21.8.1  IMF International Adjustments (Cont. 2)

21.8.1.6 
U.S. Virgin Islands

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

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

    Note:

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

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

    Note:

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

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

    • Entity information

    • CCC and RPC edits

    • Received date

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

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

21.8.1.7  (10-01-2013)
Guam

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

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

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

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

    Note:

    A penalty of $1,000.00 may be assessed for not filing the required information. See IRM 20.1.9.18, IRC § 6688 – Reporting for Residents of U.S. Territories. A Penalty Reason Code (PRC) is required with a penalty abatement See IRM 20.1.1–2, Penalty Reason Code Chart.

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

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

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

    Note:

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

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

    Reminder:

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

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

    • GUAM

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

    • UNITED STATES

      Internal Revenue Service Center
      Austin, TX 73301-0215

21.8.1.7.2  (10-01-2014)
Credits and Payments - Guam

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

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

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

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

    Caution:

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

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

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

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

    2. Substantiated credit elect amounts claimed require a completed Form 8796, Request for Return/Information (Federal/State Tax Exchange Program) , verifying the amount of Guam credit elect claimed on the Form 1040. To allow credit verification, the completed Form 8796 must be mailed to
      IRS
      Central Processing Unit Stop 93A
      P. O. Box 621506
      Atlanta, Georgia 30362-3006 .

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

      Note:

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

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

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

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

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

    Note:

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

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

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

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

    Note:

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

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

    Note:

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

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

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

    Caution:

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

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

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

    • A copy of a canceled check, or

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

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

21.8.1.9  (10-01-2013)
American Samoa

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Note:

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

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

    Caution:

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

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

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

    1. The standard deduction, and

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

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

21.8.1.10  (10-01-2012)
Visa Information

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

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

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

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

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

    Note:

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

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

    Note:

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

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

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

21.8.1.11  (10-01-2007)
Aliens

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

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

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

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

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

  2. This Certificate of Compliance is obtained by filing:

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

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

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

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

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

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

    Caution:

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

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

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

    • Nonresidents having taxable income

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

    • Aliens involved in situations requiring a tax year termination

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

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

    Note:

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

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

    Note:

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

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

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

    • Alien visitors for pleasure on a B-2 visa

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

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

    Category 6 Alien residents of Canada or Mexico who frequently commute between that country and the United States for employment, and whose wages are subject to the withholding of U.S. taxes
  8. Form 1040-C:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    4. Days he or she was an exempt individual

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

    Exemption Chart
    An individual temporarily present in the United States because of diplomatic status
    An individual temporarily present in the United States because of a visa that the Secretary of the Treasury determines to represent full-time diplomatic or consular status Individuals present in the U.S. under an “A” or “G” Visa are considered to have full-time diplomatic or consular status
    An individual temporarily present in the United States because of full-time employment with an international organization
    An individual temporarily present in the United States because of membership in the immediate family of a person described in the preceding 3 blocks in this chart (a foreign government-related individual)
    A teacher or trainee, temporarily present in the United States under a "J" or "Q" visa (other than as a student), who substantially complies with the requirements of the visa, (usually limited to 2 years during the last 6 calendar years)
    A student, temporarily present in the United States under an "F" , "J" , "M" or "Q" visa, who substantially complies with the requirements of the visa (usually limited to 5 years)
    A professional athlete temporarily in the United States to compete in a charitable sports event
    Immediate family members of exempt teachers and trainees
  3. An exception to the substantial presence test can be made by showing a closer connection (Form 8840) to a foreign country. Even though an alien would otherwise meet the substantial presence test, they do not meet the test for the current year, if:

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

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

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

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

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

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

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

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

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

21.8.1.11.3  (10-01-2012)
Resident Aliens

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

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

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

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

    Caution:

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

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

    Note:

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

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

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

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

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

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

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

    2. Meets the substantial presence test, or

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

21.8.1.11.4  (02-27-2008)
Nonresident Aliens

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

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

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

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

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

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

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

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

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

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

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

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

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

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

      Note:

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

    Note:

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

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

    • Make the election under 6013(h)

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

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

  5. For additional information, see Publication 519.

21.8.1.11.6  (10-01-2014)
Nonresident Alien Filing Requirements - Form 1040NR/NR-EZ

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

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

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

    • Their income is tax exempt

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

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

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

    Note:

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

  5. Form 1040NR/NR–EZ is due:

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

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

      Note:

