3.38.147  International Notices (Cont. 1)

3.38.147.9 
Credits Claimed on International Returns

3.38.147.9.5  (01-01-2014)
Foreign Child Care Provider

  1. Since foreign child care providers do not have U.S. filing requirements, they are not required to have a TIN.

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

3.38.147.9.6  (01-01-2014)
Earned Income Tax Credit (EITC)

  1. If the taxpayer resides outside the U.S., he or she is generally not entitled to EITC. See below for exceptions.

  2. Any taxpayer who claims a foreign earned income exclusion on Form 2555/2555-EZ is not entitled to EITC.

  3. Any taxpayer who exempts income under IRC 933 (Puerto Rico) or IRC 931 (Form 4563) is not entitled to EITC.

  4. Taxpayers who file Form 1040NR/1040NR-EZ are not entitled to EITC.

  5. Taxpayers who live in U.S. territories are not entitled to EITC.

  6. If the taxpayer claims EITC and resides outside the U.S. for part of the tax year, and it can be determined that the taxpayer moved from one of the 50 states or the District of Columbia (D.C.), allow EITC if the address on W-2(s) or the Schedule C is one of the 50 states or D.C.

    Note:

    Allow EIC on U.S. Source Earned Income only.

  7. Allow EITC for U.S. territories if the taxpayer claims the credit and is in the U.S. Military stationed overseas in a U.S. territory. Search signature area, W-2(s) and/or attachments for any of the following indications:

    • U.S. Air Force

    • U.S. Army

    • U.S. Coast Guard

    • U.S. Marines, U.S. Navy

    • DCPS CIVPAY Directorate

    • DFAS - ATTN: Defense and Accounting Service (See Job Aid for complete list)

    • USAF - Active Duty, DFAS - PMJFC/DE

    • Commanding Office USCG Human Resources Service Information campus

3.38.147.9.7  (01-01-2014)
Recovery Rebate Credit

  1. The following taxpayers are not eligible for the 2008 Recovery Rebate Credit:

    1. Taxpayer is residing in any of the U.S. territories.

    2. Form 1040NR-EZ

    3. Form 1040-PR, Form 1040-SS

3.38.147.9.8  (01-01-2014)
Making Work Pay and Government Retiree Credits

  1. Making Work Pay Credit - Bona fide residents of Puerto Rico, American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), Guam, and the U.S. Virgin Islands (USVI) will receive this credit from their territorial Governments. Nonresident aliens are not eligible for the Making Work Pay Credit.

    Note:

    Military personnel and their spouses residing in a territory are eligible for Making Work Pay Credit.

    Note:

    Form 2555 exclusions and deductions affect the earned income computation on Schedule M. See Schedule M instructions.

  2. Government Retiree Credit - For 2009, bona fide residents of American Samoa and Puerto Rico may use Form 1040, or Form 1040-PR. Form 1040-SS (if there is no Form 1040 filing requirement) to claim the credit. Residents of the other territories must file with their territorial government to receive this credit.

  3. Dual-Status -Taxpayer is entitled to the Making Work Pay Credit when Form 1040 is the controlling document. Dual-Status taxpayers are eligible for Government Retiree Credit with either as the controlling document.

  4. Nonresident Aliens - may receive the Government Retiree Credit in 2009.

3.38.147.9.9  (01-01-2014)
First-Time Homebuyer Credit (FTHBC) and Recapture of 2008 Credit

  1. Nonresident aliens do not qualify for this credit, but may qualify for the recapture.

  2. Any home purchased as your principal residence and located in the United States qualifies.

  3. Uniformed services, Foreign Service members, and Employees of the intelligence community have additional time to purchase a home (see Instructions for Form 5405).

3.38.147.10  (01-01-2014)
Dual-Status General Information

  1. A dual-status taxpayer is both a resident and nonresident alien during the same tax year.

  2. A dual-status alien is required to submit two separate tax forms: Form 1040 and 1040NR.

  3. Where the taxpayer resides on the last day of the year determines which form the taxpayer uses. If they reside in the U.S. on the last day of the year, Form 1040 is the return and Form 1040NR is the statement. If they do not reside in the U.S. on the last day of the year, Form 1040NR is the return and Form 1040 is the statement.

  4. Form 1040 covers the part of the year that the taxpayer is a resident and includes worldwide income.

  5. Form 1040NR covers the part of the year the taxpayer is a nonresident and includes U.S. source income only and certain foreign source income treated as effectively connected with a U.S. trade or business.

  6. Dual-Status taxpayers must use itemized deductions.

    Exception:

    Only students and business apprentices from India are eligible to claim the standard deduction under Article 21(2) of the United States - India Treaty.

  7. Dual-Status taxpayers may claim their own exemption and are allowed exemptions for spouse and dependents for the part of the year they were resident alien. The amount they claim for these exemptions is limited to their taxable income before exemptions for the part of the year they were resident aliens.

  8. Dual-Status taxpayers are not eligible for education tax credits, earned income credit, or the credit for the elderly or the disabled.

  9. Dual-Status taxpayers cannot file as head of household.

  10. Dual-Status taxpayers cannot file a joint return unless the nonresident spouse is treated as a resident alien. Process as Form 1040; Dual-Status restrictions no longer apply (See IRM 3.38.147.3.3, Filing Status).

  11. Dual-Status taxpayers with a valid Form 2555/2555-EZ, Foreign Earned Income Exclusion, Housing Deduction, and/or Housing Exclusion may exclude income on Form 1040 whether it is the controlling document or statement. Income earned during Form 1040NR period may not be excluded with Form 2555/2555-EZ. All income should be brought forward to the controlling document and the tax figured on Form 2555 tax worksheet, regardless if the controlling document is Form 1040 or 1040NR.

  12. Tax Rates – A taxpayer who is married and a nonresident of the United States for all or part of the tax year and does not choose to file jointly, must compute tax as married filing separately on income effectively connected with a U.S. trade or business.

    Note:

    See Pub. 519 for more information on Dual-Status returns.

3.38.147.10.1  (01-01-2014)
Form 1040 Dual-Status (D/S) Return

  1. Form 1040, Dual-Status is required when a taxpayer is a resident of the United States on the last day of the year.

  2. Form 1040 covers the part of the year in which taxpayer was a resident and includes worldwide income from all sources.

  3. Dual-Status taxpayers must attach Form 1040NR/NR-EZ or substitute statement reflecting U.S. Source income earned during the period of non residency.

  4. Resident aliens are taxed on worldwide income and income earned while temporarily abroad. Income is reported on Form 1040.

  5. Generally, income earned in non residency status is not taxable unless it is effectively connected with a U.S. trade or business.

