBAs) - Survivor Benefit Plans (SBPs)

  1. A member of the U.S. military reaching retirement age may elect to receive, during his/her lifetime, a reduced U.S. military pension in order that his/her surviving spouse may continue to draw a U.S. military pension after his/her death.

  2. After the death of the U.S. military retiree, the pension that is paid to the retiree's "surviving spouse" is called a:

    • "Survivor Benefit Annuity" (SBA), or

    • "Survivor Benefit Plan" (SBP)

21.8.1.17.1  (10-01-2010)
Survivor Benefit Annuity (SBA) / Survivor Benefit Plan (SBP) Taxability

  1. U.S. tax law generally considers SBA/SBP benefits to be taxable income, unless the Internal Revenue Code is overridden by a tax treaty between the United States and the country in which the nonresident alien recipient is a resident.

  2. SBA/SBP benefits paid to nonresident aliens who are residents and citizens of the following countries are generally not taxable in the United States under current tax treaties:

    SBA/SBP Country List
    • Australia • Lithuania
    • Austria • Luxembourg
    • Bangladesh • Mexico
    • Barbados • Morocco
    • Belgium • Netherlands
    • Bulgaria • New Zealand
    • China • Norway
    • Cyprus • Pakistan
    • Czech Republic • Portugal
    • Denmark • Romania
    • Egypt • Russia
    • Estonia • Slovenia
    • Finland • South Africa
    • Germany • Spain
    • Hungary • Sri Lanka
    • India • Sweden
    • Ireland • Switzerland
    • Italy • Thailand
    • Jamaica • Tunisia
    • Japan • Turkey
    • Kazakhstan • United Kingdom
    • Republic of Korea (South Korea Only) • Venezuela
    • Latvia  

  3. SBA/SBP benefits paid to residents and citizens of the following countries are generally taxable in the United States at the following tax rates under current tax treaties (or in the absence of a treaty):

    Country Tax Rate
    Canada 15%
    Commonwealth of Independent States (Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, and Uzbekistan) 30%
    France 30%
    Greece 30%
    Indonesia 30%
    Israel 30%
    Philippines (If services are rendered in the United States) 30%
    Poland 30%
    Slovak Republic 30%
    Trinidad and Tobago 30%
    Ukraine 30%
    Countries without Treaties 30%

21.8.1.18  (10-01-2007)
Visa Holders - General

  1. A visa is assigned to an individual by the U.S. Citizenship and Immigration Services (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. Refer to the USCIS Web site at http://www.uscis.gov for additional information on visas.

  3. The method of taxation of a visa holder depends primarily upon whether the individual is defined as a resident or a nonresident alien. If the visa holder is determined to be a nonresident alien, he/she is taxed on all U.S. source income and on all income that is effectively connected with the conduct of a trade or business in the United States. Non-effectively connected foreign source income is not taxed. Resident aliens are taxed the same as U.S. citizens.

  4. The following are types and definitions of visas most frequently recognized by IRS:

    • H-1 Visa: "H-1" visas are for temporary workers in a specialty occupation (profession).

    • TN Visa: "TN" visas are trade visas for Canadian and Mexican professionals entering under the North American Free Trade Agreement (NAFTA).

    • F Visa: The "F" visa is issued to alien students accepted as registered students by an educational institution or language learning program approved by the Attorney General.

    • J Visa: The "J" visa is issued to an alien entering for the purpose of teaching, instructing, or lecturing; studying; observing; conducting research; consulting; demonstrating special skills; or receiving training. These individuals are commonly referred to as "exchange visitors." An alien temporarily present in the United States on a J Visa is admitted for an initial period of two years.

    • M Visa: The "M" visa is issued to an alien accepted as a registered student by an established vocational or other recognized nonacademic institution (other than in a language training programs) approved by the Attorney General.

    • Q Visa: The "Q" visa is issued to an alien participating (for a period not to exceed 15 months) in an international cultural exchange program approved by the Attorney General for the purpose of providing practical training, employment, and the sharing of history, culture, and traditions of the country of the aliens nationality.

  5. There are special rules for "F" , "J" , "M" , and "Q" visa holders.

    • Subject to certain limitations, "F" , "J" , "M" , and "Q" visa holders are treated as exempt individuals for purposes of the substantial presence test. The result of this is that they are frequently determined to be nonresident aliens without regard to the number of days spent in the United States.

    • "F" , "J" , "M" , and "Q" visa holders are treated as engaged in a trade or business in the United States, even if they are nonresident aliens. They may be able to exclude from U.S. gross income, pay received from a foreign employer.

    • These types of visa holders, together with certain scholarship and fellowship holders, are afforded a lower rate of withholding.

    • These four types of visa holders are exempt from social security and Medicare taxes on wages as long as the visa holder is classified a nonresident alien and the services are performed to carry out the purpose for which the visa holder was admitted to the United States. Restrictions on the type of work and the number of hours worked apply according to the type of visa held.

    • One important limitation applies to teachers of trainees who are temporarily present in the United States under "J" or "Q" visas. After two years, such individuals generally are classified as resident aliens under the substantial presence test.

  6. See IRM 21.8.1.10. for a complete list of visas.

21.8.1.18.1  (10-01-2008)
Foreign Student/Nonresident Visitors - Exemption from Federal Insurance Contributions Act (FICA) Tax

  1. IMF has the responsibility of verifying that the taxpayer submits a complete claim containing proper information and documentation. The adjustment portion of the claim is performed by BMF International and complete claims are routed there. The procedures used by BMF can be found in IRM 21.8.2.7.3.1, Adjusting Employee Visa Claims (Employer's Account - BMF).

  2. Per IRC § 3121(b)(19) , certain foreign students and other nonresident visitors are exempt from FICA tax for services performed as specified in Sections 101(a)(15)(F), (J), (M) and effective October 1, 1994, (Q), of the Immigration and Nationality Act.

