21.8.1  IMF International Adjustments

Manual Transmittal

August 30, 2013

Purpose

(1) This transmits revised IRM 21.8.1, International, IMF International Adjustments.

Material Changes

(1) This IRM was revised to reflect various editorial and grammatical changes as well as the following changes:

IRM subsection Description
IRM 21.8.1.1 Replaced reference to IRM 21.8.3 with reference to IRM 21.7.12 in paragraph 1. Clarified paragraph 4 and removed Note.
IRM 21.8.1.1.1(2) IPU 13U0577 issued 03-21-2013 Removed exception for Form 1116
IRM 21.8.1.1.1(4) IPU 13U0451 issued 03-01-2013. Added a Note and link for working cases with Taxpayer Identification Number (TIN) related problems.
IRM 21.8.1.1.4 IPU 13U0647 issued 03-29-2013. Added Paragraph 2 to include information about not transferring any call from the International number to any toll-free number. Renumbered the remaining paragraphs
IRM 21.8.1.1.4(1) Updated links and removed the link for Qualified Intermediaries.
IRM 21.8.1.1.4(2)(3) Clarified both statements.
IRM 21.8.1.1.8 Remove paragraph 4 and renumber rest of subsection.
IRM 21.8.1.1.9 Added paragraph 7
IRM 21.8.1.1.11 IPU 13U1009 issued 05-30-2013. Added reference to Internal Revenue Manual IRM 21.5.9.5.44 to statement 2
IRM 21.8.1.1.14 Added a link to IRM 21.5.5, Unpostables and deleted the rest of the section.
IRM 21.8.1.1.17 Clarified paragraphs 3 and 5.
IRM 21.8.1.1.17.1 Clarified paragraph 4(a) and Note in paragraph 4(b).
IRM 21.8.1.1.17.3(5)(d) Removed Note.
IRM 21.8.1.1.20 Added a link to Document 6209 on SERP and removed paragraph 4.
IRM 21.8.1.1.22(5) Updated irs.gov path to tax treaties.
IRM 21.8.1.2(2) IPU 13U0451 issued 03-01-2013. Added a "Reminder" for Foreign Earned Income and a link to the IRM 5.19.10.6.1.
IRM 21.8.1.2.4(2) Updated annual exclusion chart for 2013.
IRM 21.8.1.2.4.1 Revised paragraph 5 to clarify the instruction is only for tax year 2006.
IRM 21.8.1.2.6 Updated annual exclusion amounts for 2013.
IRM 21.8.1.2.10 Removed last sentence in paragraph 4.
IRM 21.8.1.2.11 Updated travel restriction chart.
IRM 21.8.1.2.12(3) Added Iraq to boycott list.
IRM 21.8.1.3 Revised paragraphs 1 and 2.
IRM 21.8.1.3.2 Removed note in paragraph 1. Modified paragraphs 2b, 3, 4, 5. Added third bullet to paragraph 6 and reminder to paragraph 7.
IRM 21.8.1.3.3 Revised paragraph 1(b) Expanded paragraph 1(c) and added paragraph 1(f).
IRM 21.8.1.3.5(3) Clarified the Note.
IRM 21.8.1.3.6 Revised paragraph 1, clarified paragraph 5 and added countries to the list in paragraph 11.
IRM 21.8.1.3.6(7) IPU 12U1928 issued 12-11-2012. Updated the "Note" to provide clarification.
IRM 21.8.1.3.6(11) IPU 13U0451 issued 03-01-2013. Added a "Caution" concerning the use of the Worksheet at the end of Pub. 514.
IRM 21.8.1.4.5(7)(8) Updated social security rates and amounts for 2013.
IRM 21.8.1.4.6 IPU 13U1009 issued 05-30-2013 Removed paragraph 5 and renumbered rest of section. Revised if/then box in paragraph 10.
IRM 21.8.1.4.6 Removed paragraphs 5 and 6, renumbered the rest of the subsection.
IRM 21.8.1.4.6(8)(9)(10) IPU 13U0451 issued 03-01-2013. Removed the chart, deleted (9) and (10), added a link to the same information in IRM 21.7.2.3.3, and renumbered the remaining paragraphs.
IRM 21.8.1.4.7 Removed Note from paragraph 5 and revised paragraph 7. Specified in 3rd bullet of paragraph 10 the amount of FTP penalty to remove based on MSRRA claim.
IRM 21.8.1.4.8(15) Clarified overpayment amount in 8th bullet and the Reminder.
IRM 21.8.1.4.8(23) IPU 13U0451 issued 03-01-2013. Updated the Integrated Data Retrieval System (IDRS) profile number.
IRM 21.8.1.4.9.2 IPU 13U1009 issued 05-30-2013. Updated mail stop for Unpostable Code 141 cases
IRM 21.8.1.5.1 Clarified statement in 7th "if " box.
IRM 21.8.1.5.2 Removed second sentence from paragraph 6. Clarified 8a and 8b.
IRM 21.8.1.5.3(6) Revised paragraph.
IRM 21.8.1.5.3.1 Updated Child Tax Credit qualifications in paragraph 4 and removed the Note. Removed paragraphs 5 and 7(c). Renumbered the rest of the subsection.
IRM 21.8.1.5.3.1(7)(g) IPU 13U0451 issued 03-01-2013. Updated the Additional Child Tax Credit (ACTC) for Non U.S. Government Employees in Puerto Rico procedures.
IRM 21.8.1.5.3.2 Removed paragraph 1 and renumbered rest of section. Updated Additional Child Tax Credit (ACTC) chart for 2013.
IRM 21.8.1.5.3.2(2) IPU 13U0451 issued 03-01-2013. Updated the Additional Child Tax Credit (ACTC) earned income amount for 2012.
IRM 21.8.1.6 Added referral to IRM 21.8.1.4.2 to paragraph 2. Expanded paragraph 4. Removed paragraph 5 and renumbered rest of section.
IRM 21.8.1.6.3(1) Removed Note.
IRM 21.8.1.7 Clarified paragraph 2.
IRM 21.8.1.7.1(1) Clarified bottom "if" box.
IRM 21.8.1.8.1 Clarified 5th "if" box.
IRM 21.8.1.9(2) Clarified paragraph.
IRM 21.8.1.9.2 Clarified paragraphs 1 and 2.
IRM 21.8.1.11.2(2) Revised exemption chart.
IRM 21.8.1.11.3(4) Clarified the Caution.
IRM 21.8.1.11.6(6) Deleted the personal exemption amount for 2012 and added the second sentence to the paragraph.
IRM 21.8.1.11.7 Removed entire subsection, renumbered rest of section.
IRM 21.8.1.11.9(1)(a)(b) IPU 13U0451 issued 03-01-2013. Updated the requirements for filing Form 2350.
IRM 21.8.1.11.10(2) Clarified 1st row of chart.
IRM 21.8.1.11.11 Clarified paragraph 2 and removed chart. Clarified exception in paragraph 6.
IRM 21.8.1.11.12(3) Clarified exception.
IPU 13U1009 issued 05-30-2013 IRM 21.8.1.11.14.1 Clarified 1042-S verification procedures.
IRM 21.8.1.11.15 Clarified note in paragraph 1. Removed Note in paragraph 2. Added link to IRM 21.8.1.11.15.1 in paragraph 3.
IRM 21.8.1.11.15.1 Relocated American Samoa exception to paragraph 2 and added a link to IRM 21.8.1.9
IRM 21.8.1.11.17 Removed entire subsection renumbered rest of section.
IRM 21.8.1.1.17.1 Clarified the Note in paragraph 4.
IRM 21.8.1.11.18 Removed entire subsection renumbered rest of section.
IRM 21.8.1.11.18(1) Clarified paragraph.
IRM 21.8.1.11.20(4) Clarified paragraph.
IRM 21.8.1.11.20.3 Added Note to paragraph 4
IRM 21.8.1.11.22(2) Added reference to IRM 21.6.3.4.2.8, Additional Child Tax Credit (ACTC)
IRM 21.8.1.11.20(4) Updated deemed sale rule reduction amount for 2013.
IRM 21.8.1.11.20.1 Updated annual net income tax liability averaged for 2013.
IRM 21.8.1.12.3 Expanded paragraph 1(c) and removed the Note.
IRM 21.8.1.19.1 Updated address in paragraph 2.
IRM 21.8.1.23.2(3) Clarified first sentence.
IRM 21.8.1.25 Modified and replaced entire subsection.
IRM 21.8.1.25.1 Modified and replaced entire subsection.
IRM Exhibit 21.8-1 Removed entire exhibit.

Effect on Other Documents

IRM 21.8.1, effective October 1, 2012, is superseded. Interim Guidance Numbers 12U1928, 13U0451, 13U0577, 13U0647, 13U1009 are incorporated into this IRM.

Audience

The primary users of this IRM are employees in Wage and Investment, Accounts Management, Taxpayer Advocate Service, and all others who perform International adjustment work.

Effective Date

(10-01-2013)

Ivy S. McChesney
Director, Accounts Management
Wage and Investment Division

21.8.1.1  (08-12-2011)
International IMF/NMF and CADE Overview

  1. This IRM provides additional adjustment procedures for International returns processed to the Individual Master File (IMF). As an additional reference, the basic IMF account resolution/adjustment procedures are found in IRM 21.5, Account Resolution and IRM 21.6, Individual Tax Returns. Non Master File (NMF) International Adjustments procedures are located in IRM 21.7.12, Business Tax Returns and Non-Master File Accounts (NMF) Adjustments.

    Note:

    Business Master File (BMF) International Adjustments procedures are located in IRM 21.8.2, BMF International Adjustments.

  2. CADE is the Customer Account Data Engine. Through a number of incremental increases, CADE will ultimately mesh with Master File and enable daily processing of eligible accounts. Taxpayer records are being moved from the current processing environment to CADE using a release-based approach starting with the simplest taxpayer accounts.

  3. General processing procedures outlined in this IRM are used in conjunction with the following IRMs:

    • IRM 13 - Taxpayer Advocate Service

    • IRM 21 - Customer Account Services

    • IRM 25.6 - Statute of Limitations

    • IRM 25.12 - Delinquent Return Refund Hold Program

    • IRM 20 - Penalty and Interest

  4. Contact representatives using this IRM must have had basic IMF Adjustments, Integrated Data Retrieval System (IDRS), Correspondence Imaging System (CIS), and AMS (Account Management Services) training to effectively use the material presented in this International IRM.

  5. Integrated Automation Technologies (IAT) are tools that assist employees with IDRS research. The screens access numerous IDRS control codes multiple times to improve quality by simplifying and standardizing research paths and consolidating IDRS Command Code responses on one screen.

  6. All references to the Internal Revenue Code or Treasury Regulations (Treas. Regs) can be researched on Westlaw or LEXIS-NEXIS.

  7. For the forms addressed in this IRM, see IRM 21.8.1.1.2.

21.8.1.1.1  (03-21-2013)
Campus Consolidation and Program Centralization

  1. As a result of the ramp-down of the Philadelphia Submission Processing Campus (PSPC), International Individual Master File (IMF) return processing moved in its entirety to the Austin Submission Processing Campus (ASPC) in June of 2007. However, the Philadelphia Accounts Management Campus (PAMC) continues to process IMF International Accounts Management work.

  2. Correspondence, amended returns, no-merge cases, and/or Form 1040X involving the following issues are considered "IMF International Issues" and are worked at PAMC.

    • Form 1040NR, Form 1040NR-EZ, Form 2555, Form 1116, Form 1040-PR, Form 1040-SS, Form 8233, Form 8833, Form 8840, Form 8689, and related notices with Document Locator Number (DLN) Filing Location Codes 98, 66, 20 or 21

    • Dual Status

    • Form 1042-S for individual taxpayers, received loose, or with taxpayer correspondence

    • Correspondence or amended returns for changes due to "tax treaties"

    • Spanish language correspondence relating to Form 1040-PR or Form 1040-SS and/or other International issues

    • Schedule H for U.S. Territories

    • Form 843 Excess Federal Insurance Contributions Act (FICA) claims for addresses in U.S. Territories

    • Form 1040X Foreign Tax Credit carryback claims

    • Form 4442 addressing International issues such as tax treaties, U.S. citizens living overseas, self-employment tax for individuals living in a territory, etc.

      Note:

      The U.S. Territories consist of the U.S. Virgin Islands, Puerto Rico, American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands. Accounts Management cases involving these territories are handled by the International function in Philadelphia.

  3. Non-Master File (NMF) account processing ceased at PSC in 2006. NMF is now centralized at the Cincinnati Submission Processing Campus (CSPC).

    Note:

    The Campus Program Locator Guide provides information on the continuing Wage and Investment (WI) and Small Business/Self-Employed (SBSE) program consolidation and centralization. The guide is on Servicewide Electronic Research Project (SERP) at: http://serp.enterprise.irs.gov/databases/who-where.dr/transshipment.dr/campus_locator_guide/01_cplg_toc.htm.

  4. Beginning January 26, 2012, Philadelphia Accounts Management started working International Identity Theft (IDT) cases with a category code of IDT1 and IDT3. All time spent working these cases is reported under Program Code 40011. See IRM 21.6.2, Adjusting TIN-Related Problems, for the procedures to resolve these cases.