    Exception:

    annuities, dividends, interest, capital gains, rents, royalties. etc. are taxed at 30% or applicable treaty rate.

  6. The tax on both returns is combined on the Form 1040 D/S return.

  7. If the taxpayer computes tax on non-effectively connected income on Schedule NEC, Page 4 of Form 1040NR, the amount is carried over to non-effectively connected income on Line 53 of Form 1040NR and to dotted portion of Line 61 of Form 1040.

  8. The combination of incomes and withholding amounts shown on both Form 1040 and Form 1040NR is totaled on Form 1040.

  9. If the amounts on the Form 1040 and 1040NR are the same, do not combine with the Form 1040 amounts.

    Note:

    If the amounts on the Form 1040NR have been X'ed out and have been combined with the Form 1040 amounts, then return to original taxpayer figures.

  10. If the amounts on the Form 1040 and 1040NR are not the same, combine the amounts from the 1040NR to Form 1040.

  11. Only filing status codes 1, 3, 5, or 6 are allowed.

3.38.147.10.2  (01-01-2014)
Form 1040NR Dual-Status

  1. A Form 1040NR Dual-Status (D/S) is required when taxpayer is a nonresident alien of the U.S. on the last day of the year.

  2. Generally, Form 1040NR D/S returns show a foreign address. If return shows domestic address, review to ensure dual-status.

  3. Dual-Status returns are taxed according to two separate tax periods under provisions applicable to nonresident aliens and resident aliens.

  4. If the taxpayer computes tax on non-effectively connected income on Schedule NEC, page 4 of Form 1040NR/NR-EZ, the amount is carried over to the tax on income not connected with the U.S. trade or business on Line 53 of Form 1040NR.

  5. Non-effectively connected income received during non residency is taxed at 30% or applicable treaty rate.

  6. A Form 1040 dual-status return is attached as a statement to Form 1040NR/NR-EZ to show U.S. source income earned during non residency.

  7. When nonresident aliens give up U.S. residency and file Form 1040NR, they are required to attach Form 1040 to show tax on income received during residency.

  8. The combination of incomes and withholding amounts shown on both Form 1040 and Form 1040NR is totaled on Form 1040NR.

  9. If the amounts on the Form 1040NR and 1040 are the same, do not combine amounts to the Form 1040NR.

    Note:

    If the amounts on the Form 1040 have been X'ed out and have been combined with the Form 1040NR amount, then return to original taxpayer figures.

  10. If the amounts on the Form 1040 and 1040NR are not the same, combine the amounts from the 1040 to Form 1040NR.

  11. During the period of residency, all exemptions can be claimed just like Form 1040 filing but cannot exceed taxpayer's taxable income (computed without regard for personal exemptions).

  12. Only filing status codes 1, 3 or 6 allowed.

  13. Earned Income Tax Credit (Schedule EIC), Education Credits (Form 8863), and Credit for the Elderly or Disabled (Schedule R) cannot be claimed by a taxpayer who is filing as a nonresident alien.

  14. Self employment tax is paid only on income earned during residency.

  15. Canadian and Mexican commuters file Form 1040NR and are not liable for self-employment tax.

3.38.147.10.3  (01-01-2014)
Manual Refunds

  1. There are certain times when an overpayment cannot be refunded through normal procedures. Follow procedures in IRM 3.14.1.6.6, Manual Refunds.

  2. A manual refund is required for the issuance of an overpayment in the following situations:

    • There is a different address entered on Form 1040NR, Line 71e.

    • To avoid the payment of interest on a refund if 45 day interest free period is imminent.

    • Hardship cases.

    • A deceased taxpayer's spouse (Resident alien) claiming a refund for incorrectly withheld taxes on Social Security Benefits

3.38.147.10.4  (01-01-2014)
Erroneous Refunds

  1. The IRS occasionally issues a refund to a taxpayer who is not entitled to the money. When this occurs, the refund is known as an erroneous refund. The reason for the erroneous refund may be an error by the IRS or an error or intentional misstatement by the taxpayer. Follow instructions in IRM 3.14.1.6.7, Erroneous Refunds.

  2. Definition of Erroneous Refund - Any receipt of money from the IRS to which the recipient is not entitled. This definition provided by Chief Counsel is intended to be very broad and includes all erroneous payments even if the erroneous refund involves returning the taxpayer's money and even if the non-entitlement could not have been known at the time of the refund.

  3. A taxpayer who receives an erroneous refund has a legally enforceable obligation to repay the money to the IRS.

  4. For all category "A" erroneous refunds, follow local procedures. The workleader will route the package to EXAM in Philadelphia.

3.38.147.11  (01-01-2014)
Foreign Address Review

  1. Foreign addresses will contain one name line and three lines for address/location.

  2. City/State line will only show name of the country.

  3. City/State/Province are edited to the third entity line.

  4. When correcting an address, first name, second name and address lines are limited to 35 characters and city & state line has a limit of 24 characters.

  5. All foreign country names must be spelled out (no abbreviations except where noted in the International Job Aid 2510-001).

  6. Always use the following abbreviations for U.S. territories : Puerto Rico PR, U.S. Virgin Islands VI, Guam GU, Commonwealth of the Northern Mariana Islands MP , America Samoa AS, Palau Islands PW, Marshall Islands MH, Federated States of Micronesia FM. See International Job Aid 2510-001.

  7. Always use "United Kingdom" when England, Northern Ireland, Scotland, or Wales is listed on the return.

3.38.147.11.1  (01-01-2014)
CAF Mismatch

  1. The Centralized Authorization File (CAF) contains information regarding authorizations that taxpayers have given third parties (representatives) for various tax matters within their accounts. Occasionally the computer will identify a CAF Mismatch on accounts where there is a missing address for the Representative. This appears on the marking screen of OLNR as a CM. To obtain this information for the International Account, use command code CFINK, in the following format beginning on TXMOD.

    • CFINK 000-00-1234

    • 30 201312


  2. Use the MFT and year of the return. Then do CFINK XXXX-XXXXXR for the Representative number authorized to receive notices. This will be the Representative designated by the taxpayer.

    1. If an "N" is not present, select the "E" Entity. Mark the box on the CAF entity tab to void the CAF notice.

    2. If the "N" is present for one or more Representatives, Select the disposition "E" and edit the CAF information.

    3. If the CAF Representative has a foreign address, only use the most pertinent information when shortening the address.

    4. If the "Rep-action" Line shows either Undeliverable, Disbarred, Suspended, or Deceased, select the "E" disposition and mark the box on the CAF entity tab to void the CAF notice.