  3. The following documentation substantiates the exemption from FICA tax for the individual holding the F, J, M or Q visa:

    • A copy of the visa

    • Immigration and Naturalization Form I-94, Arrival-Departure Record, (or other documentation showing the dates of arrival and departure)

      Note:

      Overseas filers no longer have the Form I-94 since the USCIS keeps this document when the student/visitor leaves the United States.

    • F-1 students need Form I-20 (Certificate of Eligibility for Non-Immigrant (F-1) Student Status).

    • J-1 visa holders need Form IAP-66/DS-2019 (Certificate of Eligibility for Exchange Visitor (J-1) status). Form DS-2019 replaced IAP-66 as of August 31, 2002.

      Note:

      Form I-766 or I-688B (Employment Authorization Document) is needed only if the student is engaged in optional practical training (OPT) which is part of a curriculum such as work study or an internship. Copies of pay stubs showing the amount of FICA tax erroneously withheld are also needed to verify claims involving students employed in OPT, and those in M-1 status, who have completed a course of study and are employed for practical training for up to 6 months.

  4. Copies of pay statements must be secured in cases involving visa status changes from exempt type to substantiate the amount of FICA withheld prior to the change in visa status.

  5. Publication 519 contains additional information.

  6. See IRM 21.8.1.10. for a list of U.S. Citizenship and Immigration Services (USCIS) forms and their descriptions.

21.8.1.18.2  (10-02-2008)
Validating Exemption/Qualification

  1. When an inquiry is received regarding refund of erroneously withheld FICA tax, verify that the claim is valid, i.e.,

    • Form 1040NR was filed within the statutory period

    • Visa is exempt from FICA tax

    • Employee has provided a statement from the employer indicating the amount of the reimbursement the employer provided, if any, and the amount of the credit or refund the employer claimed was authorized by the employee to claim

  2. When a claim is filed, but research shows that there is no account on record and no tax return has been filed, do not process the claim. Correspond using a Letter 916C or Letter 513C to request the filing of Form 1040NR/NR-EZ. One of the following statements can be used:

    Use the statement that is applicable
    Because our records do not indicate a Form 1040NR being filed on your behalf, we are unable to process your claim. The Form 1040NR is an essential part of the erroneous withheld FICA process and therefore necessary to process your claim. If your Form 1040NR has been filed since submitting this claim, please resubmit this claim with the indication "1040NR" . If you have not filed, complete and submit a Form 1040NR, a copy of this claim we are returning to you, and this letter. Please indicate "1040NR filed" on your 843 claim.
    or
    Because we do not have a record of receiving an income tax return for this tax period, we are unable to process your claim at this time. Please resubmit your claim six weeks after the return is filed.

  3. When the employee filed a tax form other than the Form 1040NR, reject the claim using the following statement on the 916C letter:

    Use the statement that is applicable
    Because our records indicate that you filed a Form 1040, U.S. Individual Income Tax Return, we are unable to process your claim. The filing of the Form 1040 indicates that you are a resident of the United States for tax purposes. As a resident of the United States, you are not exempt from FICA tax.
    or
    Because our records indicate that you filed a tax form other than the Form 1040NR, we are unable to process your claim. The Form 1040NR is an essential part of the erroneously withheld FICA tax process since it identifies you as a nonresident alien. Because you did not file the Form 1040NR declaring your nonresident alien status, you are not exempt from FICA Tax.

    Exception:

    Do not disallow claims from F-1 or J-1 Visa holders who elect under IRC § 6013(g) or IRC § 6013(h) to file a joint return with their spouse as a resident alien. These claimants continue to be exempt from FICA under IRC § 3121(b)(19) or IRC § 3121(b)(10).

  4. A teacher, researcher, or trainee in the United States with a J or Q visa is not automatically exempt from FICA tax:

    • If the teacher, researcher, or trainee has visited the United States during any two of the six preceding calendar years as either a student or teacher, researcher, or trainee, then he/she is no longer an "exempt individual" for the current year for purposes of the substantial presence test, and must begin counting days of presence under the substantial presence test from his/her very first day of arrival in the United States.

    • After 2 years, a nonstudent under a J-1 visa status who was exempt from social security and Medicare taxes during his first two calendar years in the United States is considered a U.S. resident for tax purposes, and therefore liable for FICA tax. The claim is not valid and must be disallowed.

      Note:

      Document I-94, Arrival/Departure Record, contains the entry and departure dates to determine if they have exceeded the qualification period.

    • Disallow the claim if you determine that it is not valid. Input TC 290 .00 with Blocking Series 98 or 99 and issue Letter 105C with the following fill-in paragraph:

      Letter Paragraph
      We have disallowed your claim because, in accordance with Internal Revenue Code § 7701(b), you meet the substantial presence test and are considered a resident alien; therefore you do not qualify for exemption from FICA tax on wages.

    • If the Visa status changes from an exempt F-1, J-1, M-1, or Q Visa type, the holder is then liable for social security and Medicare taxes (in accordance with IRC § 7701(b)) from the day the status is changed. For example, a change to an H-1 visa type.

      Note:

      T/P must provide documentation of exempt earnings up to the date the visa status changed. A copy of a pay statement with cumulative tax information is sufficient to support the claim for the exempt portion of the earnings.

    • Dual-status filings may occur when residency status changes. Care needs to be taken to properly adjust accounts when both a Form 1040 and a Form 1040NR are filed.

  5. A student in the United States with an F or M visa is not automatically exempt from FICA tax.

    • Generally a student is not exempt from FICA if he or she was a student, teacher, researcher, or trainee for more than any part of five calendar years.

      Note:

      Check for Form 1040NR filings. Disallow if Form 1040NR was filed for more than 5 consecutive years.

    • A student who has been exempt more than five years is subject to the substantial presence test.

    • If this individual meets the substantial presence test for the calendar year, he is considered a U.S. resident for tax purposes, and therefore liable for FICA tax. The claim is not valid and must be disallowed. Input TC 290 .00 with Blocking Series 98 or 99 and issue 105C letter with the following fill-in paragraph:

      Letter Paragraph
      We have disallowed your claim because, in accordance with Internal Revenue Code § 7701(b), you meet the substantial presence test and are considered a resident alien. Therefore you do not qualify for exemption from FICA tax on wages.