    Note:

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

21.8.1.1.2  (10-01-2012)
IMF/NMF Forms

  1. IMF International Individual Income Tax Returns:

    • Form 1040 with Form 1116, Form 2555, Form 2555-EZ, Form 4563, Form 5074, Form 8689, and/or Form 8891 attached

    • Form 1040-C

    • Form 1040NR

    • Form 1040NR-EZ

    • Form 1040-PR

    • Form 1040-SS

  2. NMF International Income Tax Returns:

    • Form 1120-IC-DISC

    • Form 926

    • Form 8404

    • Form 1040NR Fiduciary

  3. Foreign Withholding Tax Returns and Associated Forms:

    • Form 8288, Form 8288-A and Form 8288-B

    • Form 8804

    • Form 8805

    • Form 8813

    • Form 1042

  4. Foreign Information Returns:

    • Form 926

    • Form 5713

    • Form 8233

    • Form 8833

    • Form 8840

    • Form 8843

    • Alien Exemption Certificate Form W-8BEN, Form W-8ECI, Form W-8EXP, Form W-8IMY, and Form W-8CE

21.8.1.1.3  (10-01-2012)
Related Publications

  1. The following publications are used for International issues. They can be used as technical reference material or provided to taxpayers when necessary. These publications are available for reference on SERP and on the internet at http://www.irs.gov.

    • Publication 3 - Armed Forces' Tax Guide

    • Publication 54 - Tax Guide for U.S. Citizens and Resident Aliens Abroad

    • Publication 514 - Foreign Tax Credit for Individuals

    • Publication 515 - Withholding of Tax on Nonresident Aliens and Foreign Entities

    • Publication 516 - U.S. Government Civilian Employees Stationed Abroad

    • Publication 519 - U.S. Tax Guide for Aliens

    • Publication 570 - Tax Guide for Individuals With Income From U.S. Possessions

    • Publication 593 - Tax Highlights for U.S. Citizens and Residents Going Abroad

    • Publication 597 - Information on the United States-Canada Income Tax Treaty

    • Publication 850 series - A series of publications that provide glossaries of words and phrases in various languages for translation of federal tax terminology

    • Publication 901 - U.S. Tax Treaties

    • Publication 970 - Tax Benefits for Education

    • Publication 972 - Child Tax Credit

    • Publication 4588 - Basic Guide for Green Card Holders: Understanding Your U.S. Tax Obligations

    • Publication 4732 - Federal Tax Information for U.S. Taxpayers Living Abroad

  2. In addition to these publications, some general information publications are also printed in Spanish for the convenience of taxpayers. The following publications are available for reference on SERP and on the internet at http://www.irs.gov.

    • Publication 1 (SP) - Your Rights as a Taxpayer (Spanish Version)

    • Publication 1544 (SP) - Reporting Cash Payments of Over $10,000 (Received in a Trade or Business) (Spanish Version)

    • Publication 4261 (SP) - Do You Have a Foreign Bank Account? (Spanish)

    • Publication 4580 (DVD/SP) - Basic Tax Responsibility (DVD) Spanish Language

    • Publication 4588 (SP) - Basic Tax Guide for Green Card Holders: Understanding Your U.S. Tax Obligations (Spanish Version)

21.8.1.1.4  (03-29-2013)
Web-sites and Telephone Numbers

  1. The following Web-sites are helpful when researching International issues:

    • Submission Processing Website at http://win.web.irs.gov/SP/index.htm

    • IRC codes listed here by section number at http://www.fourmilab.ch/ustax/ustax.html

    • Tax treaties on line at http://www.irs.gov/Businesses/International-Businesses/United-States-Income-Tax-Treaties---A-to-Z

    • various International topics at http://www.irs.gov/Businesses/International-Businesses

    • IRS Bulletins, Notices, Announcements, etc. at http://www.irs.gov/irb/

    • U.S. Citizenship and Immigration Services (USCIS) Website at http://www.uscis.gov

    • Lexis-Nexis at http://www.lexisnexis.com/clients/irshome/

    • The Social Security Administration website http://www.ssa.gov/

    • Electronic Tax Law Assistance at http://www.irs.gov/uac/Help-With-Tax-Questions---International-Taxpayers

    • United States Department of State at http///www.state.gov/

    • International dialing codes at http://www.countrycallingcodes.com/

    • IR Web research center at http://rnet.web.irs.gov/

  2. Assistors staffing the International Taxpayer Customer Service line DO NOT use the Telephone Transfer Guide (TTG) to transfer calls. International assistors must follow the Form 4442 referral process, see Paragraph (3) below. International assistors may transfer International calls to other International Applications if necessary.

  3. Assistors staffing any Toll-Free application should not transfer to the International Taxpayer Customer Service line (267-941-1000). The following helpful telephone numbers can be provided to international callers for working International issues. Ensure the callers are informed these are not toll free numbers. If the caller does not want to call back, follow the referral process. See IRM 21.3.5.4, Referral Procedures, for more information.

    Business Unit Phone Fax
    International Accounts Management 267-941-1000** 267-941-1055
    Automated Collection System (ACS) Support 267-941-1004** 267-941-1031
    Automated Underreporter (AUR) 267-941-1026 267-941-1023
    International Examination 267-941-1037** 267-941-1463
    Offer in Compromise (OIC) - General 267-941-2004** 267-941-1034
    (OIC) - Accepted Offers Only 631-447-4018  
    Taxpayer Advocate Service - English speaking 787-622-8940 787-622-8933
    Taxpayer Advocate Service - Spanish speaking only 787-622-8930  
    U.S. Certification Program 267-941-1000**  

    Caution:

    Numbers marked with (**) CANNOT be called using IRS phones on the FTS system.

  4. Current International Post contact information can be found on the Large Business and International Division (LBI) website at: http://www.lmsb.irs.gov/international/dir_treaty/eoi_overseas/posts.asp.

21.8.1.1.4.1  (08-12-2011)
Telephone Numbers for Courier Service Mailing

  1. These phone numbers are for International taxpayers that need to send packages and documentation to the different campuses. If the courier service (FED EX, UPS, etc.) requests a phone number for the destination use:

    Campus Telephone number
    Andover (978) 474-9822
    Atlanta (678) 530-6616
    Austin (512) 460-7948
    Brookhaven (631) 654-6334
    Cincinnati (859)-669-5250
    Fresno (559)-454-6168
    Kansas City (816) 325-3019
    Memphis (901) 546-3700
    Ogden (801) 620-3738
    Philadelphia (267) 941-1832

    Caution:

    The telephone numbers listed above are for use on express mail air bills only. These numbers are not to be used for technical issues.

21.8.1.1.5  (04-10-2009)
Translation Services

  1. The Office of the Deputy Commissioner, International, Large Business and International Division (LBI), will translate documents written in French, German, Italian, Portuguese, and Spanish into English for any IRS office.

  2. To have a document translated, download a Translation Request Sheet at http://www.lmsb.irs.goc/international/dir_treaty/treaty/translate.asp. If you mail or fax your document, send two copies of each item to be translated. Hard copies of translations will be kept on file for six months, and electronic copies will be kept for one year.

    Note:

    If the document is more than 10 pages, submit requests in 10 page increments.

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

21.8.1.1.6  (08-12-2011)
Taxpayer Advocate Service (TAS)

  1. Refer taxpayers to the Taxpayer Advocate Service (TAS) (see IRM Part 13, Taxpayer Advocate Service) when the contact meets TAS criteria (see IRM 13.1.7, TAS Case Criteria) and you can't resolve the taxpayer's issue the same day. The definition of "same day" is within 24 hours. "Same day" cases include cases you can completely resolve in 24 hours, as well as cases in which you have taken steps within 24 hours to begin resolving the taxpayer's issue. Do not refer these cases to TAS, unless they meet TAS criteria and the taxpayer asks to be transferred to TAS. Refer to IRM 13.1.7.4, Same-Day Resolution by Operations. When referring cases to TAS, use Form 911, Request for Taxpayer Advocate Service Assistance (And Application for Taxpayer Assistance Order) , and forward to TAS in accordance with your local procedures. Preparation instructions for the Form 911 are available on the form and in IRM 21.1.3.18,Taxpayer Advocate Service (TAS) Guidelines.

  2. The National Taxpayer Advocate has reached agreements with the Commissioners of the Wage and Investment (WI) Division, Small Business and Self-Employed Division (SB/SE), Tax Exempt and Government Entities (TEGE) Division, Criminal Investigation (CI), Appeals, and Large Business and International (LBI) Division, that outline procedures and responsibilities for the processing of TAS casework when either the statutory or delegated authority to complete case transactions rests outside of TAS. These agreements are known as Service Level Agreements (SLA's). The SLA's are located on the Intranet at http://tas.web.irs.gov.

  3. When referring cases to TAS, keep in mind that TAS employees do not have the delegated authority to make International adjustments. TAS employees, can, however, assist taxpayers with certain International issues. For more information about TAS's delegated authorities, see IRM 13.1.4, Taxpayer Advocate Case Procedures - TAS Authorities.

  4. For taxpayers who prefer to contact TAS directly, provide the toll-free number 1-877-777-4778. International callers who cannot dial toll-free may call 787-622-8940 (English assistance) and 787-622-8930 (Spanish assistance). Publication 1456, Taxpayer Advocate Service - Your Voice at the IRS, contains addresses and phone contact information for each Taxpayer Advocate office.

21.8.1.1.7  (10-01-2008)
General Disclosure Guidelines

  1. IRC § 6103 establishes the taxpayer's (T/P's) right to confidentiality of returns and return information. You must be sure that you provide correct information to the correct T/P or authorized representative. Check the Integrated Data Retrieval System (IDRS) Command Code (CC) CFINK for the Power of Attorney (POA).

  2. IRC § 7213, IRC § 7213A , and IRC § 7431 provide criminal penalties and civil remedies to ensure that T/Ps' returns and return information remain confidential.

  3. For more information on General Disclosure Guidelines, refer to IRM 21.1.3.2. For a full discussion on disclosure, refer to IRM 11.3.1 through IRM 11.3.40.

  4. For information on the use of FAX and Signature Stamps, refer to IRM 21.3.4.14.5, Use of FAX for Taxpayer Submissions.

21.8.1.1.8  (10-01-2013)
Technical Issues

  1. Refer all technical issues that cannot be resolved using an IRM or publication to campus management. If management is unable to make a determination, follow local assistance procedures that involve coordinating resolution through the Planning and Analysis Section.

  2. When necessary, the analyst from the Planning and Analysis Section will review and forward any International problems requiring the attention of the Headquarters International Analyst.

  3. IRM 21.1.2.2.2, IRM 21 - Change Requests, lists the various forms used to request changes or submit comments and/or suggestions.

  4. When an issue is questionable, but does not meet CAT-A criteria, and assistance is needed from Examination, follow procedures in IRM 21.5.3.4.7.2.1, Examination Technical Assistance Request.

21.8.1.1.9  (10-01-2013)
Competent Authority Claims

  1. Rev. Proc. 2006-54 updated and revised the procedures to allow a U.S. citizen or resident to request a determination by the U.S. Competent Authority on issues arising under a tax treaty between the U.S. and a foreign country.

  2. Usually, an adjustment to tax is requested when the foreign tax administration creates a double taxation issue by making an income adjustment in the foreign jurisdiction.

  3. The IRS Deputy Commissioner, (LB and I) International, acts as the U.S. competent authority, charged in administering the provisions of tax treaties, interpreting and applying the treaties, and reaching mutual agreement in specific cases.

  4. Send written requests for, or any inquiries regarding competent authority assistance to:

    Internal Revenue Service
    Deputy Director, International Large Business and International Division
    Internal Revenue Service
    1111 Constitution Ave. N. W.
    Routing: MA3-2-209
    Washington, D.C. 20224

  5. Direct any questions regarding Competent Authority Claims to the Office of Tax Treaty at the above address.

  6. Nonresident Aliens generally must contact the Competent Authority in their foreign government with their inquiries.

  7. For more information, see Tax Treaties on IRS.gov at http://www.irs.gov/Individuals/International-Taxpayers/Tax-Treaties.

21.8.1.1.10  (10-01-2007)
Use of Fax and Signature Stamps for Taxpayer Submissions

  1. The IRS is involved in a significant number of taxpayer contacts to perfect returns during the filing process, to resolve issues identified in post-filing, and to secure delinquent returns.

    Note:

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

  2. Based on requests from practitioners and other stakeholders, the Service developed guidance on the acceptance of faxes and signature stamps that has been approved for Servicewide adoption.

  3. Refer to IRM 21.3.4.14.5, Use of FAX for Taxpayer Submissions, for current procedures for the acceptance of FAX and signature stamps.

21.8.1.1.11  (05-30-2013)
Examination Criteria

  1. For domestic issues, refer to information contained in Exhibit 21.5.3-2, Examination Criteria (CAT-A), and Exhibit 3.11.6-3, Form 1040X Reference Guide, for applicable Examination criteria.

  2. Forward the following types of International claims and issues to Examination for classification:

    • IMF Dual Status Claims (Form 1040NR converted to Form 1040, Form 1040 converted to Form 1040NR, etc.) for any amount

    • Nonresident alien claiming non-taxable income due to receiving pension from a U.S. based company for any amount

    • Foreign Tax Credit Carryback in excess of ≡ ≡ ≡ ≡ ≡ ≡ ≡ . For additional information see IRM 21.5.9.5.44 , Carryback of Foreign Tax Credit (FTC).