3.38.147.12  (01-01-2014)
Territories of the United States

  1. Five U.S. territories have independent tax administrations. The territories are:

    • Commonwealth of Puerto Rico (PR)

    • U.S. Virgin Islands (USVI)

    • Guam (GU)

    • American Samoa (AS)

    • Commonwealth of the Northern Mariana Islands (CNMI)

    Note:

    Prior to 2013, U.S. Territories were known as U.S. Possessions.

  2. Taxpayer with income from a U.S. possessions may be required to file:

    1. A U.S. income tax return

    2. A tax return with that territory, or

    3. Both

  3. Filing requirements are determined by a persons residency status (bona fide resident or non bona fide resident). A bona fide resident pursuant to IRC 937 and the accompanying regulations:

    1. Meets the presence test for a taxable year, and

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

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

  4. Presence is satisfied if the U.S. citizen or resident alien:

    • Was present in the relevant territory at least 183 days in the year, or

    • Was present in the territory at least 549 days during a consecutive 3-year period consisting of the tax year and the 2 immediately preceding years (individual must also have been in the territory at least 60 days during each taxable year of the period), or

    • Was present in the U.S. no more than 90 days during the tax year, or

    • Had less than $3,000 in U.S. earned income (wages, salaries, or professional fees for personal services performed), or

    • Had no significant connection to the U.S. during the tax year [see Treas. Reg. 1.937-1(c)].

    Note:

    It is often difficult to determine bona fide residency based on the test above. Therefore, for the purpose of processing income tax returns the following additional guidance is being given. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  5. A tax home refers to a regular or main place of business, employment, or post of duty, regardless of the location of the taxpayer's family home.

  6. A closer connection to the territory is likely if the person maintains more significant contacts with the territory than with the U.S. or a foreign country.

  7. If withholding from any of the following Form W-2's listed below is claimed on Line 61/38, Form 1040/A, delete the withholding and assign TPNC 438.

    • Form W-2AS

    • Form W-2CM*

    • Form W-2GU*

    • Form 499R, Form W-2PR

    • Form W-2VI

    Note:

    *See the individual sections for CNMI and Guam for exceptions to the above.

  8. Child Tax Credit and Additional Child Tax Credit may be claimed by qualifying residents of Puerto Rico using Form 1040, Form 1040-A and Form 8812. Only bona fide residents of Puerto Rico who meet certain requirements may claim ACTC on Form 1040-PR, Form 1040-SS. See IRM 3.38.147.15.3,Puerto Rican Additional Child Tax Credit (ACTC) for more details. Taxpayers in other U.S. territories generally do not file ACTC claims with the Service but instead claim a refundable credit with the respective territory tax administration where they are required to file income tax returns.

  9. Taxpayers who live in U.S. territories are not entitled to EITC. See (10) and (11) for exceptions.

  10. If the taxpayer claims EITC and resides outside the U.S. for part of the tax year, and it can be determined that the taxpayer moved from one of the 50 states or the District of Columbia (D.C.), allow EITC if the address on W-2(s) or the Schedule C is one of the 50 states or D.C.

    Note:

    Allow EIC on U.S. source earned income only.

  11. Allow EITC for U.S. territories if the taxpayer claims the credit and is in the U.S. Military stationed overseas in a U.S. territory. Search signature area, W-2(s) and/or attachments for any of the following indications:

    • U.S. Air Force

    • U.S. Army • U.S. Coast Guard

    • U.S. Marines, U.S. Navy

    • DCPS CIVPAY Directorate

    • DFAS - ATTN: Defense and Accounting Service (See Job Aid for complete list)

    • USAF - Active Duty, DFAS - PMJFC/DE

    • Commanding Office USCG Human Resources Service Information campus

3.38.147.12.1  (01-01-2014)
Exclusion of Income from Sources in U.S. Territories

  1. Bona fide residents of American Samoa earning income from American Samoa may claim an exclusion from U.S. Income Tax under IRC 931.

  2. To claim an IRC 931 exclusion, Form 4563 must be filed and attached to Form 1040.

  3. Amounts paid for services performed as an employee of the U.S. Government or an agency do not qualify for this exclusion.

  4. Bona fide residents of Puerto Rico exempt Puerto Rico source income from their U.S. gross income under IRC 933.

3.38.147.13  (01-01-2014)
U.S. Virgin Islands Residents

  1. Individuals (including U.S. nonresident aliens) who are bona fide residents of the U.S. Virgin Islands (USVI) are required to:

    1. File an income tax return with the USVI Bureau of Internal Revenue.

    2. Report world-wide income on USVI return.

    3. Pay all income tax due to the USVI government.

    4. Bona fide residents of the U.S. Virgin Islands do not have gross income for U.S. income tax purposes provided they fully report pay, and identify the source of their income in accordance with IRC 932(c)(4).

  2. U.S. citizens and residents with income from sources within the U.S. Virgin Islands (USVI) or with income effectively connected with a trade or business in the U.S. Virgin Islands, who are not bona fide residents of the U.S. Virgin Islands are required to:

    1. File an income tax return with the IRS, including Form 8689, Allocation of Individual Income Tax to the U.S. Virgin Islands, and any other necessary attachments and schedules.

    2. File an exact duplicate income tax return including Form 8689 and any other attachments and schedules with the VI Bureau of Internal Revenue.

3.38.147.13.1  (01-01-2014)
Processing Form 1040/A/EZ with Income or Address from U.S. Virgin Islands

  1. If the only source of income was derived from USVI and the taxpayer does not have a United States income tax filing obligation, prevent the refund from generating, void notice, and take following action. Refer to IRM 3.14.1 guidelines regarding the timelines for TC570/NOREFP input:

    1. Zero out the module. Use Blocking Series 00, Reason Code 99, Source Document Y. In Remarks, state "return transshipped to USVI." Attach the ADJ 54 print to a copy of the source document (remember to write "copy" on the document). Give the original document to the work leader.

    2. Input Letter 86C, Referring Taxpayer Inquiry/Forms to Another Office to inform taxpayer that the return has been transshipped to the Virgin Islands Bureau of Internal Revenue for processing. Use paragraphs A, E, Q, d, and p.

    3. For fill-in "d" enter: Information on your return indicates the only source of income was derived from USVI and it appears you do not have a United States income tax filing obligation for the year indicated on your return. If you have questions, you may write to that office at the address we have provided in this letter.

    4. Use the following address for fill-in "p" :


    Virgin Islands Bureau of Internal Revenue
    6115 Estate Smith Bay
    Suite 225
    St. Thomas, VI 00802

  2. Work Leader will transship return to VI.

    Caution:

    If Form 8689 is attached or there is an indication on the dotted portion of line 71 that the taxpayer is reporting taxes paid to the USVI, or the taxpayer is filing in compliance with Notice 2007-19 (Indicated by zero return, taxpayer's name, address, TIN and signature), DO NOT SEND THESE RETURNS TO THE USVI.