  6. A student qualifies for exemption from FICA tax provided he or she can show evidence that he or she does not intend to reside permanently in the United States. Evidence may consist of, but is not limited to:

    • Maintaining a tax home in a foreign country during the year

    • Maintaining a more significant contact (closer connection) with the foreign country, where the student has a tax home, than they have with the United States.

    • Being present in the United States for less than 183 days during the year (usually occurs in the final year of education or training)

    • Publication 519 can be used to further explain these requirements.

  7. A claim received after the statute has expired for refund (i.e., one that is not timely filed) is not valid and must be disallowed. Check postmark date to determine timeliness. See IRM 21.8.1.1.17.

    • Send a Letter 105C and identify that the claim is not timely filed (include appeals rights).

    • Input a TC 290 .00 with Blocking Series 98/99 on the requester's tax account.

  8. A claim received with a J-2, F-2, H-1, or TN visa is not a valid claim and must be disallowed.

    • Input a TC 290 .00 with Blocking Series 98/99 on the requester's tax account.

    • Send 105C letter with the following fill-in paragraph:
      " We have disallowed your claim because in accordance with Title 26, CFR § 3121(b), your entry visa does not qualify you for exemption from FICA tax on wages."

  9. A teacher, researcher, or trainee may qualify for exemption from FICA tax provided that he or she is a resident of a country with which we have a Totalization Agreement - Bilateral Social Security Agreement, and provides a copy of the statement from the foreign country, or the U.S. Social Security Administration, exempting the individual's pay from U.S. social security tax, but not foreign social security tax. See IRM 21.8.1.19., Totalization Agreement - Bilateral Social Security Agreement , for additional information.

21.8.1.18.3  (10-01-2012)
Processing Employee Claims

  1. All adjustments are done on the employer's Form 941 (Form 943 for H-2A claims) account and the resulting credit is transferred to the employee's account for refunding.

  2. See IRM 21.5.3, General Claims Procedures for information on general claim processing.

  3. A complete claim contains the following substantiation:

    • Form W-2 (If not provided, attempt to verify the withholding amount using command code IRPTR). Attach a print and accept.

    • A copy of the entry and current visa

    • Form I-94, Arrival/Departure Record

    • Form I-20 (for F-1 visa only) or IAP-66/DS-2019 (for J-1 visa only)

    • Form 8316 or signed claim/statement verifying that unsuccessful attempts have been made to obtain a refund from the employer. Statements replacing the Form 8316 must include all the information requested on the Form 8316.

      Note:

      Form I-766 or I-688B (Employment Authorization Document) is issued by USCIS and is needed only if the student is engaged in optional practical training.

    • Copies of pay statements (see IRM 21.8.1.18.1.)

  4. If an incomplete claim for refund of FICA tax is received:

    • Send Letter 513C to the claimant requesting that the employee seek reimbursement from the employer, and return the Form 843 claim to requester. "X" out the IRS received date on the Form 843 prior to mailing.

    • When sending a 513C to the employee, also send a Letter 512C to the employer advising the employer to reimburse the employee for any erroneously withheld FICA taxes and to file Form 941X. Beginning January 2009, the employer will need to file a Form 941X to correct the errors since the Form 941C will be obsolete.

      Note:

      These two letters are issued at the same time and reference each other in their content.

      Exception:

      Do not send Letter 512C to the employer if the claimant submits a signed Form 8316 indicating they have unsuccessfully attempted to get reimbursed from their employer.

  5. If the employee has filed the appropriate tax return (Form 1040NR) and submitted the proper documentation, route the claim to BMF, or refer to IRM 21.8.2.7.3, Processing Employee Claims, for processing procedures.

  6. Route employer claims to BMF. Procedures are contained in IRM 21.8.2.7.4, Claims From the Employer.

21.8.1.18.4  (03-03-2011)
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21.8.1.19  (10-01-2007)
Totalization Agreements- Bilateral Social Security Agreements

  1. The United States has entered into Bilateral Social Security Agreements with several foreign countries in order to eliminate dual coverage and dual contributions to the social security system for the same work.

  2. The Bilateral Social Security Agreement generally makes sure that social security taxes (including SE tax) are paid only to one country. See IRM 21.8.1.19.3. for a list of countries.

21.8.1.19.1  (10-01-2013)
Substantiation of Exempt Status

  1. In order for an individual or the individual's employer to substantiate the individual's exemption from FICA under the terms of a Bilateral Social Security Agreement, the individual or his or her employer must secure an Exemption Statement from either the country in which the individual is employed or the individual's country of residence.

  2. Some of the countries, with which the United States has agreements, will not issue certificates of coverage. In those countries, the employee or the employer can request a statement from the following address:

    Social Security Administration
    Office of International Programs
    P.O. Box 17741
    Baltimore, MD 21235-7741

  3. For the employee or the employer to establish that the employee's income is subject only to U.S. social security tax, the U.S. employer can obtain more information or get a determination by:

    • Writing to the address in paragraph (2) above

    • Calling 1-800-772-1213, 410-965-0144 or 410-965-3549

    • Faxing to 410-966-6029, or

    • Accessing the SSA Web site at http://www.ssa.gov/international

  4. Correspondence for Exemption Statements must include:

    • The employee's name

    • The employee's U.S. and foreign social security numbers

    • The employee's date and place of birth

    • The employee's citizenship

    • The employee's place and date of hiring

    • The employer's name and address in the United States and in the foreign country

    • The beginning date and the expected ending date of the employee's employment in the foreign country

  5. The Exemption Statement must be maintained by the employer because it establishes that the employee's pay is exempt from taxation in the foreign country.

21.8.1.19.2  (10-01-2007)
Social Security Tax Obligation

  1. Use the following charts (with the exception of Italy) to determine the taxpayer's (U.S. citizen or resident alien) social security tax obligation when working in a foreign totalization country. The agreement with Italy does not contain a "detatched-worker rule," which means that the taxpayer would remain covered under the U.S. program and be exempt from Italian coverage and contributions.