    • Adjustments to Foreign Tax Credit in excess of ≡ ≡ ≡ ≡ ≡

    • Decreases on Form 1040NR Fiduciaries in excess of ≡ ≡ ≡ ≡ ≡ ≡

    • Form 1040NR claiming temporary living or business expenses in excess of ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • Revocation of IRC § 6013 (g) - joint return with a nonresident alien spouse

    • Form 926, per IRM 4.19.11.1.19, Form 926, Return by a U.S. Transferrer of Property to a Foreign Corporation

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  3. If the taxpayer cites an IRC, Regulation, Tax Treaty, etc., research the reference and attempt to secure an explanation unless the claim meets other Examination Criteria. This information may be available on-line through Lexis-Nexis at http://www.lexisnexis.com/clients/irshome/ or on Westlaw at https://web2.westlaw.com/signon/default.wl?bhcp=1.

21.8.1.1.12  (08-12-2011)
Referrals to Examination

  1. The following instructions refer to paper cases not on the Correspondence Imaging System (CIS). For CIS cases refer to IRM 21.5.1.5, Correspondence Imaging System (CIS) Procedures.

  2. Every International case sent to Exam Classification MUST include:

    • A current transcript (TXMOD, MFTRA or IMFOLT)

    • A print of RTVUE for the Taxpayer Identification Number (TIN) and year on the claim, plus any other year(s) referenced

      Reminder:

      The original return does not need to be provided as long as a copy of all appropriate schedules are being included.

    • A print of the entity module (ENMOD or INOLE) of the individual involved or referenced

  3. When the claim year or related return modules show an "-L" freeze (generated by TC 420 input), the case MUST have an AMDISA print (do not request the original return). Every "-L" freeze has an AIMS record. The last 2 digits of the AIMS control number indicate which area office has control of the AIMS data base.

  4. When an amended return claim is being referred to Examination Classification, ensure that pages 1 and 2 of Form 1040X are complete, including verification of all needed schedules and forms required for making an issue determination. Form 1116 is required to verify a Foreign Tax Credit. IRM 21.5.3.4.7.2, Examination"Disallows," "Accepts," or "Selects" the Claim, lists the requirements for Examination area claim referrals.

    Note:

    An IDRS control must remain on the account under the employee's profile number or a unique control number designated by local management (ex. 05XXX33333). IRM 21.5.3.4.7,Processing Claims and Amended Returns With Examination Involvement, lists the control follow-up time frames.

  5. When the case is returned from Examination, follow the steps in the table below.

    TO PROCESS THE CLAIM
    If Examination Classifier: CSR Should:
    Rejects the claim
    • Resolve the reason for the rejection, e.g., additional documentation or IDRS research.

    • Initiate telephone call to taxpayer, or

    • Correspond with taxpayer using Letter 916C, input TC 290.00 Blocking Series 18 or 00 if the original return is in hand.

    Accepts the claim Input necessary Transaction Codes, Reference numbers, TC 29x, Blocking Series 15 or 00, and reverse the TC 470.
    Disallows the claim in part
    • Input necessary transactions, TC 29x, Blocking Series 18, or 00 if the original return is attached

    • Send Letter 106C - include the complete and exact disallowance explanation provided by the classifier. Use an open paragraph, if necessary, and include the taxpayer's appeal rights.

    Disallows the claim in full
    • Input necessary transactions, TC 290 .00, Blocking Series 98, or 99 if the original return is attached

    • Send Letter 105C - include the complete and exact disallowance explanation provided by the classifier. Use an open paragraph if necessary and include the taxpayer's appeal rights, even for statutory disallowances.

    Selects the claim
    • Send Letter 86C explaining that the claim has been selected for further review by the Examination Department and that they will be contacted by their office once a determination has been made.

    • If there is no TC 976 present on the account, input TC 971, Action Code 013, using the received date of the claim.

  6. If a copy of the disallowance letter is returned for association, attach the copy with the original return.

    Note:

    Copies of disallowance letters forwarded to the Centralized Print Site will not be returned for association. These letters will be available on CTRL-D if they are needed at a future date. See IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures.

21.8.1.1.13  (10-01-2007)
Protective Claims

  1. Protective Claims are formal claims or amended returns for credit or refund normally based on expected changes in a:

    • Current IRC section

    • Current Regulation

    • Pending legislation, or

    • Current litigation

  2. These claims are filed to protect the claimant's right to recover an Internal Revenue Tax before the expiration of the statue of limitations. For this reason, they are all considered to meet CAT "A" criteria. See IRM 21.5.3.4.7.3, Protective Claims, for additional information.

  3. All Protective Claims must be sent to Examination Classification. All processable Protective Claims must be selected by Examination Classification.

  4. Protective Claims must be processable before sending to Examination Classification. Screen all protective claims for:

    • Statute timeliness

    • Completeness, and

    • Signature(s)

  5. If the claim is not processable, call or correspond with taxpayer for missing information. If no reply is received, follow normal adjustment procedures for rejecting the claim.

    Note:

    See IRM 21.3.3.5.1.1, Suspense Timeframes for more information on suspending case for taxpayer reply.

21.8.1.1.14  (10-01-2013)
Unpostables

  1. Unpostables are transactions which cannot post to the Master File. A transaction that fails to post to an account is returned to the originating campus for corrective action. See IRM 21.5.5, Unpostables for complete information.

21.8.1.1.15  (10-01-2012)
International Forms Processing

  1. Due to the ramp-down of the Philadelphia Submission Processing Campus (PSPC), International tax returns are no longer processed at PSPC. IMF International return processing began to phase out of Philadelphia in 2006 and moved entirely to the Austin Submission Processing Campus (AUSPC) in June of 2007. Beginning in 2007, all BMF International returns are processed at the Ogden Submission Processing Campus (OSPC). International returns are assigned unique File Location Codes (FLC).

    FLC Chart
    Philadelphia 66 and 98
    Austin 21 and 20
    Ogden 78 and 60

    • File Location Codes 66, 21 and 78 contain all returns with a U.S. territory address (with a 5 digit zip code), Form 1040-PR and, Form 1040-SS.

    • File Location Codes 98, 20 and 60 contain all returns with an address from a foreign country and/or Form 2555/ Form 2555-EZ Foreign Earned Income Exclusion attached, Form 1040NR, and Form 1040NR-EZ.

  2. International returns include:

    • Form 1040NR

    • Form 1040NR-EZ

    • Form 1040-PR

    • Form 1040-SS

      Note:

      Send Form 1040-GUAM to Guam.

  3. International processes any Form 1040/A/EZ with the following attachments:

    • Form 2555/Form 2555-EZ - Foreign Earned Income Exclusion

    • Form 4563 - Exclusion of Income for Bona Fide Residents of American Samoa

    • Form 5074 - Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands

    • Form 8288-A - Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests

    • Form 8689 - Allocation of Individual Income Tax to the U.S. Virgin Islands

    • Form 8805 - Foreign Partner's Information Statement of Section 1446 Withholding Tax

    • Form 8833 - Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)

    • Form 8840 - Closer Connection Exception Statement for Aliens

    • Form 8843 - Statement for Exempt Individuals and Individuals With a Medical Condition

    • Form 8891 - U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans

  4. An International return is also any Form 1040/A/EZ with the following indications:

    1. Any address outside the 50 United States or the District of Columbia

    2. Taxpayer claiming Dual Status (Form 1040 and Form 1040NR filed together as taxpayer claims part year residence and part year nonresidence)

    3. Primary or both taxpayers are nonresident aliens Non Resident Aliens (NRA)

    4. Tax Treaty benefit or exemption is claimed

    5. IRC § 911, 931, or 933 is indicated

    6. Taxpayer is a treaty trader or Fulbright grantee

    Note:

    Returns on which taxpayers convert income paid in foreign currency to U.S. currency are not considered International (e.g., Canadian dollars converted to U.S. dollars).

21.8.1.1.16  (10-01-2009)
General Adjustment Procedures for International Accounts

  1. When adjusting IMF International accounts using CC REQ54, or transferring credits using CC ADD/ADC24, ADD/ADC34 or ADD/ADC48, input a Filing Location Code (FLC) 66 or 98 according to the primary location code shown on TXMOD or ENMOD. Input FLC 66 for primary location code 21 and FLC 98 for primary location code 20.

    Exception:

    Input FLC 21 on adjustments to U.S. Virgin Islands cover over accounts input at the Austin Accounts Management Campus.

  2. Input FLC 66 or 98 when adjusting accounts incorporating forms NOT filed during original processing that are listed in International Forms Processing (IRM 21.8.1.1.15 (2) and (3)) or with International return indicators (IRM 21.8.1.1.15 (4)). See IRM 21.8.1.1.15 (2)

21.8.1.1.17  (11-20-2009)
Timeliness Determinations

  1. Based on Rev. Rul. 2002-23, a document mailed from a foreign country with a timely official postmark of the foreign country is treated as being timely filed.

  2. This rule applies to all documents required or permitted to be filed with the Service, including returns, claims, requests for an extension to file, and payments made with returns.

  3. If the last day for filing falls on a Saturday, Sunday or a legal holiday, then a document with a foreign country official postmark date on or before the next succeeding day that is not a Saturday, Sunday, or legal holiday is treated as timely filed under IRC § 7503 and Rev. Rul. 2002-23. The term legal holiday is defined under Rev. Rul. 2002-23 and IRC § 7503 as a legal holiday in the District of Columbia, in the United States, or a statewide legal holiday in the state where the federal tax return, claim for refund or other document is required to be filed or sent. The term does not include legal holidays in foreign countries, unless such holidays are also legal holidays in the District of Columbia or applicable state, as described above. See Rev. Rul. 2002-23 for additional requirements when foreign mail is received later than such mail is ordinarily received.

  4. The postmark determination for documents sent from a foreign country also applies to designated international private delivery services. The list of designated delivery services (both international and domestic) are only updated if new delivery services are added in lieu of designated Private Delivery Services (PDSs).

  5. The current types of delivery services through designated PDS's, per Notice 2004-83 are:

    • DHL Express (DHL): DHL Same Day Service ;DHL Next Day 10:30am; DHL Next Day 12:00pm; DHL Next Day 3:00pm; and DHL 2nd Day Service

    • Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2 Day, FedEx International Priority, and FedEx International First; and

    • United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

  6. Currently, only FedEx International Priority, FedEx International First, UPS Worldwide Express Plus, and UPS Worldwide Express are authorized as designated PDS's, for documents sent from a foreign country.

21.8.1.1.17.1  (10-01-2013)
Calculation of Failure to File (FTF) and Failure to Pay Penalties (FTP) on Taxpayers Abroad

  1. Under Reg. § 1.6081-5, certain U.S. taxpayers abroad may qualify for an automatic two-month extension to file an income tax return and to pay any tax shown on the return.

  2. For U.S. taxpayers who are overseas and file on a calendar year basis, the Service uses 6/15 as the due date from which to calculate both the failure to pay and failure to file penalties ( IRC § 6651(a)(1) and IRC 6651(a)(2)), for taxpayers who qualify for an automatic two-month extension under Treasury Reg. § 1.6081-5, but file and/or pay late.

  3. Failure to File

    1. If a return from a taxpayer abroad is not filed timely by the extended due date, a penalty of 5% per month, or fraction of a month, (not to exceed 25%) is calculated on the amount of tax not paid timely without regard to the extension. When FTF penalty under IRC § 6651 (a)(1) and the penalty for failure to pay tax on the return under IRC §6651 (a)(2) both apply for the same months, the 5% FTF penalty is reduced by the amount of the FTP penalty for that month. The reduction does not apply if the minimum penalty applies. See IRM 20.1.2.2.7.4, Minimum Penalty.

    2. For U.S. citizens or residents whose tax homes and abodes, in a real and substantial sense, are located outside the U.S. and Puerto Rico, and for U.S. citizens and residents in military or naval service, on duty outside the U.S. and Puerto Rico, their extended due date for a calendar year income tax return is June 15.

    3. If the taxpayer meets the two month extension requirements, a statement to this effect must be attached to the return. If the statement was not provided and a penalty notice was issued, consider the information the taxpayer provides with the notice dispute before abating.

    4. If the return is not filed by the extended due date, the penalty calculation starts the following day. For calendar year taxpayers, the penalty starts on June 16th.

    5. If a taxpayer needs additional time to file, they must file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, by checking box #8 for an additional four months (the extended due date of the return becomes 10/15 for a calendar-year filer). This additional time does not extend the time for payment of the tax due on the return.

    6. Taxpayers who are outside the country can request an additional 2 month discretionary extension (beyond the 6 months provided by Form 4868) by sending a letter to the Austin Campus explaining the reason(s) they need an additional 2 months to file.

    7. Taxpayers who are out of the country may request an even longer extension by filing Form 2350 if they expect to meet certain tests later than 30 days before the latest extended due date otherwise available.

      Note:

      The 2 month discretionary extension is not available to taxpayers who have an approved Form 2350.

  4. Failure to Pay

    1. If the tax from a taxpayer's return is not paid on or before the date prescribed for payment (determined with regard to extensions for payment), a penalty is assessed on the unpaid tax each month it remains unpaid. The penalty is generally 1/2% of the unpaid amount. However, it increases to 1% on any amount not paid within 10 days following notice of intent to levy, or following demand for immediate payment. If the return was filed on time, the penalty rate is reduced to 1/4% for any month during which the taxpayer has an approved installment agreement for payment of that tax. The aggregate penalty cannot exceed 25%.