3.38.147.13.2  (01-01-2014)
U.S. Virgin Islands Income & Taxation

  1. In general, bona fide residents of the USVI file returns with and pay taxes to only the USVI. U.S. citizens and resident aliens who are not USVI bona fide residents file returns with and pay taxes to only the U.S., unless they have USVI source income; if they have USVI source income, they pay a portion of tax to the United States and to the USVI. There are difference rules for taxable years ending before December 31, 2006, and for taxable years ending on or after December 31, 2006.

  2. Pre-2006 returns -- For taxable years ending before December 31, 2006 (See IRS Notice 2007-19):

    • U.S. citizens and resident aliens who are bona fide residents of the USVI with gross income of $75,000 or more must file with the USVI to report worldwide income and may file with the IRS to start the U.S. statute of limitations on assessment .

    • U.S. citizens and resident aliens who are bona fide residents of the USVI with gross income of $75,000 or more must file with the USVI to report worldwide income and may file with the IRS to start the U.S. statute of limitations on assessment

    • If you can determine that the taxpayer is filing in compliance with Notice 2077-19, then process the return. Some indications could be:

    • Notation on the return of "Notice 2007-19"

    • Zero return

    • Affirmation statement indicating the filing of a USVI Form 1040

    • Statement of gross income of $75,000 or more

    • Statement affirming the taxpayer's bona fide residence in the USVI along with a summary of facts on which residency is based

  3. 2006 and post 2006 returns -- For taxable years ending on or after December 31, 2006 (see IRS Notice 2007-31)

    • U.S. citizens and resident aliens who are bona fide residents of the USVI must file with the USVI and report worldwide income. No U.S. return is required.

    • U.S. citizens and resident aliens who are not USVI bona fide residents must file identical tax returns with the IRS and the USVI if they have income from sources in the USVI or income that is effectively connected with the conduct of a trade or business in the USVI.

      Note:

      The taxpayer will complete and attach Form 8689 to both returns to determine how much tax to pay to the U.S. and to the USVI.

  4. Form 8689, Allocation of Individual Income Tax to the United States Virgin Islands, is used to figure the amount of United States tax allocable to the USVI.

  5. Form 8689 must be attached to take the credit for United States tax allocated to the USVI. The taxpayer should add lines 40 and 44 of Form 8689 and include that amount in the total portion of line 72 Form 1040. The credit claimed cannot exceed the amount of Total Tax on Line 61, Form 1040.

  6. The credit for taxes paid to the U.S. Virgin Islands is nonrefundable. Use TC TC 766 (+/-) with Reason Code 063 (U.S. Virgin Islands Credit on Form 8689) when applying or adjusting the credit.

    Caution:

    If the credit exceeds the total tax on line 61, reverse it with a TC 767.

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

  8. If the return includes both Notice 2007-19 and Form 8689, process as Form 1040 with Form 8689.

  9. A bona fide resident of the USVI will file a USVI Form 1040INFO with the USVI if he or she has a non-USVI income.

3.38.147.13.3  (01-01-2014)
U.S. Virgin Islands with Self-Employment (SE) Income

  1. U.S. citizens and residents of the Virgin Islands with income from the conduct of a trade or business are required to file Form 1040-SS, U.S. Self-Employment Tax Return with the Internal Revenue Service.

    Note:

    This separate filing is in addition to the income tax return filed with the Government of the U.S. Virgin Islands.

  2. Form 1040-SS resembles a combination of Form 1040 Schedules C, F, and SE.

  3. If the taxpayer is residing in a U.S. territory (except Puerto Rico) or foreign country on the day their return is due, the taxpayer has an automatic 2-month extension to June 15.

3.38.147.13.4  (01-01-2014)
U.S. Virgin Islands Cover Over

  1. A Cover Over is the transfer of income tax withholding.

  2. USVI Cover Over can be recognized by the DLN of the return and the category code shown on the IDRS case control:

    • DLN identified by 21211 or 21221

    • Category Code is ISPJ (International Special Project)

    • There is a TC 150 for .00 on the module

    • "Dummy" returns are processed in order to complete the cover over process

    • Do not take any actions on these accounts. Refer case to work leader.

3.38.147.14  (01-01-2014)
American Samoa Residents

  1. Bona fide residents of American Samoa (AS) must file:

    • AS tax return reporting gross income from worldwide sources.

    • U.S. tax return reporting income from worldwide sources, but excluding income from sources within AS. Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, to exclude AS income will be attached.

      Note:

      Nonresident aliens file Form 1040 but are still subject to the rules for nonresident aliens, Therefore they cannot take a standard deduction, file Married Filing Jointly, or claim a deduction for a dependent unless that person is a U.S. citizen or national.

  2. Non bona fide residents of American Samoa for entire year must file:

    U.S. citizen or resident alien:


    • AS tax return reporting only income from sources within AS.

    • U.S. tax return (Form 1040) reporting income from worldwide sources (including AS). Taxpayers can claim the Foreign Tax Credit against their liability for income taxes paid to AS reported on U.S. return.


    Nonresident alien:

    • AS tax return reporting only income from sources within AS.

    • U.S. tax return (Form 1040NR) reporting U.S. source income. Use rules for nonresident aliens.

  3. AS married residents may file single. This is called abandoned spouse provision. They may claim dependents as allowed under this provision.

  4. U.S. Government employees in AS, whether bona fide residents or not, must report wages paid by the U.S. Government on both their AS and U.S. returns. Taxpayers can claim the Foreign Tax Credit on their U.S. return with respect to income taxes paid to AS.

  5. Bona fide residents of AS with earned income from AS may claim the IRC 193 exclusion using Form 4563.

  6. Allow only withholding taxes paid to the U.S. Government on an attached Form W-2. Do not allow withholding paid on a W-2AS.

  7. U.S. government employees who report government wages on both U.S. and AS tax returns can take a credit on the U.S. tax return for income taxes paid or accrued to AS. The taxpayer will figure the credit on Form 1116, Foreign Tax Credit, and attach it to the U.S. tax return.

3.38.147.14.1  (01-01-2014)
Processing Form 1040/A/EZ with Income or Address from American Samoa

  1. If the only source of income was derived from AS and the taxpayer does not have a United States income tax filing obligation, prevent the refund from generating, void notice, and take following action. Refer to IRM 3.14.1 guidelines regarding the timelines for TC570/NOREFP input:

    1. Zero out the module. Use Blocking Series 00, Reason Code 99, Source Document Y. In Remarks, state "return transshipped to AS." Attach the ADJ 54 print to a copy of the source document (remember to write "copy" on the document). Give the original document to the work leader.