    If... Then...
    Sent abroad by a U.S. employer for less than 5 years The taxpayer pays U.S. social security tax only.
    Sent abroad by a U.S. employer for more than 5 years The taxpayer pays foreign social security tax.
    Working for a foreign employer The taxpayer pays the foreign social security tax only, unless the foreign employer is an affiliate of a U.S. company that has entered into the contract coverage under Title 11 of the Social Security Act with the U.S. Treasury Department.
    Locally hired U.S. or foreign employer The taxpayer pays foreign social security tax only.
    Working for the U.S. government Taxpayer pays U.S. social security tax only.
    Self-employed Taxpayer pays based on residency.

    Note:

    IRC § 3121(l) addresses foreign employers affiliated with U.S. companies, in which case, the employee pays only U.S. social security tax for 5 years.

  2. Use the following charts to determine the taxpayer's (foreign persons, including resident aliens for income tax purposes) social security tax obligation when working in the United States:

    If... Then...
    Sent by a foreign employer for less than 5 years in the United States Taxpayer pays foreign social security tax only.
    Sent by a foreign employer for more than 5 years in the United States Taxpayer pays U.S. social security tax only.

21.8.1.19.3  (10-01-2009)
Claims of Exemption from FICA Tax by Reason of Bilateral Social Security Agreement

  1. Claims of erroneously withheld FICA tax must include:

    • Form W-2

    • Social Security Tax Exemption Statement

    • A signed statement from the employee or employer (whichever is applicable)

  2. The signed statement included in the claim must state which unsuccessful attempts have been made to secure a refund of the erroneously withheld FICA tax from the employer. A Form 8316 may be used for this purpose.

  3. The claim is only valid when it involves one of the countries with which the U.S. has a Bilateral Social Security (Totalization) Agreement. These countries are shown in Publication 54. The following is a list of those countries:

    • Australia

    • Austria

    • Belgium

    • Canada

    • Chile

    • Czech Republic

    • Denmark

    • Finland

    • France

    • Germany

    • Greece

    • Ireland

    • Italy

    • Japan

    • Luxembourg

    • Netherlands

    • Norway

    • Poland

    • Portugal

    • South Korea

    • Spain

    • Sweden

    • Switzerland

    • The United Kingdom

  4. Use procedures in IRM 21.8.2.8.4 for processing claims for FICA tax erroneously withheld.

21.8.1.19.4  (10-01-2007)
Adjusting IMF Accounts to Reduce Self-Employment Tax Due to Bilateral Social Security Agreement

  1. In cases where the exempt taxpayer reported self-employment tax on their individual tax return, abate the tax using TC 291. For exempt status substantiation requirements, See IRM 21.8.1.19.1.

  2. Reduce the posted self-employment tax, self-employment income, and Medicare income amounts accordingly, using the following Credit Reference Numbers:

    • 889 - Self-Employment Tax Adjustment

    • 878 - Primary Self-Employment Income

    • 879 - Secondary Self-Employment Income

    • 895 - Primary Medicare Income

    • 896 - Secondary Medicare Income

      Note:

      Both SE income and Medicare income amounts must be reduced as necessary to correct the amounts reported since data from these adjustments is sent to Social Security Administration (SSA) electronically.

21.8.1.20  (10-01-2007)
General Organization for Social Insurance (GOSI)

  1. The General Organization for Social Insurance, a Saudi Arabian government corporation, administers the Saudi Arabian Social Insurance System.

  2. The Government of Saudi Arabia sends lump-sum benefit cancellation payments to United States taxpayers who irrevocably surrender their GOSI benefits.

  3. The amount of the lump-sum payment consists of 5 percent of the non-Saudi worker's GOSI wage base plus a bonus.

  4. GOSI benefit cancellation payments are fully includible in the recipient's gross income under IRC § 61 in the year received.

  5. Disallow any claims received to reduce the taxpayer's income by the amount of the GOSI payment.

21.8.1.21  (10-01-2007)
Form 8288 and Form 8288-A

  1. IRC § 1445 requires the deduction and withholding of tax by the transferee on amounts realized on dispositions of U.S. real property interests by a foreign seller.

  2. Form 8288, U.S. Withholding Tax Return for Dispositions of U.S. Real Property Interests, is filed by the withholding agent to report the tax withheld at source.

  3. This Form is processed to Master File beginning in 2006.

21.8.1.21.1  (10-01-2013)
Claims for FIRPTA Credits

  1. Taxpayer claims for FIRPTA credits on Form(s) 1040NR, etc., must be accompanied by Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, Copy B. If a partnership disposes of a U.S. Real Property Interest, the foreign partners' allocable shares of the gain recognized are treated as effectively connected taxable income subject to withholding under IRC §1446, rather than section 1445. Therefore, if a transferee withholds on the sale of a U.S. Real Property interest by a foreign partnership, the partnership may claim a credit for the amount withheld allocable to its foreign partners against the amount of section 1446 tax it must withhold. If a domestic partnership disposes of the U.S. real property interest, it must withhold under IRC § 1446, rather than section 1445, on the gain recognized allocable to the partnership's foreign partners. So that the foreign partner can prepare its return, the partnership provides the partner with Form 8805, Foreign Partner's Information Statement of § 1446 Withholding Tax, which is similar to domestic withholding claims being accompanied by a Form W-2.

  2. Check the validity of the credits claimed on Form 8288-A against the INTLWEBAPPS, FIRPTA data base and IDRS prior to allowing the credit. The person verifying the credit will:

    • Access the account on IDRS to verify any FIRPTA credits already allowed during initial processing, or any later adjustments.

    • Access INTLWEBAPPS, FIRPTA data base to verify the amount of credits paid in based on the transaction.

    • Use Form 13698, International Credit(s) Verification Slip to notate the amount of credit verified

    • Based on the amounts previously allowed on IDRS compared to the amounts verified on the FIRPTA data base, notate the amount of unused credit available for adjustment in the remarks section of the Form 13698.