    2. The extension of time for payment of income tax under IRC §6161(a) can be for a reasonable period of time, not to exceed six months.

      Note:

      Undue hardship must be demonstrated. Also, extension under IRC §6161(a) can be for longer than 6 months in the case of a taxpayer who is abroad see IRC §6161(a)(1).

    3. For U.S. citizens and residents overseas, Treasury Reg. § 1.6081-5 (a) (5) and (6) provide an automatic 2 month extension of time for payment of the tax on their return.

    4. If the taxpayer meets the two-month extension requirements, a statement to this effect must be attached to the return. If the statement was not provided and a penalty notice was issued, the information the taxpayer provides with the notice dispute must be considered before abating.

    5. The failure to pay penalty is only applicable if payment is made after the extended due date.

      Example:

      For a calendar year return with a two month automatic extension, the failure to pay penalty applies if payment is made after June 15.

  5. See IRM 21.8.1.11.7, IRM 21.8.1.11.8, IRM 21.8.1.11.9, for more specific details, i.e., filing deadline exceptions.

21.8.1.1.17.2  (10-01-2007)
Period of Limitation

  1. A period of limitation is a time period established by law to review, analyze and resolve taxpayer and/or IRS related issues.

  2. The Internal Revenue Code (IRC) states that the Internal Revenue Service (IRS) will assess, refund credit, and collect taxes within specific time limits. These limits are known as the Periods of Limitations. When they expire, we cannot assess additional tax, allow a claim for refund by the taxpayer, nor take collection action. The determination of Statute expiration differs for Assessment, Refund, and Collection.

  3. The Statute function reviews amended returns which reflect an increase in tax and documents that unpost or are rejected for statute imminent or expired periods.

  4. Statute imminent cases are those cases requiring either an original assessment or a subsequent assessment and the Assessment Statute Expiration Date (ASED) is within 90 days, or expired.

  5. The following are categories that meet the criteria for possible statute imminent cases:

    • Statute period original returns for input through processing

    • Additional assessments on cases that have an ASED within 90 days

    • Additional assessments on cases with an expired ASED

    • Statute period returns to be re-input with a received date more than 2 1/2 years old

21.8.1.1.17.3  (10-01-2013)
Statute Year Claims

  1. Once it is determined that an assessment of tax is necessary, take the following action when a claim is filed indicating a tax increase and the statute for assessment expires within 90 days:

    1. Prepare Form 10959, Statute Control Transmittal, and hand carry case with current research (IMFOL print) attached to the Statute Coordinator on a Form 3210, Document Transmittal.

    2. When routing these cases to the statute function, leave the control base open to the originator and update the activity to "statute" .

    3. The control base can be closed only after receiving notification from the statute function that they will keep the case.

    4. When the case is returned stamped "CLEARED BY STATUTES" , it can be input or adjusted following normal adjustment procedures.

  2. Once it is determined that a timely claim to decrease tax has been filed (check the postmark date), take the following action:

    1. Cases indicating a decrease in tax are resolved by Accounts Management, even if the statute is imminent or expired.

    2. Follow normal adjustment procedures.

  3. If a claim for tax decrease is incomplete and the return is received within the refund statute expiration date (RSED), refer to IRM 25.6.1.10.2.5, Claims for Credit or Refund - Processing Directions.

  4. If a claim was received before the RSED, additional information was requested to process the claim, and the taxpayer submits the information after the RSED but within 45 days (no more than 60 days) of the IRS request, then allow the claim.

  5. If a claim for tax decrease is not timely, deny the claim sending a formal disallowance Letter 105C stating that the statute for refund has expired. Input TC 290 .00 with Blocking Series 98 (complete claim disallowance without original return) or 99 (complete claim disallowance with original return). Include appeal rights paragraphs in the 105C letter.

    1. Do not use expired credits to offset liabilities for other tax periods.

    2. In general, amounts are refundable if they were paid within three years plus the period of any extension of time to file the tax return, or the filing of the refund claim.

      Note:

      This means all prepaid credits expire for refund 3 years after the return due date or extended due date, whichever is later.

    3. Alternatively, payments received after the return filing date are refundable for 2 years from the payment received date.

    4. Credits transferred to a balance due module are refundable for 2 years from the corresponding date of the cycle in which the transfer occurred. Refer to IRM 25.6.1.10.2.5, Claims for Credit or Refund - Processing Directions , for additional information.

21.8.1.1.18  (10-01-2007)
Math Error Codes / Taxpayer Notice Codes (TPNC)

  1. When an error is made on an International return, a specific range of notice code numbers are assigned. They are listed in research material according to the type of return filed, and do not follow strict numerical sequence. Often scrolling must be done to locate specific notice numbers.

  2. Reference sources that provide literal definitions for these codes, which are also referred to as Input Codes and Notice Codes, can be found in Chapter 9 of Document 6209.

21.8.1.1.19  (08-12-2011)
IDRS Command Codes

  1. Account research is performed through the Integrated Data Retrieval System (IDRS). Command Codes are used to access different types of taxpayer information. See the Command Codes Job Aid on SERP under the "IRM Supplements" tab.

  2. The most common command codes and their purposes are:

    • ADJ54 - Used to adjust taxpayer's account.

    • ENMOD - Used to request the entity module for a specific TIN

    • IMFOL - Displays entity and tax information that is posted for on-line query. It accesses the IMF and allows several screen displays based on the definer codes used.

    • INOLE - Used to access the most current entity data from the National Account Profile, (NAP) files.

    • IRPTR - Accesses the Information Returns Masterfile (IRMF), which contains income and withholding data reported to the IRS from payers/employers, i.e., W-2, 1099, 1098 and Form 1040-S.

    • NAMEB - Name and address data is entered to research a missing EIN

    • NAMEE - Name and address data is entered to research a missing EIN

    • NAMEI - Name and address data is entered to research a missing SSN

    • NAMES - Name and address data is entered to research a missing SSN

    • REQ54 - Overlays TXMOD on the TXMOD screen to request ADJ54 screen

    • RTVUE - Contains line by line original tax return information that is posted to the Master File. Math error corrections are also shown. It accesses the Return Transaction File (RTF) and contains all edited, transcribed and corrected data from the return. This command code requires a definer to access a particular index type screen. For further explanation of the displays and definer codes, refer to the Command Code Job Aid on SERP. This command code can be used as an alternative to command code ESTAB requests.

    • TPIIP - Research a taxpayer using only the last 4 digits of SSN and last name

    • TRDBV - used by IDRS users to gain detailed read-only access to the tax return data base

    • TXMOD - Used to research a specific tax period. It is only available for active modules and shows pending information. Command code IMFOL may be used if TXMOD is not available.

21.8.1.1.20  (10-01-2009)
Unallowable Codes

  1. During return processing, a two digit unallowable code identifies item(s) that have been disallowed. These can include a taxpayer's deduction, exemption, item exceeding statutory limitations, items of a questionable nature, or items not supported by the proper information or schedule.

  2. These codes and their explanations are listed in Chapter 3 of Document 6209. This information can also be found on SERP at http://serp.enterprise.irs.gov/databases/irm.dr/current/6209.dr/6209minitoc.htm.

  3. These codes appear on TXMOD and a sample can be found on Servicewide Electronic Research Program (SERP) in the Command Code Job Aid.

21.8.1.1.21  (01-20-2012)
ITIN

  1. The IRS Individual Taxpayer Identification Number (ITIN) is a nine digit number issued by the Internal Revenue Service (IRS) to individuals who are required, for U.S. tax purposes, to have a U.S. taxpayer identification number, but who do not have, and are not eligible to obtain, a social security number (SSN) issued by the Social Security Administration (SSA).

  2. The ITIN is for federal tax purposes only. It does not entitle the holder to social security benefits and does not change their immigration status or their right to work in the United States.

  3. An ITIN is formatted like an SSN. The ITIN begins with a "9" and has a uniquely identifying 4th and 5th digit range of "70-88" , "90-92" and "94-99" inclusive.

    Note:

    "89" and "93" are NOT used as fourth and fifth numbers for ITINs but are reserved for other programs.

  4. Income earned in the United States is taxable regardless of the individual's immigration status. Those individuals earning income in the United States who have not been granted work authorization by the United Status Citizenship and Immigration Services (USCIS) must meet their tax filing obligations.

  5. To obtain an ITIN, an individual must complete, Form W-7, Application for IRS Individual Taxpayer Identification Number, or the Spanish version, Form W-7SP, and submit the required supporting identification documentation along with their valid U.S. Federal income tax return or exception documentation, as required.

  6. ITIN applicants must show that they need an ITIN for a Federal income tax purpose.

    • A U.S. Federal income tax return must be attached to the ITIN application unless the applicant meets one of the five exceptions discussed in Publication 1915, Understanding Your IRS Individual Taxpayer Identification Number (ITIN).

  7. All ITIN applicants must submit supporting identification documentation

    • The 13 acceptable identification documents are listed in the instructions for Form W-7 and W-7SP , Publication 1915, Understanding Your IRS Individual Taxpayer Identification Number (ITIN), and in IRM 3.21.263, IRS Individual Taxpayer Identification Number (ITIN) Real Time System (RTS).

    • ITINs are issued on security paper and no longer on a card to avoid the similarities to a social security number card.

21.8.1.1.21.1  (10-01-2007)
ITIN Restrictions

  1. Although an ITIN is required for certain individuals to file a valid Federal U.S. return, it has limited use on the tax return.

  2. An ITIN does NOT allow a filer to claim the earned income tax credit for dependent children, but allows a parent to claim a child care tax credit and child tax credits.

  3. A filer can claim most tax deductions and credits available but NOT the earned income tax credit. A valid SSN, not an ITIN, is required if Earned Income Tax Credit is claimed.

21.8.1.1.22  (10-01-2013)
Tax Treaties - General

  1. The United States has income tax treaties (conventions) with a number of foreign countries. Under these treaties, residents of foreign countries are taxed at a reduced rate, or are exempt from U.S. income tax on certain types of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and with specific items of income.

    Reminder:

    U.S. citizens or residents can also receive benefits from tax treaties. Refer to Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

  2. In some cases tax Treaties permit foreign individuals who are residents of the treaty country to visit the United States, practice their profession, and earn income (sometimes in limited amounts) for a limited period of time without having to pay U.S. income tax with respect to such income.

  3. Treaty provisions relating to such income can be found in Publication 901, U.S. Tax Treaties.

  4. Taxpayers and contact representatives can access the individual country treaties through the internet. Access http://www.irs.gov and search for Tax Treaties.

  5. Intranet access can be made through the IRS Web:

    1. Click on irs.gov on the IRS Intranet home page.

    2. Click on the Help and Resources tab.

    3. Click on Tax Treaties link.

    4. Select the treaty link for required country.

  6. The U.S.S.R. income tax treaty remains in effect for the following members of the Commonwealth of Independent States: Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan. In 2001, Ukraine entered into a separate agreement, and in 2003, Kazakhstan also entered into a separate agreement.

  7. The United States Senate consented to the ratification of the United States - Bangladesh income tax treaty on March 31, 2006. The treaty generally is effective for taxable periods beginning on or after January 1, 2007.

  8. The United States and Bulgaria signed an income tax treaty on February 23, 2007. This treaty is the first of its kind between the two countries.

21.8.1.2  (03-01-2013)
Foreign Earned Income

  1. Foreign Earned Income is income received for services performed in a foreign country or countries while satisfying either the bona fide residence test or the physical presence test.

  2. All U.S. citizens and resident aliens residing and working in a foreign country are subject to the same U.S. income tax laws as persons in the United States. However, they may qualify for the election to exclude some, or all, of their foreign earned income. When qualified, they may also separately claim exclusion or deduction from gross income for their housing expenses.

    Reminder:

    Civilians working in a combat zone are subject to the same rules and must complete Form 2555, Foreign Earned Income Exclusion, if they try to exclude some, or all, of their foreign earned income. See IRM 5.19.10.6.1(7), Combat Zone Exclusion of Income.

  3. This exclusion of income is provided under IRC § 911. Taxpayers claiming the § 911 foreign earned income exclusion must file a Form 2555 or Form 2555-EZ, Foreign Earned Income, with Form 1040.

    Note:

    A nonresident alien taxpayer who has a U.S. citizen or resident alien spouse and elects to be taxed as a resident alien could qualify under the physical presence test if the time requirement is met.