    2. Input Letter 86C to inform taxpayer that the return has been transshipped to the American Samoa Tax Division for processing. Use paragraphs A, E, Q, d, and p.

    3. For fill-in "d" enter: Information on your return indicates the only source of income was derived from AS and it appears you do not have a United States income tax filing obligation for the year indicated on your return. If you have questions, you may write to that office at the address we have provided in this letter.

    4. Use the following address for fill-in "p" .


    Tax Office

    Executive Office Building

    Pago Pago, AS 96799

  2. Work leader will transship return to American Samoa

3.38.147.14.2  (01-01-2014)
Guam Residents

  1. Bona fide residents of Guam (GU) file with the Guam government.

  2. If the taxpayer is not a bona fide resident of Guam and is a U.S. citizen or resident alien, the taxpayer will report worldwide income on Form 1040 including income and withholding from W-2GU. Allow income and withholding. Tax and withholding due to the Guam government will be allocated by the IRS via Form 5074, Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands.

    Note:

    If a Form 5074 is present, the taxpayer is indicating they are not a bona fide resident of Guam.

  3. A nonresident alien who is not a bona fide resident of Guam will file a return both with Guam and the U.S. (on Form 1040NR). Allow only U.S. source income according to the rules for a nonresident alien. Do not allow income or withholding from a Form W-2GU.

  4. If copy (c) of a Form W-2GU is attached to the return, route a copy of the return to the following address using Form 3499. Annotate “Guam W-2, Copy (c), Adjustment needed” on a Form 3465 included with the copy of the return.

    Accounts Management

    International Unit

    ATTN: North Building HUB International

    Philadelphia, PA 19255

3.38.147.14.3  (01-01-2014)
Processing Form 1040/A/EZ with Income or Address From Guam

  1. If the taxpayer is a United States citizen, resident alien or nonresident alien and a bona fide resident of Guam during the entire tax year, they must file their income tax return with Guam. If the only source of income was derived from Guam and the taxpayer does not have a United States income tax filing obligation, prevent the refund from generating, void notice, and take further action for transshipment. Refer to IRM 3.14.1 guidelines regarding the timelines for TC570/NOREFP input:

    1. Zero out the module. Use Blocking Series 00, Reason Code 99, Source Document Y. In Remarks, state "return transshipped to Guam." Attach the ADJ 54 print to a copy of the source document (remember to write "copy" on the document).

    2. Input Letter 86C to inform taxpayer that the return has been transshipped to Guam. Use paragraphs A, E, Q, d, and p.

    3. For fill-in "d" enter: Information on your return indicates the only source of income was derived from Guam and it appears you do not have a United States income tax filing obligation for the year indicated on your return. If you have questions, you may write to that office at the address we have provided in this letter.

    4. Use the following address for fill-in "p" .

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


  2. Work leader will transship return to Guam.

  3. If income is reported from W-2 (U.S. source) and W-2GU and the taxpayer is not a bona fide resident of Guam, process the return.

3.38.147.14.4  (01-01-2014)
Commonwealth of Northern Mariana Islands (CNMI)

  1. Bona fide residents of Commonwealth of the Mariana Islands (CNMI) file with the CNMI government.

  2. If the taxpayer is not a bona fide resident of CNMI and is a U.S. citizen or resident alien, the taxpayer will report worldwide income on Form 1040 including income and withholding from W-2CM. Allow income and withholding. Tax and withholding due to the CNMI government will be allocated by the IRS via Form 5074, Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands..

    Note:

    If a Form 5074 is present, the taxpayer is indicating they are not a bona fide resident of CNMI.

  3. A nonresident alien who is not a bona fide resident of CNMI will file a return both with CNMI and the U.S. on Form 1040NR. Allow only U.S. source income according to the rules for a nonresident alien. Do not allow income or withholding from a Form W-2CM.

  4. If income is reported from W-2 (U.S. source) and W-2CM and the taxpayer is not a bona fide resident of CNMI, process the return.

3.38.147.14.5  (01-01-2014)
Processing Form 1040/A/EZ with Income or Address from CNMI

  1. If the taxpayer is a United States citizen, resident alien or nonresident alien and a bona fide resident of CNMI during the entire tax year, they must file their income tax return with CNMI. If the only source of income was derived from CNMI and the taxpayer does not have a United States income tax filing obligation, prevent the refund from generating, void notice, and take further action. Refer to IRM 3.14.1 guidelines regarding the timelines for TC570/NOREFP input:

    1. Zero out the module. Use Blocking Series 00, Reason Code 99, Source Document Y. In Remarks, state "return transshipped to CNMI" Attach the ADJ 54 print to a copy of the source document (remember to write "copy" on the document).

    2. Input Letter 86c to inform taxpayer that the return has been transshipped to CNMI. Use paragraphs A, E, Q, d, and p.

    3. For fill-in "d" enter: Information on your return indicates the only source of income was derived from CNMI and it appears you do not have a United States income tax filing obligation for the year indicated on your return. If you have questions, you may write to that office at the address we have provided in this letter.

    4. Use the following address for fill-in "p" .

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

  2. Work leader will transship return to CNMI

  3. If income is reported from W-2 (U.S. source) and W-2CNMI and the taxpayer is not a bona fide resident of CNMI, process the return.

3.38.147.15  (01-01-2014)
Puerto Rican Residents

  1. This section provides procedures for processing returns with income and/or an address from Puerto Rico (PR).

3.38.147.15.1  (01-01-2014)
Notices w/Puerto Rican Addresses

  1. Allow only withholding taxes paid to the U.S. Government on an attached Form W-2. Do not allow withholding paid on a Form 499R-2/W-2PR. If all income is solely from Puerto Rico (Form 499R-2/W-2PR), it should be exempt. If either is on the return, disallow income and/or withholding. Assign TPNC's 141 and/or 438.

    Reminder:

    Puerto Rican taxpayers will sometimes pay SE tax on Form 1040 instead of Form 1040-PR/SS. Allow SE tax in this instance.

  2. FICA taxes paid to Puerto Rico can be allowed as excess FICA. FICA taxes paid must be verified by attached Form 499R-2/W-2PR or IRPTR.

  3. If Puerto Rico is in the address and the income is from Puerto Rico, disallow EITC.

  4. If a taxpayer claims an ES credit with a payment DLN of 21227, secure documents and forward to Stop 6567 AUSPC, Attn: Accounts Management, International Unit with Form 6567 annotated "Duplicate Filing" .