    Example:

    IDRS indicates $10,000 in FIRPTA credits allowed. The FIRPTA data base indicates $20,000 paid in based on the transaction. Notate the Form 13698 as having $20,000 8288-A credit. Also notate in the remarks section $10,000 unused credit available for adjustment

  3. The presence of a TC 971 with Action Code 650 on a tax module indicates that a refund of the FIRPTA credits was issued from the BMF MFT 17 account for the amount indicated. A TC 972 indicates a reversal of a TC 971.

  4. Beginning in 2006, when a Form 1040NR attempts to post to Master File, and a TC 971 Action Code 650 is present, the account is frozen from refunding and a Master File transcript generates. Research to determine if the FIRPTA credit claimed on the return was previously refunded as indicated by the TC 971 Action Code 650.

    If... Then...
    The Action Code 650 amount is the same as the Credit Reference Number (CRN) 332 amount Input an adjustment to reduce the CRN 332 amount to zero, since the credit has already been refunded.
    The Action Code 650 amount is included in the CRN 332 amount (i.e., $9,200.00 is part of the $10,500.00 claimed) Reduce the CRN 332 amount by the AC 650 amount since this has already been refunded. See Caution below.
    The Action Code 650 amount is not included in the CRN 332 amount Input TC 571 to release the freeze on the account. CW the transcript.

    Caution:

    Research the FIRPTA database or request the original return from Files, if necessary, to determine if the FIRPTA credit being claimed on the return is the same credit previously refunded according to the TC 971 CRN 332 transaction.

  5. If correspondence or an amended tax return is received requesting credit for withheld FIRPTA tax, Form 8288-A, Copy B must be attached in order to verify the credit.

  6. Perform the verification against the INTLWEBAPPS data base.

  7. Allow the credit after the availability is verified with CRN 332 (which posts as a TC 766), Reason Code 069, and adjust tax, if necessary Refer to paragraph 2 above for verification instruction.

    Note:

    When issuing a manual refund from a Form 8288 account, use Line Number 65.

  8. Credits substantiated by Form 8288-A and 8805 are Chapter 3 withholding credits and subject to the 180 day interest free period. For more information on the 180 day interest free period refer to IRM 20.2.4.7.6, 180-Day Rule.

21.8.1.22  (10-01-2012)
Withholding Tax on Foreign Partners - Form 8804

  1. Form 8804, Form 8805, and Form 8813 are used to pay and report § 1446 withholding tax that is based on effectively connected taxable income allocable to foreign partners, without regard to distributions.

  2. The total withholding tax liability of the partnership for its tax year is reported on Form 8804, Annual Return for Partnership Withholding Tax (§ 1446). Prior to 1/1/2005, Form 8804 was processed to the Non-Master File. For tax periods 200412 and subsequent, Form 8804 is processed to the Business Master File under MFT 08.

  3. Form 8805 is used to report the amount of effectively connected taxable income allocable to the foreign partner, and the § 1446 tax withheld for the partnership's tax year. If the foreign partner is a foreign trust or estate, the foreign trust or estate must provide to each of its beneficiaries, a copy of the Form 8805 furnished by the partnership. In addition, the foreign trust or estate must complete Schedule T for each of its beneficiaries and must provide that Schedule T information to each beneficiary. Form 8805 is processed on a stand alone computer system.

    • A separate Form 8805 must be filed for each foreign partner.

    • A copy of each Form 8805 must be attached to the Form 8804 when filed.

  4. The foreign partner must attach Form 8805 to their individual tax return in order to claim a credit on Form 1040NR, Form 1120-F, or Form 8804, in the case of an upper tier partnership. The TIN and the name of the partner on the Form 8805 must match the TIN and name on the U.S. tax return of the partner. (See IRM 21.8.2.15.1.) Allow credits that can be verified using CC IRPTR and/or the INTLWEBAPPS database without further research.

    Note:

    Credits of ≡ ≡ ≡ ≡ ≡ or more must be verified.

  5. Any U.S. person erroneously made subject to the withholding tax would also receive Form 8805 from a partnership and must attach it when filing Form 1040 or Form 1120 to obtain the credit.

  6. Form 8813, Partnership Withholding Tax Payment (§ 1446), is used to transmit payments to the IRS.

  7. Final and temporary §1446 regulations were published on May 18, 2005. The final and temporary regulations are effective for partnership taxable years beginning after May 18, 2005. However, a partnership may also elect to apply the final regulations to partnership years beginning after December 31, 2004, and before May 19, 2005, by attaching a statement to Form 8804 indicating that the partnership is making the election under Regulation §1.1446-7. A partnership may also apply the temporary regulations to partnership years beginning after December 31, 2004, and before May 19, 2005, by electing to apply the final regulations and electing under Regulation §1.1446-6T(f) to apply the temporary regulations.

  8. Partnerships are instructed to attach withholding certificates filed under Reg. § 1.1446-6T that support the reduced §1446 withholding, along with a computation of the reduction in withholding relating to each partner for which it is submitting a certificate, to their Form 8805 and Form 8813.

    Note:

    Route any loose withholding certificates to the Low Income Housing Team at the Philadelphia Campus, 2970 Market Street, Drop Point 4-E08.142, Philadelphia, Pa 19104.

  9. § 1.1446-6T was finalized on April 29, 2008. The regulations are effective for partnership taxable years ending after December 31, 2007. The final regulations have a transition rule providing that any certificate submitted on or before July 28, 2008, that met the requirements of the temporary regulation, is not defective solely because it does not meet the requirements of the final regulations. However, any certificate (including any updated certificates and status reports) submitted, or required to be submitted after July 28, 2008, must comply with the requirements of the final regulations and be submitted using Form 8804-C , Certificate of Partner-Level Items to Reduce Section 1446 Withholding.

21.8.1.23  (08-12-2011)
Withholding Certificates

  1. A series of Forms W-8 are available and must be filed with a withholding agent if an exemption or a reduced rate is being claimed.