21.8.1.2.1  (10-01-2007)
Income Classifications

  1. The following paragraphs classify many types of income into three categories.

  2. Earned income is compensation for personal services performed. The source of earned income is the place where the services are performed. The following types of income have been classified as earned income:

    • Salaries

    • Wages

    • Commissions

    • Bonuses

    • Professional fees

    • Tips

  3. The following types of income have been classified as unearned income:

    • Dividends

    • Interest

    • Capital gains

    • Gambling winnings

    • Alimony

    • Social Security benefits

    • Pension and annuities

  4. Some types of income are considered variable, they may fall into the category of earned, unearned or partly both. They are:

    • Business Profits

    • Royalties

    • Rents

  5. For additional information on the various types or classifications of income, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

21.8.1.2.2  (10-01-2010)
Qualifying for the Income Exclusion

  1. The following tests are used to determine if a taxpayer qualifies for the foreign earned income exclusion:

    • Tax Home Test

    • Bona Fide Residence Test

    • Physical Presence Test

  2. Qualified individuals may elect to exclude their foreign earned income from their gross income. To qualify, the taxpayer must:

    1. Have a tax home in a foreign country, and

    2. Be a U.S. citizen or resident alien who is a national of a country with which the United States has an income tax treaty with a nondiscrimination clause, and

    3. Be a bona fide resident of a foreign country or countries for a full taxable year, or

    4. Be a U.S. citizen or U.S. resident alien and be physically present in a foreign country or countries for 330 days.

  3. An individual who resides or is present in a U.S. territory does not qualify for the foreign earned income exclusion.

    1. Some taxpayers may qualify for the territory exclusion. See IRM 21.8.1.9.2, § 931 Territory Exclusion (Form 4563).

    2. Disallow claims for the foreign earned income exclusion and inform the taxpayer about the territory exclusion, if he or she appears to qualify.

    Caution:

    Johnston Islands are not specified territories nor a foreign country. DO NOT allow claims for a Territory Exclusion or Foreign Earned Income Exclusion. Use Letter 105C to deny the claim. Ross Island is considered part of the Antarctic region and claims must also be disallowed.

  4. For purposes of the foreign earned income exclusion, foreign earned income does not include any amount paid by the United States or any of its agencies to its employees, whether from appropriated or non-appropriated funds. Payments to employees of non-appropriated fund activities include the following:

    • Armed forces post exchanges

    • Officers and enlisted personnel clubs

    • Post and station theaters

    • Embassy commissaries

    Note:

    Amounts paid by the United States or its agencies to persons who are not their employees may qualify for exclusion or deduction.

  5. If a U.S. Government employee is paid by a U.S. agency that assigned that person to a foreign government to perform specific services for which the agency is reimbursed by the foreign government, the compensation is from the U.S. Government. It does not qualify for the exclusion or deduction as long as the individual continues to be an employee of the U.S. Government.

  6. Consider the following factors when determining the taxpayer's tax home:

    Tax Home
    The tax home is located in the general area of the taxpayer's main place of business, employment or post of duty, regardless of where the taxpayer maintains his or her family home.
    The tax home is the place where the taxpayer is permanently or indefinitely engaged in work as an employee or as a self-employed individual.
    The tax home, for taxpayers who do not have a regular or main place of business because of the nature of their work, is considered to be where they regularly live.

    Example:

    Taxpayers employed on offshore oil rigs in territorial waters of a foreign country that work a 28 day on 28 day off schedule, and return to their family residents in the United States during their 28 days off, have their tax home in the United States where they regularly live.

    The tax home for taxpayers who do not have a regular or main place of business, nor a regular place to live, is considered to be where they work.
    The location of a taxpayer's abode depends on where their economic, family, and personal ties are. "Abode" does not have the same meaning as tax home.
  7. Consider the following factors when determining if a taxpayer qualifies for the foreign earned income exclusion as a bona fide resident (IRC § 911(d)) of a foreign country.

    Bona Fide Residence Factors
    The taxpayer must be a U.S. citizen or resident alien who is a citizen or national of a country with which the U.S. has an income tax treaty with an applicable nondiscrimination clause in effect and who is a bona fide resident of a foreign country or countries, for an uninterrupted period that includes an entire tax year.

    Note:

    See Publication 901, U.S. Tax Treaties, for a list of these countries.

    The taxpayer must have earned their income for personal services rendered in a foreign country.

    Exception:

    Income earned from personal services rendered in a foreign country as an employee of the U.S. Government or one of its agencies or instrumentalities

    The taxpayer must have established residency in a foreign country, or countries, for an uninterrupted period. This must include an entire tax year. (For example, January 1 - December 31 for calendar year filers.)
    The taxpayer must have earned income attributable to the uninterrupted period of bona fide residence. The income must be received no later than the year after the services were performed.
    The taxpayer must establish that he or she has set up permanent living quarters for himself or herself.
    The taxpayer must establish that his or her work in the foreign country is indefinite or for an extended period of time.
    The taxpayer must NOT have submitted a statement to the authorities of a foreign country stating that he or she is not a resident of that country and therefore not liable for any income taxes of that country. IRC § 911(d)(5) denies the taxpayer the status of "qualified Individual" and he or she is not eligible for the foreign earned income exclusion as a bona fide resident if such statements have been submitted.

  8. The following definitions are clarification of terms used in the above chart which identifies bona fide residence factors.

    1. Foreign Country - A territory under sovereignty of a government other than the United States.

      Note:

      International waters are not treated as foreign countries. Individuals working on oil rigs in international waters, on a 28 days on 28 days off basis, are not considered bona fide residents of a foreign country.

    2. Entire Taxable Year - A 12 month period, calendar or fiscal. A calendar year is the period beginning January 1 and ending December 31. A fiscal year begins with a month of the taxpayer's choosing and ends on the last day of the month, following a 12 month period.

    3. Uninterrupted Period - The taxpayer may leave the country for brief temporary trips abroad for vacation or business, but must have clear intentions of returning to his foreign residence or to a new bona fide residence in another country without unreasonable delay.

  9. Consider the following factors when determining if a taxpayer qualifies for the foreign earned income exclusion due to their physical presence in a foreign country.

    Physical Presence Factors
    The taxpayer must be a U.S. citizen or resident alien physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months.

    Exception:

    This requirement is unconditional, except in the instances stated below in Waiver of Time Requirements. See IRM 21.8.1.2.3.

    The taxpayer must have foreign earned income attributable to the 12 month period and receive it no later than the year after the services were performed.
    The taxpayer must have foreign earned income for personal services rendered in a foreign country.
    The taxpayer must not consider foreign earned income paid to him/her as an employee of the U.S. Government or one of its agencies.

  10. Consider the following explanations when determining if the taxpayer qualifies for the §911 foreign earned income exclusion due to their physical presence:

    1. A "full day" is a continuous period of 24 hours starting at midnight and ending with the following midnight.

    2. The day of arrival or departure may not be counted in determining the 330 days.

    3. The "qualifying days" may include vacation time spent on foreign soil.

    4. The 330 full days presence on foreign soil need not be consecutive, and may be interrupted by periods during which travel is over international waters, or in which the taxpayer is otherwise not present in a foreign country (i.e., a brief visit to the United States).

  11. The physical presence test does not depend on the type of residence the taxpayer establishes, the nature or purpose of the stay abroad, nor his or her intentions about returning to the United States. It is based only on how long the taxpayer stays in a foreign country or countries.

21.8.1.2.3  (10-01-2012)
Waiver of Time Requirements

  1. IRC § 911(d)(4) allows certain taxpayers who had to leave a foreign country because of war, civil unrest, or similar adverse conditions to waive the minimum time limitation requirements specified under the bona fide residence or physical presence test.

  2. Taxpayers who qualify for the waiver must be able to show that they reasonably could have expected to meet the minimum time requirements if they had not been required to leave the country.

    Note:

    Each year the IRS publishes a list of countries and dates that qualify for the waiver in the Internal Revenue Bulletin.

  3. Waiver of the minimal time limitation requirement can be accomplished by:

    1. Submitting a statement with the return explaining that they expected to meet the applicable time requirements, but the conditions in the foreign country prevented them from the normal conduct of business and

    2. Entering "Claiming Waiver" in the top margin on page 1 of the Form 2555 or Form 2555-EZ.

  4. When the documentation which would prove the taxpayer's intent to meet the physical presence time requirement is unavailable, the taxpayer must provide a statement with a complete explanation. If the taxpayer meets the waiver based on his statement, allow the claim. To qualify for relief under IRC § 911(d)(4), an individual must have established residency or have been physically present in the foreign country prior to the date determined that the individual was required to leave.

  5. Individuals who establish residency, or are first physically present in the foreign country after the date that the Secretary prescribes, are not treated as qualified individuals under IRC § 911.

  6. A Revenue Procedure is generally issued each year to list the countries and dates those countries are eligible for the IRC § 911(d)(4) waiver. The latest additions are listed in the following table:

    Note:

    If an individual left one of the countries listed in the revenue procedure on or after the specified departure date, they are treated as a qualified individual with respect to meeting IRC § 911.

    Country Tax Year Date of Departure - On or After
    Madagascar 2009 March 18, 2009
    Guinea 2009 October 1, 2009
    Cote D'Ivoire 2010 December 19, 2010
    Haiti 2010 January 13, 2010
    Egypt 2011 February 1, 2011
    Libya 2011 February 21, 2011
    Syria 2011 April 25, 2011
    Yemen 2011 May 25, 2011

  7. Taxpayers may claim the exception on their original return, or if an original return has been previously filed, taxpayers must file a Form 1040X with the correct Form 2555/2555-EZ for the year the exception is being claimed, within the normal 3 year statute of limitation period.

21.8.1.2.4  (10-01-2013)
Foreign Earned Income Exclusion (Form 2555)

  1. Once the taxpayer has established that their tax home is in a foreign country and the taxpayer meets either the bona fide residence test or the physical presence test, they may elect to exclude from their income all or some of the amount of their foreign earned income.

  2. The foreign earned income of an individual which can be excluded for any taxable year cannot exceed the amount of foreign earned income computed on a daily basis. The maximum excludable annual rates are listed in the following table:

    Taxable Years Annual Rate
    2010 $91,500.00
    2011 $92,900.00
    2012 $95,100.00
    2013 $97,600.00

    Note:

    The maximum foreign earned income exclusion amount is adjusted annually for inflation.

  3. When both spouses have foreign earned income and each meet either the bona fide residence test or the physical presence test, each must file a separate Form 2555. In this case, for tax year 2013, up to $195,200.00 can be excluded.

  4. IRC § 911(d)(6) denies the double benefit that could occur if taxpayers claimed the foreign earned income exclusion and did not reduce it by adjustments to income, or did not reduce certain itemized deductions and credits related to the excluded income. An adjustment to income can cause an adjustment to the foreign earned income exclusion on Form 2555, line 26. This line is always checked when there is an adjustment to income which is related to the excluded earned income.

  5. Itemized deductions which are related to excluded income must be reduced on Schedule A. Such reductions must always be checked when there are itemized deductions, (i.e., moving expenses, employee business expenses, etc.), which are related to excluded earned income. See Publication 54 for more details.

  6. Generally, the reduction of nonrefundable credits (i.e., child care credit, foreign tax credit, etc.) is limited to that portion which is specifically related to the excluded income.

  7. In applying the IRC § 911 foreign income exclusion limitations under community property laws, the total community income excluded cannot exceed the amount that would be excludable if the income was not community property income.

  8. Wages received by employees of the United States Government, or any of its agencies, working overseas do not qualify for exclusion of foreign earned income under IRC § 911. These employees include:

    • Military personnel

      Caution:

      This includes any military personnel assigned to the North Atlantic Treaty Organization (NATO) or any other international organization.

    • State Department employees

    • IRS employees

    • Drug Enforcement Agency (DEA) employees

      Note:

      Amounts paid by the U.S. government or its agencies to persons who are not their employees, may qualify for foreign earned income exclusion or deduction. If unsure, correspond with the taxpayer for a clarification. Publication 15-A,Employer's Supplemental Tax Guide, can answer questions to help determine if the taxpayer is an employee or an independent contractor.

  9. The foreign earned income exclusion has no impact on the requirement for the payment of self-employment tax. See IRM 21.8.1.16.

  10. The exclusion is not available if travel, and therefore employment, in a foreign country is restricted by regulations pursuant to the Trading With the Enemy Act (50 U.S.C. 1701 etc. seq.) or the International Emergency Economic Powers Act (50 U.S.C. App.) mentioned in § 911. There are some exceptions, primarily for journalists who travel with permission from the Treasury Department.

  11. If income is excluded under the foreign earned income exclusion, the income cannot be considered as compensation in determining the amount of IRA contribution.

21.8.1.2.4.1  (10-01-2013)
TIPRA Changes to the Foreign Earned Income and Housing Exclusions

  1. For tax years beginning after 2005, section 515 of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA; Public Law 109-222) requires that taxpayers claiming the foreign earned income exclusion, the housing exclusion, or both, must determine their tax on their non-excluded income using the tax rates that would apply had they not claimed the exclusion. Taxpayers must complete worksheets contained in the instructions to Form 1040 and Form 6251 to determine the amount of their regular and alternative minimum tax.

  2. The Tax Technical Corrections Act of 2007 clarified that in computing the tentative minimum tax on non-excluded income, the computation of tax is made before reduction for the AMT foreign tax credit. This is effective for tax years beginning AFTER December 31, 2006.

  3. This provision was passed in May 2006 but is retroactive for tax years beginning after December 31, 2005. The Service will waive the 2006 estimated tax penalty to the extent the underpayment of any installment is attributable to changes made by section 515 of TIPRA per Notice 2007-16.

  4. To request a waiver, taxpayers must follow the instructions under Waiver of Penalty in the 2006 instructions for Form 2210. Taxpayers must file a Form 2210 to request a waiver of the penalty.

    Caution:

    This waiver is only available to qualified individuals who file Form 2555.

  5. If the taxpayer submits a tax year 2006 Form 2210 with a penalty amount calculated and attaches a statement requesting abatement because they filed a Form 2555 or 2555-EZ, or if they mention TIPRA, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ If a statement is not attached, correspond with the taxpayer for the statement. If a statement is not obtained, send an 854C letter using the open paragraph to explain the reason for denial and giving his/her appeal rights. Input TC 290 .00 with Blocking Series 98/99 and Reason Code 065.