  5. Any U.S. citizen who is required to report Puerto Rico income on their U.S. tax return may claim a credit to the extent computed on Form 1116, Foreign Tax Credit . When computing the foreign tax credit, taxpayers who have both excludable and non-excludable income from Puerto Rican sources must reduce the foreign taxes paid amount by the taxes allocable to exempt income. Use the following formula to determine the reduction in foreign taxes:

    • (Income from P.R. Sources not subject to U.S. Tax less deductible expenses allocable to that income/Total Income subject to P.R. tax less deductible) X Tax paid or accrued to P.R. = Reduction in Foreign Taxes.


3.38.147.15.2  (01-01-2014)
Puerto Rican Child Tax Credit (CTC)

  1. U.S. Government employees (example: U.S. Postal Employee) in Puerto Rico may claim Child Tax Credit. For these taxpayers, CTC and ACTC rules are identical to those for U.S. citizens. If income is excluded under IRC 933 (Puerto Rico), the taxpayer must complete the Child Tax Credit worksheet in Pub. 972.

3.38.147.15.3  (01-01-2014)
Puerto Rican Additional Child Tax Credit (ACTC)

  1. Bona fide residents of Puerto Rico is not required to file U.S. tax return but should file Form 1040-PR or Form 1040-SS. ACTC can be claimed directly on the tax return by completing Parts I and II; therefore, Schedule 8812, Child Tax Credit, is not required.

  2. ACTC is limited to;

    • those with 3 or more qualified children

    • no more than $1000 per qualified child

    • the total of withheld social security tax Medicare Tax, and Self-Employment Tax Deduction

    It may be further limited by AGI for higher income taxpayers, but not by Earned Income (EI) as for U.S. Citizens.

  3. Bona Fide taxpayers may choose to file Form 1040/A instead of Form 1040PR/SS, but they are still required to follow the Bona Fide rules. If the taxpayer is filing a Form 1040/1040A for ACTC, Schedule 8812 must be attached, but ACTC is calculated as if the taxpayer had filed Form 1040-PR/SS (ex. must have three or more children, cannot exceed total of withheld Social Security tax, Medicare tax, and Self-Employment Tax Deduction).

    Note:

    If a PR bona fide resident exempts income under IRC 933 (via attached Form 499R-2/W-2PR or statement indicating an exemption), the amount must be subtracted from the Adjusted Gross Income.

  4. U.S. Government employees (example: U.S. Postal Employee) may file Form 1040/A and Schedule 8812 to claim ACTC. They follow the same rules as domestic filers of ACTC.

    Reminder:

    Excluded income must be used in this calculation. See worksheet in Pub 972.

3.38.147.15.4  (01-01-2014)
1040PR/SS Excess FICA

  1. The rate for social security tax is 10.4% with maximum limitations for 2011 and 2012. Previously the rate for social security tax has been 12.4% with maximum limitations. There is no ceiling on Medicare wages. For 2013, the social security tax has been returned to 12.4%.

  2. PR filers may claim excess FICA on Form 1040-PR, which is figured the same as domestic.

  3. Excess FICA can be claimed on both Form 1040-PR and 1040-SS by taxpayers residing in U.S. territories. It is calculated the same as on domestic returns. The taxpayer must have more than one employer and the combined amount must exceed the maximum amount for that tax year. Verify the entry by combining all Form W-2, Form W-2AS, Form W-2CM, Form W-2GU, Form W-2VI or Form 499R-2/Form W-2PR, Form W-2PR or CC IRPTRL.

    Caution:

    If married filing joint, compute excess FICA for primary and secondary taxpayers separately.

3.38.147.15.5  (01-01-2014)
Notices Excluding Income from Puerto Rico

  1. A taxpayer who is a bona fide resident of Puerto Rico and has no income derived from sources outside of Puerto Rico may exclude all of their income under IRC 933. They do not have a federal income tax return filing obligation with the IRS. If the only source of income is from a Form 499R-2/W-2PR AND there is an indication that the taxpayer is bona fide resident of PR ( the only address on the return or attachments is PR), prevent the refund from generating, void notice, and take following action. Refer to IRM 3.14.1 guidelines regarding the timelines for TC570/NOREFP input:

    1. Zero out the module. Use Blocking Series 00, Reason Code 99, Source Document Y. In remarks, state "return sent to TP to file with PR." Attach the ADJ 54 print to a copy of the source document (remember to write "copy" on the document).

    2. Prepare Form 9143, Request for Missing Information or Papers to Complete Return (International Returns) to send the return to the taxpayer.

    3. Use the following fill-in: "You do not have a U.S. filing obligation, since all of your income is derived from Puerto Rican sources."

  2. If the bona fide resident taxpayer has income derived from sources outside Puerto Rico, they generally will have a federal income tax filing obligation and may claim an allocable and/or prorated standard deduction or itemized deduction on a federal return. Accept taxpayers prorated itemized deductions or standard deduction, but verify the taxable income. Use the following formula to determine the allowable portion of the deductions. If the income and withholding is from Form 499R-2, Form W-2PR, adjust the AGI and withholding to disallow.

  3. (Gross Income subject to U.S. Tax/Gross Income from all sources) X Deductions = Allowable portion of the deduction.

  4. If the return includes Schedule C annotated "Income exclude per IRC 933 but included for FICA tax purpose only" ; this is for self employment tax. It should not be reported on Form 1040, Line 12, since the taxpayer will pay the appropriate tax to Puerto Rico.

  5. A bona fide resident of Puerto Rico earning income from a trade or business must file Form 1040-SS or 1040-PR with the IRS to report self employment income and, if necessary, pay self-employment tax to the United States.

  6. A taxpayer who is a bona fide resident of Puerto Rico for an entire taxable year may claim an exclusion from U.S. income tax on income from Puerto Rican sources.

  7. This exclusion cannot be claimed in the year the taxpayer moves to Puerto Rico.

  8. A U.S. citizen may exclude income from Puerto Rican sources in the year the taxpayer ceases Puerto Rico residency provided the taxpayer was a bona fide resident of Puerto Rico for at least 2 full years prior to changing residence and the income is attributable to the taxpayer's Puerto Rico residency.

  9. A taxpayer employed by the U.S. Government cannot exclude such income.

  10. Schedule H-PR (ANEHO H-PR) may be attached to a Form 1040-PR return, or is sometimes filed as a stand alone form.

3.38.147.16  (01-01-2014)
Form 1040-SS/1040-PR Self Employment Tax

  1. Self-employed persons residing in American Samoa, Guam, Northern Mariana Islands, Puerto Rico or the U.S. Virgin Islands file Form 1040-SS to pay their FICA Tax with the United States Government.

    Note:

    The taxpayer cannot claim the self-employment tax deduction for FICA tax purposes. The self-employment tax deduction only applies for U.S. Income Tax purposes.