  2. Additional information and the purpose for each of the certificates are listed below.

21.8.1.23.1  (08-12-2011)
Form W-8, Certificate of Foreign Status

  1. The possible forms that can be submitted as a certificate of foreign status are:

    • Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding.

    • Form W-8ECI , Foreign Person's Claim of Income Effectively Connected with the Conduct of a Trade or Business in the United States.

    • Form W-8EXP , Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding.

    • Form W-8IMY ,Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding.

    • Form W-8CE , Notice of Expatriation and Waiver of Treaty Benefits.

  2. All Forms W-8 are submitted to the withholding agent/financial institution. The Form W-8 is not sent to the IRS.

  3. The withholding agent keeps the Form W-8. A withholding agent must retain each withholding certificate and other documentation for as long as may be relevant to the determination of the withholding agent's tax liability. For further information see Treas. Reg §§ 1.1441-1(e)(4)(iii) and 1.1446-1(c)(2)(vi).

  4. CAUTION: When a nonresident alien files a claim for erroneous backup withholding:

    1. Return the claim to the taxpayer, and

    2. Advise the taxpayer to file the appropriate tax form (Form1040NR Individual or Form 1120-F Corporation) with a copy of 1099INT or 1042-S attached.

21.8.1.23.2  (10-01-2013)
Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding

  1. If the income is considered "fixed or determinable annual or periodical income," such as interest, dividends, rents, royalties, premiums, annuities, profits, gains, etc., the nonresident alien recipient must provide Form W-8BEN to the withholding agent in order to claim reduced or exempt withholding under a U.S. Tax Treaty.

  2. A foreign partner may submit Form W-8BEN to qualify a partnership to use a preferential rate of withholding under §1446 relating to the foreign partner submitting the form.

  3. Loose Forms W-8BEN or any W-8 series document sent in by an individual, will be returned to the individual taxpayer. The taxpayer must provide the form to their withholding agent/financial institution.

  4. Associate loose Form W-8 series documents sent in by business taxpayers with their withholding tax return (i.e., Form 1042).

21.8.1.23.3  (08-12-2011)
Form W-8ECI, Certificate of Foreign Person's Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States

  1. Effectively connected income from a U.S. trade or business is described as "income from services performed" or "fixed or determinable annual or periodical income" (e.g., interest, dividends, rents and certain similar amounts), if the income is from assets used in, or held for, the conduct of that trade or business, or the activities of that trade or business were a material factor in the realization of the income.

  2. Income that is "effectively connected" , that is earned other than through a partnership, may be exempt from chapter 3 withholding only if the nonresident alien is materially involved in the operation of the trade or business as opposed to merely being a passive investor.

  3. Foreign persons are generally subject to U.S. tax at a 30% rate on fixed or determinable, and annual or periodical income they receive from U.S. sources, however, no withholding under IRC § 1441 or IRC § 1442 is required on the following types of income:

    • Income subject to withholding under IRC § 1445 (disposition of U.S. real property interests); and

    • Income subject to withholding under IRC § 1446 (foreign partners share of effectively connected income).

  4. A foreign person is defined as a:

    • Nonresident alien individual,

    • Foreign corporation,

    • Foreign partnership,

    • Foreign estate, or,

    • Foreign trust.

  5. The Form W-8ECI, Certificate of Foreign Person's Claim for Exemption from Withholding on Income Effectively Connected with the Conduct of a Trade or Business in the United States, is used by foreign persons to:

    1. Establish that they are a foreign person

    2. Claim that they are the beneficial owner of the income for which Form W-8ECI is being provided

    3. Claim that the income is effectively connected with the conduct of a trade or business in the United States

  6. The Form W-8ECI is not filed with the IRS. It must be filed with, and maintained by, the withholding agent when a recipient considers that its "effectively connected income" is exempt from withholding.

  7. The Form W-8ECI is filed by foreign persons who are beneficial owners of U.S. source income that is, or is deemed to be, effectively connected with a trade or business in the United States and may be eligible for exemption from chapter 3 withholding.

21.8.1.23.4  (08-12-2011)
Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding

  1. Investment income (stock, bonds, and other domestic securities, interest on deposits in banks, and payments from any other source) earned in the United States by foreign governments, international organizations, foreign central banks of issue, foreign tax-exempt organizations, foreign private foundations, or by the governments of U.S. Territories is exempt from Chapter 3 Withholding if the income is not derived from a commercial activity or received from or by a controlled commercial entity.

  2. Foreign governments, international organizations, foreign central banks of issue, foreign tax-exempt organizations, foreign private foundations, or governments of U.S. Territories must file Form W-8EXP with the withholding agent to:

    1. Establish that they are a foreign person,

    2. Claim that they are the beneficial owner of the income for which Form W-8EXP is being filed, and

    3. Claim a reduced rate of, or exemption from, withholding.

21.8.1.23.5  (10-01-2007)
Form W-8IMY, Certificate of Foreign Intermediary, Foreign Partnership, or Certain U.S. Branches for United States Tax Withholding.

  1. Foreign persons are subject to U.S. tax at a 30% rate on income they receive from U.S. sources that consists of:

    • Interest,

    • Dividends,

    • Rents,

    • Premiums,

    • Annuities,

    • Compensation for, or in expectation of services performed, or

    • Other fixed or determinable annual or periodical gains, profits or income

  2. This tax is imposed on the gross amount paid and is generally collected by withholding on that amount.

  3. A payment is considered to have been made whether it is directly to the beneficial owner or to another person, such as an intermediary, agent trustee executor, or an intermediary agent, trustee, executor, or partnership for the benefit of the beneficial owner.

  4. Form W-8IMY must be provided to the withholding agent by:

    • A foreign person, or a foreign branch of a U.S. person to establish that it is a qualified intermediary that is not acting for its own account to represent that it has provided or provides a withholding statement, and, if applicable, to represent that it has assumed primary withholding responsibility

    • A foreign person to establish that it is a non-qualified intermediary that is not acting for its own account, and if applicable, that it is using the form to transmit withholding certificates and has provided, or will provide, a withholding statement as required

      Note:

      A U.S. person cannot be a non-qualified intermediary.