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

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

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

    • RC 100 - Form 1040NR filing requirement

    • RC 101 - Form 1040 filing requirement

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

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

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

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

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

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

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

    • 2 = Other single nonresident alien

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

    • 4 = Married resident of the South Korea

    • 5 = Other married nonresident alien

    • 6 = Qualifying widow(er) with qualifying

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

    • 1 = Single nonresident alien

    • 2 = Married nonresident alien

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

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

    Note:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

  3. First time filing deadlines:

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

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

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

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

21.8.1.11.8  (10-01-2007)
Extensions of Time

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

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

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

      Note:

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

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

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

      Note:

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

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

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

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

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

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

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

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

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

    Note:

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

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

21.8.1.11.10  (08-12-2011)
Effectively Connected Income

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

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

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

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

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

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

    Note:

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

  4. The following chart identifies three types of effectively connected foreign source income.

    Effectively Connected Foreign Source Income
    Rents and royalties from the use outside the United States of intangible property (e.g., patents, copyrights, trademarks, etc.) derived in the active conduct of a U.S. trade or business
    Dividends or interest derived from banking, financing, or similar business in the United States
    Income, gains, or losses from sales or exchanges of inventory or property outside the United States through a U.S. office or fixed place of business (but not if the property is sold for use outside the United States and a fixed place of business of the taxpayer in a foreign country materially participated in such sale)

21.8.1.11.11  (10-01-2009)
Non-Effectively Connected Income

  1. Non-effectively connected income is income not effectively connected with a trade or business in the United States.

  2. Non-effectively connected income of nonresident aliens is taxed at 30 percent or a lower treaty rate but there are exceptions for certain types of income (e.g., portfolio interest).

    Note:

    It is taxable to nonresident aliens only when it is from U.S. sources.

  3. Foreign source non-effectively connected income does not have to be claimed or reported on a Form 1040NR.

  4. Foreign source income includes (if paid by a foreign payer or received for activities performed outside of the United States):

    • Scholarships

    • Fellowship grants

    • Grants

    • Prizes

    • Awards

  5. The income received by a nonresident alien (individuals other that a U.S. individual) is treated as income from sources outside the United States, i.e., foreign source income when it is received from a foreign:

    • Government

    • Agency

    • Political subdivision

    • Person, or

    • International organization (any foreign entity) for the purpose of study within the United States

  6. Exempt from taxes: nonresident aliens present in the United States less than 183 days during the tax year are exempt from taxes on gains from sales or exchanges of capital assets, unless such gains are effectively connected with a U.S. trade or business.

    Exception:

    Gains from the disposition of U.S. real property (including stock of a U.S. real property holding corporation) are treated as effectively connected income under §897 .

    1. Determining whether or not the alien is engaged in trade or business in the United States depends on the nature of the aliens activities.

    2. A nonresident alien performing special personal services in the United States at any time during the tax year is considered engaged in trade or business in the United States and the income is therefore not exempt.

    Note:

    The only exception to this rule is for employees of foreign persons, organizations, or offices.

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  (05-15-2014)
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 withholding 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

    Note:

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

    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.

    Note:

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

    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 percent of any U.S. social security benefits (and the equivalent portion of Tier 1, Railroad Retirement benefits) received is subject to the flat 30 percent 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 percent 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 percent 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  (10-01-2014)
Gambling Winnings

  1. Nonresident aliens with income from gambling winnings are subject to tax at the 30 percent 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. Losses sustained in the types of gambling listed in paragraph (2) are not allowed to offset any taxable gambling winnings

  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 Transaction Code 291 Reason Code 037 (non effectively connected tax), to adjust.

    Note:

    Canadian residents may enter eligible gambling winnings on line 10a and 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 percent 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 percent 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 percent, 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 percent 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 percent).

      Caution:

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

21.8.1.11.17.1  (10-01-2014)
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 percent statutory rate or reduced tax treaty rate) are claimed for tax years 2013 and 2014:

    • 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 2013 and 2014:

    • 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 2013 and 2014:

    • On line 8, Form 1040NR-EZ

    • On line 31, Form 1040NR

  9. 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).

  10. 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.

  11. 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.

  12. 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.

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

  14. 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 percent 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  (10-01-2014)
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.)

  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  (10-01-2014)
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 $680,000 for 2014 ($668,000 for 2013). This amount is adjusted for inflation annually. The amount of any gain or loss subsequently realized will be adjusted for gain or 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 of the return for they year in which 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  (10-01-2014)
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 2014 the amount is $157,000 ( $155,000 in 2013, $151,000 in 2012, $147,000 in 2011) (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 entire amount owed is paid, including tax, any penalties, and interest .

  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/ or Form 2555-EZ. Income earned during the Form 1040NR period cannot not be excluded with Form 2555 or Form 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.


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