  2. Form 1040-PR, Form 1040-SS include business information.

3.38.147.16.1  (01-01-2014)
Form 1040-PR

  1. Taxpayers residing in Puerto Rico must file Form 1040-PR by the fifteenth day of the fourth month following the end of the year.

  2. Form 1040-PR can be filed to pay SE Tax and to claim additional child tax credit if taxpayer is a bona fide resident of Puerto Rico.

  3. Puerto Rico filers can also file Form 1040-SS, which is the English version of the Form 1040-PR.

3.38.147.16.2  (01-01-2014)
Form 1040-SS

  1. Taxpayers residing in other territories file Form 1040-SS.

  2. Returns are due on the fifteenth day of the fourth month following the end of the tax period.

  3. Taxpayers residing in a U.S. territory (except Puerto Rico) or foreign country on the day their return is due have an automatic extension of time to file their returns until June 15th.

3.38.147.17  (01-01-2014)
Foreign Investment in Real Property Tax Act (FIRPTA)

  1. Nonresident aliens are subject to a minimum tax on FIRPTA transactions.

  2. If any credit is claimed on Line 60b-d, Form 1040NR, verify Form 8288-A, copy B, is attached and the Date of Transfer, Box 1, is within the tax period of the return. The amount in Box 3 is not to exceed the amount the taxpayer is claiming.

  3. When the credit is verified, the information is transferred to Form 13698, International Credit(s) Verification Slip. Allow only the amount on the "Total Credit" line. If the "Total Credits" line is blank, take case to the work leader for verification on the FIRPTA database.

  4. Review IDRS for possible erroneous duplicate credit on the account for the same payment. The credit will be posted as a TC766/767 with Credit Reference Number (CRN) 332. If adjusting credit, use CRN 332 and Reason Code 069.

3.38.147.18  (01-01-2014)
Community Property

  1. Community Property laws apply to a U.S. citizen married to a nonresident alien spouse domiciled in a community property state, Guam and Puerto Rico, or a foreign country.

3.38.147.18.1  (01-01-2014)
Community Property Taxpayer - IRC 879

  1. Nonresident aliens can claim community property if domiciled in a community property country.

  2. Income earned by either spouse through wages, business, or partnership is treated as income of the spouse who earned it regardless of community property laws.

  3. Per IRC 879, income and withholding cannot be split between nonresident alien spouses.

  4. A person is not a self-employed person unless they have income from a trade or business including a partnership.

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

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

  7. If a taxpayer with a nonresident alien spouse elects to treat the spouse as a U.S. resident for tax purposes, the taxpayer will use the community property rules where they reside.

  8. Community Property States, Countries and territories:

    States:  
    Arizona New Mexico
    California Texas
    Idaho Washington
    Louisiana Wisconsin
    Nevada  
    Countries:  
    Belgium Montenegro
    Brazil Netherlands
    Colombia Philippines
    Dominican Republic Portugal
    France Spain
    Guatemala Sweden
    Mexico Venezuela
    Territories:  
    Guam Puerto Rico

3.38.147.18.2  (01-01-2014)
Community Property of nonresident aliens - IRC 879

  1. Based on attachments such as name and TIN on Form W-2, Form 1099-MISC, etc., determine the true recipient of the income.

  2. Based on combined income and withholding for each recipient, adjust amount to each separate return. If Form 1099 is not attached, adjust all interest, dividend, and capital gain income on the spouses' return who has all or most of the income. Determine the true recipient of the income based on name and TIN on attached Forms W-2, Form 1099-Misc., etc.

    Example:

    If NRA spouse shows all wages per Form W-2, adjust interest income on the NRA spouse.

    If Then
    Form 1040 and Form 1040NR are filed and the actual recipient of the income is the spouse who is a U.S. citizen or resident Adjust the income and withholding to the Form 1040 and eliminate income on Form 1040NR and attach as information
    Actual recipient of income is a nonresident alien spouse Adjust all the income and withholding to NRA return
    U.S. citizen or resident claimed FSC 4 Allow exemption for the NRA spouse and adjust the spousal exemption to FSC 5
    Income shown on NRA spouse's return and FSC 3, 4 or 5 is checked Do not allow an exemption for U.S. spouse if a return is filed
    Form 1040 and Form 1040NR filed and both spouses or only NRA spouse is recipient of the income Adjust each recipient's respective income to separate returns
    Two Form 1040NR filed and actual recipient is NRA Adjust income and withholding to NRA spouse's Form 1040NR and eliminate income and withholding from other spouse's information. Adjust filing status and exemption and allow an exemption for the other spouse only if box 3 or 4 checked (FSC 3 or 6) and no return is filed
    Two Form 1040NR are filed and both NRA spouses are recipients of the income Adjust each recipient's respective income and withholding to separate return

3.38.147.19  (01-01-2014)
Self-Employment Tax (Clergy)

  1. Missionaries claiming physical presence must pay self-employment tax on net earnings without regard to any exemptions.

3.38.147.20  (01-01-2014)
Totalization Agreement

  1. Because of a totalization agreement between the United States government and the countries listed below, if self employment tax is not clearly indicated and a Schedule SE is not attached, NO SELF EMPLOYMENT TAX IS DUE if taxpayer resides in:

      Special Agreement Table
    Australia Austria Belgium
    Canada Chile Czech Republic
    Denmark Finland France
    Germany Greece Ireland
    Italy Japan Luxembourg
    Netherlands Norway Poland
    Portugal South Korea Spain
    Sweden Switzerland United Kingdom

    Note:

    Some treaties contain time limits on the exclusion. Typically the time limit is from 2 to 5 years, depending on the Totalization Agreement.

3.38.147.21  (01-01-2014)
Withholding Tax on Foreign Partners

  1. Forms 8804, Form 8805 and Form 8813 are filed to report and pay withholding tax based on effectively connected taxable income allocable to foreign partners without regard to whether such income is actually distributed.

  2. Form 8804, Annual Return for Partnership Withholding Tax (Section 1446), shows the total withholding of tax liability of the partnership.

  3. Form 8805, Foreign Partner's Information Statement Withholding Tax, shows amount of effectively connected taxable income and withholding tax allocable to each foreign partner.

  4. Form 8805 must be attached to each foreign partner's tax return for proper credit.

    Note:

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

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

  6. Review for the credit as a TC 766 allowance and if necessary, make the appropriate adjustment. Use CRN 331, Reason Code 069.

  7. Any U.S. person erroneously subjected to the withholding tax would also receive Form 8805 from a partnership and should attach it to Form 1040 for credit substantiation.

  8. Form 8813 Partnership Withholding Tax Payment Voucher (Section 1446), is used to transmit withholding tax payments from partnerships. See Job Aid 2510-001.