    • A U.S. branch of certain foreign banks or foreign insurance companies to represent that the income it receives is not effectively connected with the conduct of a trade or business within the United States, and that it is using the form as evidence of its agreement to be treated as a U.S. person with respect to payments associated with the form, or to transmit documentation of the person receiving the payment

    • A flow-through entity to represent that it is either a withholding foreign partnership or withholding foreign trust and provides a withholding statement, as required, or a non-withholding foreign partnership or non-withholding foreign simple or grantor trust, the income which it receives is not effectively connected with a U.S. trade or business, and it has provided a withholding statement as required

    • A foreign partnership or grantor trust that is a partner in a partnership and is allocated effectively connected taxable income.

  5. Form W-8IMY must be provided to the withholding agent or payer before income is paid or credited on behalf of the beneficial owner.

    Note:

    Failure to provide a Form W-8IMY, or failure to provide necessary documentation and withholding statements, may lead to withholding at a 30% rate, or the backup withholding rate.

21.8.1.23.6  (08-12-2011)
Form W-8CE, Notice of Expatriation and Waiver of Treaty Benefits

  1. Form W-8CE, Notice of Expatriation and Waiver of Treaty Benefits, is filed with a withholding agent by a "covered expatriate" in accordance with IRC § 877A which became effective June 17, 2008. The Form W-8CE informs the withholding agent that the beneficial owner of the income is now a covered expatriate and that the covered expatriate has either a certain item of deferred compensation, a specified tax deferred account, or an interest in a nongrantor trust.

    Note:

    This withholding tax is in lieu of any withholding tax imposed by Chapter 3 or Chapter 24 of the IRC.

  2. The Form W-8CE must be filed within 30 days of expatriation or, if earlier, by the day before the first distribution on or after the expatriation date for each specified tax deferred account, item of deferred compensation, or interest in a nongrantor trust. The form is given to each payer of the identified income and is not filed with IRS. The IRS should obtain this information from the covered expatriate on Form 8854, Initial and Annual Expatriation Statement.

21.8.1.23.7  (08-12-2011)
Form 8233, Exemption from Withholding on Compensation for Independent and Dependent Personal Services of a Nonresident Alien Individual

  1. A nonresident alien individual who received compensation for independent personal services performed in the United States, or dependent personal services must file Form 8233 with the withholding agent in order to claim reduced withholding or an exemption from withholding when eligible under an income tax treaty. Use the following chart to determine if nonresident alien individuals must use Form 8233.

    If... Then...
    Receiving compensation for independent personal services performed in the U.S. Use Form 8233 to claim a tax treaty withholding exemption for all or part of that compensation and/or to claim the daily personal exemption amount.
    Receiving compensation for dependent personal services performed in the U.S. Use Form 8233 to claim a tax treaty withholding exemption for all or part of that compensation.

    Note:

    Do not use Form 8233 to claim the daily personal exemption amount.

    Receiving non-compensatory scholarship or fellowship income and personal services income from the same withholding agent Use Form 8233 to claim a tax treaty withholding exemption for part or all of both types of income.
  2. This form is not required if the taxpayer is a beneficial owner who is:

    If... Then...
    Receiving compensation for dependent personal services performed in the U.S. and is not claiming a tax treaty withholding exemption for any part of that compensation Form W-4 is used.
    Receiving non-compensatory scholarship or fellowship income and are not receiving any personal services income from the same withholding agent Form W-8BEN is used.

    Note:

    If elected by the withholding agent, Form W-4 can be used for the non-compensatory scholarship or fellowship income.

    Claiming only foreign status or treaty benefits with respect to income that is not compensation for personal services Form W-8BEN is used.

    Note:

    This exemption is not retroactive.

  3. The Form 8233 is processed at the Philadelphia Accounts Management Campus. Instructions for processing the form are found in IRM 21.8.6, Exemptions from Withholding (Form 8233).

  4. Withholding agents are instructed to keep a copy of Form 8233 for their records, give a copy to the nonresident alien, and attach a copy to Form 1042.

21.8.1.23.8  (10-01-2012)
Form W-9, Request for Taxpayer Identification Number and Certification

  1. A person who is required to file an information return with the IRS must obtain a correct Taxpayer Identification Number (TIN) to report:

    • Income paid to them

    • Real estate transactions

    • Mortgage interest they paid

    • Acquisition or abandonment of secured property

    • Cancellation of a debt

    • Contributions they made to an IRA

  2. The form is used by a U.S. person (including a resident alien) to give their correct TIN to a requester, when applicable, to:

    • Certify that the TIN is correct (or to show that the taxpayer is waiting for a number to be issued)

    • Certify that the taxpayer is not subject to backup withholding, or

    • Claim exemption from backup withholding if the taxpayer is a U.S. exempt payee

  3. Due to regulatory changes, Form W-9 serves a triple function:

    • Vehicle for U.S. persons to report Taxpayer Identification Number (TIN) to certain withholding agents

    • Vehicle for informing withholding agent that payee is a U.S. person and is not subject to income tax withholding applicable to non-resident aliens.

    • Vehicle for U.S. person to claim tax treaty exemptions

  4. All Forms W-9 are submitted to the withholding agent/financial institution. The Form W-9 is not sent to the IRS.

  5. The withholding agent keeps the Form W-9. A withholding agent must retain each withholding certificate and other documentation for as long as may be relevant to the determination of the withholding agent's tax liability. For further information see Treas. Reg. §§ 1.1441-1(e)(4)(iii) and 1.1446-1(c)(2)(vi).