  6. For additional instructions concerning estimated tax penalty abatement requests, see IRM 20.1.3.3.2.1, Evaluating Claims for Abatement or Waiver of Estimated Tax Penalties.

21.8.1.2.4.2  (10-01-2007)
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21.8.1.2.5  (10-01-2012)
Housing Exclusion/Deduction

  1. Qualified individuals may separately elect to claim the housing exclusion or the housing deduction, in addition to the foreign earned income exclusion. The housing exclusion applies only to amounts considered paid for with employer-provided amounts. The housing deduction applies only to amounts paid for with self-employment earnings.

  2. The initial election must be made by filing Form 2555 with:

    • A timely filed return (including any extensions)

    • A return amending a timely filed return, or

    • A late filed return (determined without regard to any extensions) filed within one year from the original due date of the return.

  3. The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) made the following changes to IRC § 911 which are effective for tax periods beginning on or after January 1, 2006.

    • The calculation of the base housing amount (line 32 of Form 2555) is now related to the maximum foreign earned income exclusion. The amount is 16 percent of the exclusion amount (computed on a daily basis) multiplied by the number of days in the qualifying period that fall within the tax period.

    • The amount of qualified housing expenses is limited to 30 percent of the maximum foreign earned income exclusion (computed on a daily basis) for the calendar year in which the taxable year of the individual begins multiplied by the number of days within the applicable period. However, the law provides for adjustments to the percentage based on geographic differences in foreign housing costs relative to housing costs in the United States.

    • For a comprehensive list of adjusted limitations on housing expenses see the Form 2555 instructions . http://core.publish.no.irs.gov/instrs/pdf/11901y12.pdf

      Reminder:

      Some of these adjusted limitations on housing expenses change on an annual basis.

21.8.1.2.6  (10-01-2013)
Form 2555-EZ

  1. Form 2555-EZ is the simplified version of Form 2555. Qualified taxpayers may use Form 2555-EZ when they meet the seven conditions below:

    1. Must be a U.S. citizen or resident alien,

    2. Have earned wages or salaries in a foreign country, or countries,

    3. Had total foreign earned income of $97,600.00 or less for 20123

    4. Are filing a calendar year return that covers a 12 month period,

    5. Do not have self-employment income,

    6. Do not have business/moving expenses, and,

    7. Do not claim the foreign housing exclusion or deduction.

  2. Foreign earned income exclusion may be claimed on a 2013 Form 2555-EZ if all five of the following conditions apply:

    1. Taxpayer meets the seven conditions shown above,

    2. Taxpayer's total foreign earned income received in 2013 is reported on Form 1040 line 7,

    3. Taxpayer does not have a housing deduction carry over from 2012,

    4. Taxpayer meets either the bona fide residence test or the physical presence test, and,

    5. Taxpayer meets the tax home test.

  3. The taxpayer must report, in U.S. dollars, the total foreign income earned and received on line 7 of Form 1040, and exclude this same amount (show in parentheses) on line 21 of the same form.

21.8.1.2.7  (10-01-2007)
Election and Revocation of Form 2555

  1. Once a taxpayer chooses to exclude foreign earned income or housing amount, that choice remains in effect for that year and all later years unless they revoke it.

  2. If an election choice is revoked, a new election may not be made before the sixth (6th) taxable year after the revocation without the consent of the IRS.

  3. Taxpayers can request IRS consent for reelection before the sixth taxable year after the revocation by requesting a Private Letter Ruling (PLR) from the address below:

    Note:

    A request for a Private Letter Ruling (PLR) must be submitted with payment of the appropriate fee. The first Revenue Procedure each year (currently Rev. Proc. 2010-1), which is published in the Internal Revenue Bulletin, includes the fee schedule. The package should be marked: RULING REQUEST SUBMISSION.

    Associate Chief Counsel (International)
    Internal Revenue Service
    ATTN: CC:PA:LPD:DRU
    P.O. Box 7604
    Ben Franklin Station
    Washington, DC 20044

21.8.1.2.8  (10-01-2012)
Late Filed § 911 Exclusions

  1. Treas. Reg. § 1.911-7(a)(2)(i)(D) allows citizens or residents of the United States to take the foreign earned income exclusion. The exclusion is allowed under certain conditions and with some limitations. Publication 54 contains further information.

  2. The IRC §911 foreign earned income exclusion (Form 2555/2555-EZ) must be made with:

    • A timely filed return (including any extension),

    • A return amending a timely filed return, or

    • A late-filed return, filed within 1 year from the original due date of the return (determined without regard to any extension).

  3. The IRC §911 foreign earned income exclusion is allowed on prior year returns not listed above when the taxpayer has a Private Letter Ruling (PLR) under Treasury Regulation § 301.9100-3, allowing the exclusion.

  4. The taxpayer does not need a Private Letter Ruling to claim the IRC §911 foreign earned income exclusion on prior year returns in the following situations:

    • The taxpayer owes no federal income tax after taking into account the exclusion and files Form 1040 with Form 2555 or a comparable form attached either before or after the Internal Revenue Service discovers that the taxpayer failed to elect the exclusion, or

    • The taxpayer owes federal income tax, after taking into account the foreign earned income exclusion, and there is no IRS discovery that the taxpayer failed to make a timely election. The taxpayer prints legibly at the top of the first page of the Form 1040: "Filed Pursuant to Treasury Regulation §1.911-7(a)(2)(i)(D)" .

      Note:

      Indications of IRS discovery would be a Taxpayer Delinquency Investigation (TDI) or Substitute For Return (SFR) notice where the tax was proposed to be assessed or was assessed prior to the taxpayer filing a prior year return with a IRC § 911 foreign earned income exclusion.

  5. If the taxpayer owes federal income tax and there is IRS discovery that the taxpayer failed to make a timely election:

    1. Correspond with the taxpayer and advise that they must request from Associate Chief Counsel, International, a Private Letter Ruling (PLR) by the Service under Treas. Reg. § 1.9100-3 to qualify for the IRC §911 foreign earned income exclusion election.

      Note:

      Prior year tax returns on AMS or RTVUE should be reviewed to determine if tp made a timely election to claim the exclusion. If the exclusion was allowed on a prior year tax return, then the taxpayer's election remains in effect for all subsequent tax returns until it is revoked.

    2. Advise the taxpayer of the procedure to obtain the PLR. See IRM 21.8.1.2.7 for additional information on securing the PLR.

    3. When a PLR has been secured, a copy must be provided before the foreign earned income exclusion election can be allowed.

21.8.1.2.9  (10-01-2007)
Loose Form 2555 / Form 2555-EZ

  1. U.S. citizens and resident aliens abroad have the option to file Form 2555, Form 2555-EZ, or an acceptable facsimile that exhibits their entitlement to the benefits under IRC § 911. The Form 2555/2555-EZ should accompany a Form 1040, but it is sometimes submitted without the return.

    1. The taxpayer may believe that Form 2555/2555-EZ is the only form required to be filed.

    2. Form W-2 must be attached as a means when attempting to obtain a refund.

  2. Research to determine if a return is on file for the taxpayer. Use research command code TXMOD and/or the CFOL commands.

    If ... Then ...
    A return has posted and there is no indication of a math error or a balance due Associate the Form 2555/2555-EZ with the return.
    A return has posted and there is an indication of a math error or the account has a balance due Review the original return and Form 2555/2555-EZ on RTVUE to determine if the exclusion has previously been allowed.
    The Form 2555 exclusion has already been considered Associate Form 2555/2555-EZ and refile the return.
    The Form 2555 exclusion requires a change to the previously allowed exclusion amount Adjust accordingly. Remember to use Reason Code 031 (Foreign Earned Income Exclusion).
    No Form 2555 exclusion has been previously allowed Determine if election is timely, and if so, adjust accordingly. If not, notify the taxpayer the exclusion cannot be allowed.
    There is no indication of a return having been filed for the tax year in which the exclusion is being claimed Notify the taxpayer to file Form 1040 and attach the Form 2555/2555-EZ for processing.
    The excludable income on Form 2555/2555-EZ is included in the tax computation on Form 1040 Input an adjustment transaction using TC 291 for the tax decrease computed on the allowable exempt income.
    Adding Foreign Earned Income and excluding the same Foreign Earned Income on Form 2555/2555-EZ at the same time (usually TC 290.00) Adjust accordingly using Reason Code 014 (Foreign Earned Income Reported on Form 2555).

21.8.1.2.10  (10-01-2013)
Form 673, Statement for Claiming Benefit of IRC § 911 to Discontinue Withholding from Wages

  1. IRC § 3402(a) requires employers to withhold taxes from wages as they are earned at "source" . However, an employer may discontinue the withholding of income tax from the wages of an employee who is a U.S. citizen or resident alien employed abroad, if certain conditions are met.

  2. IRC § 3401(a)(8)(A) allows employees to file a signed statement including a declaration under penalties of perjury, along with a current Form W-4, declaring that they meet or will meet the qualifications of IRC § 911(d) (qualified individual) for the taxable year and that they are exempt from tax on the maximum foreign earned income exclusion amount of earned income for the year in question.

  3. The Form W-4 must specify either:

    1. Exempt status, and the taxable year for which the Form W-4 is effective, or

    2. The number of withholding allowances allowed, based on exemptions, deductions (including the IRC § 911 deduction) and credits.

  4. The Internal Revenue Service provides Form 673, Statement for Claiming Exemption from Withholding on Foreign Earned Income Eligible for the Exclusions Provided by § 911, for U. S. citizens. A statement can be accepted in lieu of Form 673 if the taxpayer indicates to their employer that they will meet either the bona fide residence test or the physical presence test and indicates the estimated housing cost exclusion.

  5. Employers withhold income tax from any wages the employee earns in the United States and any income exceeding the IRC § 911 limitations.

  6. For questions involving the Form W-4 penalty program, contact the Campus Collection Branch.

  7. Form 673 can only be used by a U.S. Citizen.

    Note:

    Form 673 is not filed with the IRS. The U.S. employer receives the completed Form 673 from the employee. If the IRS receives loose Form 673, they are forwarded to the employer.

21.8.1.2.11  (10-01-2013)
U.S. Travel Restrictions

  1. The following chart contains the countries to which travel restrictions have been recently in effect and those to which they still apply.

    Restricted Countries
    Country Starting Date Ending Date
    Cuba January 1,1987 Still in effect

    Note:

    With respect to periods prior to or ending on the dates listed above for Libya and Iraq, these limitations do not apply to individuals engaged in activities that were permitted by a specific or general license issued by the U.S. Department of Treasury Office of Foreign Assets Control (OFAC). On March 16, 2004, OFAC issued General License No. 1 pursuant to Executive Order 13315 to allow transactions occurring after May 23, 2003. As a result, taxpayers do not need to supply substantiation, i.e., copies of licenses, with claims of IRC §911 exclusions for periods in Iraq after May 23, 2003.

  2. Taxpayers present in one of the foreign countries listed above during the time frames indicated are in violation of U.S. law and are not treated as a bona fide resident of or physically present in those foreign countries.

    1. The income they earn from sources within these countries for services performed does not qualify as foreign earned income.

    2. Housing expenses they incur while in one of these countries cannot be included in computing their foreign housing amount.

      Exception:

      Notice 2006-84 announced that the limitations of IRC § 911(d)(8)(C) do not apply to qualified individuals who perform services at the U.S. Naval Base at Guantanamo Bay, Cuba. Therefore, such individuals are eligible for the exclusion under IRC § 911, provided that they meet the other requirements of that section.

21.8.1.2.12  (10-01-2013)
International Boycott

  1. If a taxpayer participates in or cooperates with an international boycott during the tax year, their foreign taxes resulting from boycott activities reduce the total taxes available for credit.

    Note:

    For more information, see Publication 514, Foreign Tax Credit for Individuals.

  2. Use Form 5713, International Boycott Report, to report operations in or related to boycotting countries, and the receipt of boycott requests and boycott agreements made.

  3. A list of the countries that may require participation in or cooperation with an international boycott is published by the Department of the Treasury each calendar quarter. As of the date this IRM was prepared for publishing, the following countries were listed.

    • Iraq

    • Kuwait

    • Lebanon

    • Libya

    • Qatar

    • Saudi Arabia

    • Syria

    • Republic of Yemen

    • United Arab Emirates

  4. Form 5713, International Boycott Report, is currently processed at the Ogden Campus. Prior to 2007, this form was processed at the Philadelphia Campus.

21.8.1.3  (10-01-2013)
Foreign Tax Credit (Form 1116)

  1. An individual may claim a credit under IRC § 901 for income, war profits, and excess profits tax (referred to as income taxes) paid or accrued to a foreign country, or under IRC § 903 for foreign levies in lieu of an income tax. The term "foreign country," for purposes of claiming a foreign tax credit, includes U.S. territories.

    Note:

    For individuals claiming a foreign tax credit on Form 1116, the U.S. territories normally include American Samoa and Puerto Rico. With respect to Guam, The Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands, special rules apply. (See Publication 570.)

  2. A U.S. citizen or resident alien must report world-wide income from all sources, regardless of where they live. Generally, the taxpayer must pay a tax on the foreign income to the country or countries from which this income was derived. If the taxpayer pays a tax on the foreign income to the country or countries from which the income was derived, the foreign tax credit is designed to avoid having such income subject to tax by both the United States and the foreign country Publication 514, Foreign Tax Credit for Individuals, and the instructions for Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), contain detailed information on this credit.

21.8.1.3.1  (10-01-2007)
Who May Claim the Foreign Tax Credit

  1. Individuals, either U.S. citizens or resident aliens, avoid double taxation by electing to claim the foreign tax credit by using Form 1116. If a non-U.S. citizen is a bona fide resident of Puerto Rico for the entire tax year, the resident alien rules apply.

    Note:

    If an individual is a citizen of a U.S. territory (except Puerto Rico), and not a citizen or resident of the U.S., the foreign tax credit cannot be taken, except as described in paragraph (2) below.

  2. A nonresident alien can claim a credit for taxes paid or accrued to a foreign country or territory of the United States only on foreign source or territory source income that is effectively connected with a trade or business in the United States. For information on alien status and effectively connected income, see Publication 519, U.S. Tax Guide for Aliens.

21.8.1.3.2  (10-01-2013)
Claiming the Credit for Foreign Taxes

  1. Eligible taxpayers may claim a foreign tax credit for foreign income taxes, war profits, and excess profits paid or accrued (or taxes paid or accrued in lieu of those taxes) during the tax year to any:

    • Foreign country

    • U.S. territory, or

    • Political subdivision (e.g., city, state, or province) of the foreign country or U.S. territory. For further information, See Publication 570

  2. Important: When a foreign tax credit is claimed:

    1. It is a nonrefundable credit, and

    2. No foreign income taxes can be claimed as a deduction in the same year on Schedule A.

  3. IRC § 164(a)(3) allows a U.S. citizen or resident alien who itemizes dedthat is exempt from tax under the foreign earned income exclusion or the foreign housing exclusion uctions to claim foreign income tax paid or accrued as a deduction on Schedule A.

  4. Taxpayers excluding income from the territories cannot claim the foreign tax credit for foreign income taxes paid on the excluded income. See IRC § 931 and IRC § 933.

  5. Citizens or residents cannot claim the foreign tax credit for foreign income taxes paid or accrued on income that is exempt from tax under the foreign earned income exclusion, or the foreign housing exclusion (IRC § 911). See Publication 514, Foreign Tax Credit for Individuals, for definitions of accrued and paid.

  6. A Form 1116 must be filed to claim the foreign tax credit unless one of the following exceptions is met:

    • The taxpayer meets the requirements for exemption from foreign tax limit discussed in Publication 514 and chooses to be exempt from the foreign tax credit limit (They do not file Form 1116. Instead, they enter foreign taxes paid directly on Form 1040, line 47.)

    • A shareholder of a controlled foreign corporation who chooses to be taxed at corporate rates on the amount they must include in gross income from that corporation uses Form 1118 to claim the foreign tax credit.

    • The taxpayer paid income taxes to the U.S. Virgin Islands. The taxpayer must use Form 8689, Allocation of Individual Income Tax to the Virgin Islands.

  7. Adjust accordingly, using TC 29X with Reason Code 036 (Tax Credits).

    Reminder:

    If the amount deducted as foreign tax credit is later refunded from the foreign country, then the U.S. income tax return must be amended to include the amount received. Debit interest is computed from the date the refund is received from the foreign country to the payment date, plus all interest received from the foreign country. For further information see IRM 20.2.10.2.2, Interest on Adjustments to FTC.

21.8.1.3.3  (10-01-2013)
Foreign Taxes for Which a Credit Cannot Be Claimed

  1. A credit cannot be claimed for the following foreign taxes:

    1. Taxes paid to a foreign country that the taxpayer does not legally owe, including amounts eligible for refund by the foreign country

    2. Taxes imposed by and paid to certain foreign countries (see IRM 21.8.1.3.6 (14) for a list of countries that are designated by the U.S. Secretary of State as having repeatedly provided support for acts of international terrorism, and countries with which the U.S. does not have diplomatic relations, and countries whose governments the United States does not recognize.)

    3. Payment of foreign tax that is returned to the taxpayer, a related person, or a party to the transaction generating the tax, in the form of a subsidy

    4. Taxes attributable to excluded income from sources within the United States territories (See Publication 514 for additional information.)

    5. Tax withheld from dividends and other income from property (after November 21, 2004), if certain minimum holding period requirements are not met

    6. Other taxes designated in the Instructions to Form 1116.

  2. On January 1, 2008, Mexico adopted the "impuesto empresarial a tasa unica" (IETU), a single rate business tax. The IRS and Treasury Department are conducting a study to determine if it is a creditable income tax under Article 24(1) of the Convention between the United States and Mexico. Until the conclusion of the study, the IRS will not challenge that the IETU is an income tax that is eligible for the foreign tax credit under Article 24(1) of the treaty.

21.8.1.3.4  (10-01-2007)
Election - Foreign Tax Credit

  1. Each tax year, an individual has a choice of electing:

    1. To take the amount of any qualified foreign income taxes paid or accrued as a foreign tax credit against U.S. income tax, or

    2. To take the deduction on Schedule A, Form 1040

  2. The taxpayer must treat all foreign taxes in the same manner. A taxpayer cannot deduct some foreign income taxes and take a credit for others.

  3. An individual may change their election to claim a deduction or credit at any time during the period within 10 years from the due date for filing the return for the tax year for which the change is requested. See IRC § 901(a) and IRC § 6511(d)(3).

  4. An individual changing no other election may file a claim or an amended return:

    • For credit, or

    • For refund of U.S. income taxes

    If ... Then ...
    Foreign taxes are claimed as a deduction on Schedule A of Form 1040 Completion of Form 1116 is not required.
    Form 2555 exclusion is taken Foreign taxes that are available for the credit must be prorated.

    Note:

    A credit or a deduction for foreign taxes paid on income excluded under the foreign earned income exclusion or the foreign housing exclusion cannot be taken.

21.8.1.3.5  (10-01-2013)
Period of Limitation - Foreign Tax Credit

  1. There is a ten year period of limitation allowed for filing a claim for refund of U.S. tax when a taxpayer was required to pay or had accrued a larger foreign tax than originally claimed as a credit.

  2. The same limitation period applies to:

    1. A claim for refund based on the correction of math errors in figuring the foreign tax credit

    2. The discovery of qualified foreign taxes not originally reported on the return, and

    3. Any other change to the size of the credit, including one caused by a correction to the foreign tax credit limitation or a taxpayer decision to claim a credit for the taxes rather than a deduction.

  3. The 10 years are counted from the due date of the return for the year in which the foreign taxes were paid or accrued.

    Note:

    Do not confuse the refund limitation period with the five or ten year carryforward and one or two year carryback periods for the unused foreign taxes that exceed the foreign tax credit limitation.” .

21.8.1.3.6  (03-01-2013)
Computation - Foreign Tax Credit

  1. For tax years 1987 through 2006, primarily under IRC §904(a),, the foreign tax credit is calculated separately on a separate Form 1116 for the following categories of income, then added together:

    • Passive income (e.g., dividends, interest, royalties, rents, annuities, gain from the sale of property that produces investment income or non-income producing investment property, and gains from foreign currency or commodities transactions)

    • High withholding tax interest (W/H of 5% or more)

    • Financial services income

    • Shipping income

    • Dividends from a DISC or former DISC

    • Distributions from an FSC, or former FSC, from earnings and profits attributable to foreign trade income

    • Lump-sum distributions from a pension plan

    • IRC §901(j) income

    • Income re-sourced by treaty, and

    • General limitation income (all other income)

  2. For tax years beginning after 2006, the following categories of income will be eliminated for purposes of computing the foreign tax credit (Income that previously fell in these categories will fall into either the passive income category or the general limitation income category):

    • High withholding tax interest

    • Financial services income

    • Shipping income

    • Dividends from a domestic international sales corporation (DISC) or former DISC.

    • Certain distributions from a foreign sales corporation (FSC) or former FSC.

      Note:

      See Publication 514 for further information on the classification of this income.

  3. Taxpayers are instructed to use a separate Form 1116 for each category of income. Also, they are instructed to use a separate form for the foreign tax credit offset of alternative minimum tax. However, if separate forms are not submitted, or when the credit is for ≡ ≡ ≡ or less for married filing joint, or ≡ ≡ ≡ ≡ or less for other filing statuses, accept the return as filed. If adjusting the alternative minimum tax foreign tax credit, use Reason Code 041 (Alternative Minimum Tax Foreign Tax Credit).

  4. If the taxpayer paid taxes to more than 3 countries or territories with the same type of income, then additional Forms 1116 must also be used.

    Caution:

    The taxpayer cannot combine the same type of income for different countries and/or territories by writing "various" where the name of the country is to be listed.

    Exception:

    Income passed through from a Regulated Investment Company (RIC) on a country by country basis can be aggregated. Filers can enter the total of all income passed through from a RIC in a single column in Part I of Form 1116. For additional information see Pub 514, Foreign Tax Credit for Individuals.

  5. The credit on each type of income cannot exceed the proportionate amount of U.S. tax paid on that type of income. This is called the foreign tax credit limitation. Therefore, the foreign tax credit is limited to the lower of the foreign tax credit limitation or the foreign tax paid or accrued attributable to the income taxes on that limitation .

    Note:

    Refer to IRM 20.2.10.2.2, Interest on Adjustments to FTC, for information on interest computation.

  6. For each type of income, the taxpayer totals all the taxes paid on that category of foreign source taxable income and compares it to the total U.S. tax liability multiplied by the fraction equal to the amount of that type of foreign source taxable income over world-wide taxable income.

  7. The second limitation is the "reduction" or "scale down" of foreign tax due to excluded or exempt income. When income is excludable or exempt from tax (e.g., IRC § 911(a), IRC § 931(a) for income from sources within American Samoa, and IRC § 933(a) for income from sources in Puerto Rico), the amount of foreign income taxes that may be claimed as a credit (or deduction) must also be reduced or "scaled down" to account for the income on which no U.S. tax is going to be paid. See Form 1116, Part III, line 12, "Reduction in foreign taxes" .

    Note:

    If box b (General category income) is checked at the top of Form 1116, Foreign Tax Credit, with a zero or no entry on Line 12 and research shows a Form 2555/2555EZ, then request the taxpayer compute the reduction in foreign taxes. If a claim was filed, "no consider" the claim using a Letter 916C.

  8. The amount allocable to excludable income is determined by multiplying the foreign tax paid or accrued by a fraction of the excluded foreign earned income (minus apportioned deductible expenses) divided by the total foreign earned income (minus allocable deductible expenses).

    FTC Calculation
    Excluded Foreign Earned Income, Form 2555 (or other excluded foreign income) X Total Foreign Taxes Paid, Form 1116, Part II
    Total Foreign Earned Income, Form 2555 or Form 1116, line 1 (less expenses allocable to foreign earned income)

  9. When income, other than earned income, is taxed by the foreign government, and it is not separately taxed, the denominator is the foreign source income less allocable deductible expenses.

  10. For tax years beginning after 2004, the amount of alternative minimum tax foreign tax credit (AMTFTC) you can use to offset your alternative minimum tax is generally increased to 100% of your pre-credit tentative minimum tax. For tax years beginning before 2005, the amount of AMTFTC was generally limited to 90% of your pre-credit tentative minimum tax.

    Note:

    No tax treaties limiting double taxation override this provision. The Technical and Miscellaneous Revenue Act, §1012(a)(2) specifically states IRC § 59(a) overrides earlier tax treaties.

    If ... Then ...
    A claim received is requesting an increase to the FTC in excess of the Tax Computation Disallow the claim.

  11. U.S. citizens may be able to claim an additional credit for part of the tax imposed by treaty partners on U.S. source income when the U.S. citizen resides in the treaty country. This credit is calculated using the work sheet at the end of Publication 514. It is separate from and in addition to, the foreign tax credit, for foreign taxes paid and accrued on foreign source income. This special credit is provided by the treaties of the following countries:

    • Australia

    • Austria

    • Bangladesh

    • Belgium

    • Bulgaria

    • Canada

    • Czech Republic

    • Denmark

    • Finland

    • France

    • Germany

    • Iceland

    • Ireland

    • Israel

    • Italy

    • Japan

    • Luxembourg

    • Malta

    • Mexico

    • The Netherlands

    • New Zealand

    • Portugal

    • Slovak Republic

    • Slovenia

    • South Africa

    • Sweden

    • Switzerland

    • The United Kingdom

      Caution:

      Do not use the Worksheet at the end of Publication 514 to figure the additional credit for Australia and New Zealand for tax years beginning after August 10, 2010. For additional information, see "Tax Treaties" in Publication 514.

  12. The additional foreign tax credit cannot be calculated on Form 1116 for U.S. citizens residing in the following countries:

    • Australia

    • New Zealand

    If ... Then ...
    A statement is attached to the return, claiming a foreign tax credit from the countries above Process the claim as if it had been calculated on Form 1116.

  13. IRC § 901(j) denies the foreign tax credit for taxes paid to certain countries due to nonrecognition of the foreign government (in most instances), the severance or lack of diplomatic relations, or the classification of the foreign country as one supporting terrorism.