21.8.1.24  (10-01-2012)
Form 3520 and Form 3520-A

  1. The Small Business Job Protection Act of '96 (SBJPA) expanded information reporting under IRC § 6048 for:

    • U.S. persons who make transfers to foreign trusts, and

    • U.S. owners of foreign trusts

  2. The SBJPA also:

    • Added reporting requirements for the U.S. beneficiaries of foreign trusts ( IRC § 6048(c)) , and

    • Revised civil penalty procedures

  3. U.S. owners are responsible for ensuring that the foreign trust annually furnishes the IRS prescribed information to:

    • The U.S. owner, and

    • U.S. beneficiaries

  4. U.S. persons treated as owners of a foreign trust under IRC § 671 through 679 are responsible for ensuring that the foreign trust files an annual return containing a full and complete accounting of all:

    • Trust activities

    • Trust operations, and

    • Other relevant information

  5. Civil Penalty adjustments (CP 15 ; CP 223) and duplicate filing conditions (CP 193) are generated for:

    • Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, and

    • Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner (Under IRC § 6048(b) )

  6. Penalties are assessed under IRC § 6677 for each tax year in which the Form 3520 and/or 3520-A is not timely filed and/or the information contained in the filing is incomplete or inaccurate.

  7. Initial penalties may be assessed under IRC § 6677(a) or (b) and continuation penalties may be assessed under IRC § 6677(a)(2).

    • For notices and returns required to be filed before January 1, 2010, the initial penalty is 35% of the gross reportable amount transferred to (Form 3520 page 2, total of line 13), or distributed from, the foreign trust (Form 3520 page 4, total of line 27), and/or 5% of the gross value of the portion of the foreign trust's assets at the close of the year treated as owned by the U.S. person (Form 3520 page 4, Line 23 and/or Form 3520–A page 3, Line 9).

    • For notices and returns required to be filed after December 31, 2009, the initial penalty is the greater of $10,000 or 35% of the gross reportable amount transferred to (Form 3520 page 2, total of line 13), and/or distributed from, the foreign trust (Form 3520 Page 4, total of line 27) and/or 5% of the gross value of the portion of the foreign trust's assets at the close of the year treated as owned by the U.S. person (Form 3520 page 4, Line 23 and/or Form 3520–A page 3, Line 9). In the case of a failure to report foreign gifts, assess a penalty equal to 5% of the amount shown on (Form 3520 page 6, total of Line 54).

    • A continuation penalty of $10,000 every 30 days (or fraction thereof) is assessed, starting after 90 days from the date the IRS notifies the taxpayer of such failure, until such returns are filed, or until the gross reportable amount is reached. In the case of a failure to report foreign gifts, an additional 5% penalty is assessed (not to exceed a total of 25% of the fair market value of the gift or bequest).

    Note:

    The three initial penalties and two continuation penalties each has their own designated Penalty Reference Number as follows:

    Description IRC Form Penalty Reason Code
    Initial penalties 6677 3520 659
      6677 3520-A 660
      6039F 3520 668
    Continuation penalties 6677 3520 702
      6677 3520-A 703

  8. Instructions for processing Form 3520 and 3520-A adjustments are found in IRM 21.8.2.20, Information Reporting under Code § 6048.

21.8.1.25  (10-01-2013)
Form 5471 - Information Return of U.S. Persons with Respect to Certain Foreign Corporations

  1. Form 5471 must be filed by certain U.S. citizens and residents who are officers or directors of certain foreign corporations, and certain U.S. persons who are shareholders in certain foreign corporations, to report information with respect to the foreign corporation’s international activities.

  2. The Form 5471 is a four page document that includes Schedules A, B, C, E, F, G, H, and I. There are also four separate Form 5471 Schedules connected with this Form - Schedules J, M, and O. Schedule O consists of Part I and Part II.

  3. This form and schedules are used to satisfy the reporting requirements of IRC § 6038, IRC § 6046, and related regulations.

  4. The Form 5471 (and schedules) is filed with the income tax return filed by the taxpayer.

  5. The due date of the Form 5471 is the same as that of the related income tax return.

  6. An extension of time to file the income tax return is an extension of time to file Form 5471.

21.8.1.25.1  (10-01-2013)
Form 5471 Penalties

  1. Failure to file Form 5471 and the appropriate schedule(s) can result in civil penalties under IRC § 6038. The penalties are assessed on civil penalty modules for both IMF and BMF accounts with Penalty Reference Numbers:

    • 599, Failure to File Form 5471 in conjunction with Failure to File Corporate Return for tax year beginning in 2010

    • 623, Failure to Furnish Information with Respect to Certain Foreign Corporations and Partnerships for tax years prior to 2010.

    Note:

    For further information refer to Document 6209 on SERP http://serp.enterprise.irs.gov/databases/irm.dr/current/6209.dr/6209ch10.8.1.htm

  2. Area Office Examination assessed Form 5471 penalty adjustments will post with a TC 240 using Document Code 47. Examination assessed Form 5471 penalty adjustments will also post with a TC 240 using Document Code 54 and blocking series 52 or 53. Only Examination can recommend reconsideration of this penalty when it is assessed by Exam.

  3. Beginning in 2009, Master File systemically assesses IRC § 6038 penalties on Form 5471 returns that are attached to late filed Form 1120 returns to BMF MFT 13 modules. The assessments contain a TC 240 for amounts in multiples of $10,000, Document Code 54, Tax Class 3, Penalty Reference Number 623, and 00 as the first two digits of the Blocking Series.

  4. Beginning in 2010 penalties on Form 5471 returns that are attached to a late filed Form 1120 return are automatically assessed on BMF MFT 13 modules using Penalty Reference Number 599. Refer to paragraph 1, above for further details. BMF international units at the Ogden Accounts Management Campus process requests for reasonable cause relief on these systemically assessed Form 5471 FTF penalties.

    Note:

    For more information on the automated penalty assessment and abatement process see IRM 21.8.2.21.1, Form 5471 Penalties

  5. There are no automated assessments made on IMF accounts. Penalties on IMF MFT 55 accounts with penalty reference numbers 599, or 623 are made during the examination process. Forward all requests for abatement of Examination assessed penalties, including Form 843 claims, to the office that input the manually assessed civil penalty.

    • If the penalty is assessed using Document 47, research command code AMDIS to determine the Compliance office that recommended the assessment and route the request to that office.

    • If the penalty is assessed using Document code 54, research the account using IMFOL with definer A to determine the input operator, and route the case accordingly.


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