  14. The foreign tax credit is not currently available for taxes paid to the following countries:

    • Cuba

    • Iran

    • Iraq (ended June 27, 2004)

    • Libya (ended December 9, 2004)

    • North Korea

    • Sudan

    • Syria

21.8.1.3.7  (05-25-2012)
Carryback and Carryover – Foreign Tax Credit

  1. If, due to a limitation, a taxpayer cannot claim the credit for the full amount of qualified foreign taxes paid or accrued in the tax year, IRC § 904(c) was amended to allow a one-year (rather than two-year) foreign tax credit carryback for excess foreign taxes in tax years beginning after October 22, 2004 and a ten-year (rather than five-year) foreign tax credit carryover of the unused credits carried to tax years ending after October 22, 2004.

    1. The excess for that separate category is treated as paid or accrued in the applicable years to the extent of any excess foreign income tax limitation (the amount by which the limitation exceeds the amount of qualified taxes originally claimed) in those years.

    2. The excess foreign income tax credits must be applied to the first eligible preceding year and then subsequent years. This is regardless of the relative benefits in various years.

    3. Because of the foreign tax credit limitation a taxpayer may only carry excess credits backward or forward to a year in which there was foreign income subject to U.S. tax.

  2. There are special restrictions which apply to carrybacks and carryovers.

    1. The carryback or carryover of unused foreign taxes can be claimed only as a credit, not as a foreign tax deduction.

    2. In a carryback or carryover year in which foreign taxes were used as a deduction, no credits are allowed for the foreign taxes carried to that year, but the available carryover must be reduced by the amount that would have been allowed if the taxpayer had elected the credit.

  3. The excess foreign taxes that are being carried back to the preceding tax year may be claimed by filing an Amended Return - Form 1040X with a Form 1116. IRM 21.5.9, Carrybacks, further explains processing carryback/carryover claims and IRM 21.5.9.5.44, Carryback of Foreign Tax Credit (FTC), explains when to refer FTC Carryback claims to Examination Classification.

    Reminder:

    If paper case use Form 3210, Document Transmittal, when referring to Examination Classification.

  4. Neither Form 1045 nor Form 1139 may be used to carryback foreign tax credits. Taxpayers must file Form 1040X or amended returns to carryback these credits. See IRM 21.5.9.5.44, Carryback of Foreign Tax Credit (FTC), for specific instructions and restrictions.

    If ... Then ...
    An unused foreign tax is carried back The statute of limitation on IRS assessment and collection of any tax resulting from the carryback for that year does not close until one year after the statute closes on the year in which the carryback originated.

21.8.1.4  (10-01-2012)
Territories of the United States

  1. The following are the principal territories of the United States that also have independent tax administrations:

    • Commonwealth of Puerto Rico (PR)

    • U.S. Virgin Islands (USVI)

    • Guam (GU)

    • American Samoa (AS)

    • Commonwealth of the Northern Mariana Islands (CNMI)

  2. Individuals born in U.S. territories are U.S. citizens.

    Exception:

    Individuals born in American Samoa are U.S. Nationals who are not treated as U.S. citizens for tax purposes.

  3. Many individuals residing in territories are permanent residents of the U.S. because they have a "green card" and for tax purposes they are treated the same as U.S. citizens.

  4. Individuals deriving income from one or more of the above U.S. territories may be required to file a territory income tax return, a U.S. income tax return, or both, depending on residency status.

  5. 2008 Economic Stimulus Payments (ESP) - In general, the tax authorities in each of the five U.S. territories made stimulus payments to eligible residents. The law provided guidelines under which the Treasury Department made payments to each territory for this purpose. People in these areas with questions about the economic stimulus payments were instructed to contact their local tax authority. Additional information can be found in IRM 21.6.3.6, Economic Stimulus Payment (ESP).

    Note:

    Territory residents who received ESP payments from the territory and the IRS must return the payment received from IRS. See IRM 21.6.3.6.12.1, Duplicate Refunds.

  6. Federal employees residing in U.S. territories that are required to file income tax returns with both the Internal Revenue Service (IRS) and their territory treasury were not entitled to the Recovery Rebate Credit (RRC) from the IRS. For additional information, see IRM 21.6.3.4.2.12.3.3, U.S. Territory Recovery Rebate Credit (RRC).

21.8.1.4.1  (10-01-2013)
Double Taxation

  1. Procedures to settle cases of double taxation are provided in bilateral agreements between the U.S. and the following territories:

    • Puerto Rico

    • U.S. Virgin Islands

    • Guam

    • American Samoa

    • Commonwealth of the Northern Mariana Islands

  2. Written requests for the assistance provided under the mutual agreement procedures may be referred to the:

    Deputy Commissioner (International), Large Business and International Division
    Internal Revenue Service
    1111 Constitution Ave, NW
    Routing: MA2-209
    Washington, DC 20224

  3. Requests for assistance must contain the necessary information outlined in Publication 570 under the heading "Double Taxation" . Taxpayers may be referred to the following offices for special information regarding the islands:

    • PUERTO RICO

      Negociado de Asistencia
      Contributiva y Legislacion
      Departamento de Hacienda
      P.O. Box 565
      San Juan, Puerto Rico 00902–6265

    • U.S. VIRGIN ISLANDS

      Virgin Islands Bureau of Internal Revenue
      6115 Estate Smith Bay
      St. Thomas, U.S. Virgin Islands 00802

    • GUAM

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

    • AMERICAN SAMOA

      Tax Division
      Government of American Samoa
      PagoPago, AS 96799

    • CNMI

      Division of Revenue and Taxation
      Central Office
      P.O. Box 5234
      CHRB Saipan, MP 96950

  4. To resolve double taxation cases, the IRS has established general ledger accounts for the following territories:

    • Guam

    • Commonwealth of the Northern Mariana Islands

    • American Samoa

    • U.S. Virgin Islands

  5. When transferring/covering over money to or from one of the U.S. Territories identified in paragraph (4) above, use Form 3809, Miscellaneous Adjustment Voucher. Accounting uses a specific Blocking Series when numbering the Form 3809. The chart below lists how Accounting numbers the document and this DLN Blocking Series gives the indication of which territory was involved in the transfer.

    Blocking Series Territory
    000-009 * Guam
    010-019 * Commonwealth of the Northern Mariana Islands
    020-049 * American Samoa
    (Military cover over)
    050-059 * U.S. Virgin Islands
    060-099 * Military cover over - U.S. Virgin Islands

    * For use on Form 3809 by ACCOUNTING ONLY.

  6. When preparing a Form 3753, Manual Refund Posting Voucher, for one of the territories, the following information must be included on the form:

    Territory Account Number in the Remarks Section Symbol in the TXPD Area
    Commonwealth of the Northern Mariana Islands 4701 20X6737
    U.S. Virgin Islands 4702 20X6738
    Guam 4703 20X6740
    American Samoa 4704 20X6741

    Note:

    See IRM 21.4.4, Manual Refunds, for manual refund instructions.

21.8.1.4.2  (10-01-2007)
Bona Fide Residency Defined

  1. The American Jobs Creation Act of 2004 (AJCA) clarified and supplemented the U.S. tax rules dealing with U.S. territories for determining if a taxpayer is a bona fide resident of a territory and whether income is territory sourced or effectively connected with the conduct of a territory trade or business. Treasury Regulations under §937(a) on bona fide residency status were published in 2006 and the Regulations under §937(b) on sourcing issues were published in 2008.

21.8.1.4.2.1  (10-01-2008)
Residency Rules

  1. Residency Rules - Under the AJCA, an individual is generally considered a bona fide resident of a territory if during the taxable year that individual:

    • Meets the "Presence Test" ,

    • Does not have a tax home outside the relevant territory, and

    • Does not have a closer connection to the United States or a foreign country

  2. Presence Test - A United States citizen or resident alien individual satisfies the "Presence Test" for a taxable year if that individual:

    1. Was present in the relevant territory for at least 183 days during the year;

    2. Was present in the relevant territory for at least 549 days during the three-year period consisting of the taxable year and the two immediate preceding years, provided that the individual was also present in the relevant territory for at least 60 days during each taxable year of the period

    3. Was present in the United States for no more than 90 days during the tax year

    4. Earned income (pay for personal services performed, such as wages, salaries or professional fees) from the United States of no more than $3,000.00, or

    5. Had no significant connection to the United States during the tax year (See Treas. Reg §1.937-1(b) through 1(e)).

  3. Days of presence outside the U.S. territory count towards presence in the U.S. territory if they relate to the following:

    • A day that the individual is also physically present in the territory at any time during the day

    • Any day that an individual is outside of the relevant territory to receive, or to accompany on a full-time basis, a parent, spouse or child who is receiving qualifying medical treatment as defined in IRC § 213(d)(1)

    • Any day that an individual is outside the territory because the individual leaves or is unable to return to the territory during any 14 day period within which a major disaster occurs within the territory (for which a Federal Emergency Management Agency (FEMA) notice of a Presidential declaration of a major disaster is issued in the Federal Register) or period for which a mandatory evacuation order is in effect for the geographic area in the territory in which the individual's place of abode is located

      Note:

      The exceptions listed in (3) above and the following will not count as days of presence in the United States:

    • Any day that an individual is in transit between two points outside the United States and is physically present in the United States for fewer than 24 hours

    • Any day that an individual is temporarily present in the United States as a student as defined in §152(f)(2)

    • Any day that an individual is temporarily present in the United States as a professional athlete to compete in a charitable sports event

    • Any day spent serving the relevant territory as an elected representative of the relevant territory or serving full time as an appointed official or employee of the government of the relevant territory, or any political subdivision thereof (See Treasury Reg. § 1.937-1(c)(3)(ii)(E)).

  4. These rules generally apply to taxable years ending after January 31, 2006. However, taxpayers may choose to apply these rules to all taxable years ending after October 22, 2004.

21.8.1.4.2.2  (10-01-2010)
Source Rules

  1. Source Rules - In general, IRC § 937(b) and the regulations provide that the principles for determining whether income is U.S. sourced are applicable for determining whether income is territory sourced. The principles for determining whether income is effectively connected with the conduct of a U.S. trade or business are applicable for purposes of determining whether income is effectively connected to a territory trade or business. In addition, "the U.S. Income rule" provides that:

    • Income from U.S. sources is not considered income that is territory sourced or effectively connected with the conduct of a territory trade or business, and

    • Income that is effectively connected with the conduct of a U.S. trade or business is not treated as territory sourced income or effectively connected with the conduct of a trade or business in a territory.

  2. These rules are generally effective for income earned in taxable years ending after October 22, 2004. However, the U.S. Income Rule is effective for income earned after December 31, 2004.

21.8.1.4.2.3  (10-01-2007)
Special Source Rules for Certain Items of Income

  1. The regulations provide the following special source rules:

    • The regulations preserve the existing treatment of income from the sale of goods purchased or manufactured in a territory, which provide for the allocation of this income between United States and territory sources.

    • The regulations provide that gains from the disposition of certain property by a U.S. citizen or resident who owned the property on the date they became a bona fide resident of the territory may not be treated as from sources within a territory. This special gain rule applies to the disposition of certain personal property like stocks, bonds, debt instruments, and other investment property like diamonds or gold that is held for investment and sold within 10 years of the date that the individual became a bona fide resident. However, the regulations allow a taxpayer to elect to treat as territory source the portion of gain that accrued while the taxpayer was a bona fide resident of the territory.

    • The regulations also provide special rules for determining the sources of dividends and interest from territory corporations.

    • The special source rules for gains, dividends, and interest apply to dispositions and amounts paid or accrued after April 11, 2005.

21.8.1.4.3  (10-01-2012)
Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession

  1. Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession, was created as a result of the American Jobs Creation Act of 2004. (See IRC § 937(c)).

  2. The Form is used to notify the IRS that an individual became or ceased to be a bona fide resident of a U.S. Possession.

  3. Beginning with tax year 2011, the Form 8898 must be filed by individuals who have worldwide gross income in the tax year of more than $75,000.00 and meet one of the following conditions:

    1. They take a position for U.S. tax purposes that they became a bona fide resident of a U.S. possession after a tax year for which they filed a U.S. tax return as a citizen or resident of the U.S.

    2. They are a citizen or resident of the U.S. and take the position for U.S. tax purposes that they ceased to be a bona fide resident of a U.S. possession after a tax year for which they filed an income tax return as a bona fide resident of a possession.

    3. They take a position for U.S. tax purposes that they became a bona fide resident of Puerto Rico or American Samoa after a tax year for which they were required to file an income tax return as a bona fide resident of the U.S. Virgin Islands, Guam, or the CNMI.

  4. IRS Notice 2006-57 extended the due date for filing Form 8898 from July 17, 2006 to October 16, 2006, for years 2001 through 2005. Generally, individuals who are required to file Form 8898 must do so by the due date (including extensions) for filing Form 1040 or Form 1040NR.

  5. In accordance with Notice 2006-73, two questions were deleted from Form 8898 in the January 2007 revision. Taxpayers using older versions of the form are not required to answer questions 17 and 29.

    Note:

    A penalty of $1,000.00 may be assessed for not filing a required Form 8898 or for not providing the required information. For more additional information, see IRM 20.1.9.18, IRC § 6688 -Reporting for Residents of U.S. Possessions.

  6. Taxpayers are instructed to send Form 8898 to the Philadelphia Campus. Route any Form 8898 received to the Low Income Housing Team at:
    Philadelphia Campus
    2970 Market St.
    Mail Stop 4-E08.142
    Philadelphia, PA 19104.


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