3.38.147.21.1  (06-05-2013)
Withholding Tolerances on International

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

    Note:

    FIRPTA Form 8288-A has no tolerance. See IRM 3.38.147.17 , Foreign Investment in Real Property Tax Act (FIRPTA) for more details

3.38.147.22  (01-01-2014)
Social Security Benefits/Pensions and Annuities

  1. Social Security benefits, pensions and annuities paid to residents or citizens of certain countries are not taxable under tax treaties signed between the U.S. and those countries.

  2. If pension or annuity income is reported on Form 1099-R, it is considered effectively connected income. If it is reported on Form 1042-S, it is considered non-effectively connected income and taxed accordingly.

  3. U.S. citizens residing abroad are subject to normal tax rates on social security benefits unless otherwise provided by a tax treaty with the country where the U.S. citizen resides.

  4. Nonresident aliens who reside in countries who do not receive benefits under a tax treaty are subject to 30% tax rate on 85% of their benefits.

3.38.147.22.1  (01-01-2014)
Social Security/Railroad Retirement Benefits (Form SSA-1099 or SSA-1042S)

  1. Social security payments on international tax returns fall into three categories depending if the taxpayer is a U.S. citizen residing abroad, a nonresident alien, or a lawful permanent resident.

  2. Social security benefits paid to nonresident aliens who are not residents of treaty exempt countries are subject to 30% tax rate on 85% of their benefits. This income is considered non effectively connected, It is reported on Form 1040NR Schedule NEC, line 8.

    Note:

    The 30% tax must be computed on 85% of the social security benefits (i.e., If the taxpayer has $3000 of SSA/RRB income, they must pay tax on it Multiply $3000 x 85% = $2550. The tax on $2550 x 30% = $765.

    Exception:

    Switzerland benefits are taxed at 15% (benefits paid to individuals who are both residents and nationals) of Switzerland and do not have permanent residency status in the United States.

    Exception:

    Under a treaty with India, benefits paid to individuals who are both residents and nationals of India are exempt from U.S. tax if the benefits are for services performed for the United States, its subdivisions, or local government authorities.

  3. U.S. citizens residing abroad and nonresident aliens who are residents of the following countries are exempt from U.S. tax on their benefits. Disallow if claimed by the taxpayer on Form 1040, line 20b.

    1. Canada

    2. Egypt

    3. Germany

    4. Ireland

    5. Israel

    6. Italy (must also be a citizen of Italy for the exemption to apply)

    7. Japan (only applies to nonresident aliens)

    8. Romania

    9. United Kingdom

  4. The SSA will not withhold U.S. tax from a taxpayer’s benefits if they are a U.S. citizen and reside in one of these countries.

  5. Under income tax treaties with Canada and Germany, social security benefits paid by those countries to U.S. residents are treated for U.S. income tax purposes as if they were paid under the social security legislation of the United States. If the taxpayer receives social security benefits from Canada or Germany, they should include them on line 1 of the Social Security Benefits Worksheet.

    • If the taxpayer exempts earned income using Form 2555/2555 EZ and reports taxable social security, accept taxpayer's amount of taxable social security.

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

    Note:

    ERS will enter .01 in the social security field if the above condition occurs and should appear as a “1” on the RTVUE screen.

  7. If the taxpayer exempts income under IRC 933 (Puerto Rico) or IRC 931 (Form 4563), then accept taxpayer’s amount of taxable social security.

  8. The RRB will withhold U.S. tax from a taxpayer’s benefits unless they file Form RRB-1001, nonresident Questionnaire, with the RRB to provide citizenship and residency information. If they do not file Form RRB-1001, the RRB will consider them a nonresident alien and withhold tax from their railroad retirement benefits at a 30% rate on Form RRB-1042S.

3.38.147.22.2  (01-01-2014)
SSA/RRB-Form 1042S (Green Card)

  1. For U.S. income tax purposes, lawful permanent residents (green card holders) are considered resident aliens until that status under the immigration laws is either taken away or is administratively or judicially determined to have been abandoned. Social security benefits paid to a green card holder are not subject to 30% withholding. If a green card holder’s tax on social security benefits was withheld in error because they have a foreign address, the withholding tax is refundable by the Social Security Administration (SSA) or the IRS. To receive a refund of the tax withheld in error, the taxpayer must file either Form 1040 or Form 1040A with the following attached:

    1. A copy of the Form SSA-1042S, Social Security Benefit Statement

    2. A copy of "green card"

    3. A signed declaration that includes the following statements:

      "The SSA should not have withheld federal income tax from my social security benefits because I am a U.S. lawful permanent resident and my green card has been neither revoked nor administratively or judicially determined to have been abandoned. I am filing a U.S. income tax return for the tax year as a resident alien reporting all of my worldwide income. I have not claimed benefits for the tax year under an income tax treaty as a nonresident alien."

      Note:

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

  2. Taxpayers are sending in series 1040 returns using their firm address, which usually is in the United States or a U.S. territory. Processing will correspond for the 3 items above and when the taxpayer is unable to provide the required information, the claim is disallowed. Notice Review will generally see this condition generate a CP 13.

    1. To adjust withholding amount, input REQ54, Reason Code (RC) 061, Credit Reference Number (CRN) 330 (+/-). This will generate a TC 766/767 on TXMOD.

3.38.147.22.3  (01-01-2014)
Pensions and Annuities with Income Code 14

  1. Disability pensions shown on Form 1042-S (Income Code 14) will be reported on Line 8, Form 1040NR if the taxpayer has not reached the minimum retirement age set by the employer. Disability pensions received after the minimum retirement age has been reached will be reported on lines 17a/b, Form 1040NR.

  2. Nonresident Aliens with pension income supported by Form 1042-S (Income Code 14) must report such income as “non-effectively connected” on page 4, Form 1040NR. If the taxpayer has not reported Form 1042-S pension income, and it is taxable, adjust to add the income to Total Tax. See Pub 901, Table 1, to verify the tax rate. Send TPNC 429.

    • If the taxpayer has entered pension income from Form 1042-S on page 1 of Form 1040NR, adjust to delete the income from AGI. If it is taxable, add the amount to Total Tax (See Pub 901, Table 1). Send TPNC 429.

  3. A member of the U.S. military reaching retirement age may elect to receive, during his/her lifetime, a reduced U.S. military pension in order that his/her surviving spouse may continue to draw a U.S. military pension after his/her death. After the death of the U.S. military retiree, the pension which is paid to the retiree's surviving spouse is called a "Survivor Benefit Annuity" (SBA) or a "Survivor Benefit Plan" (SBP) or annuitant.

    Note:

    Form 1042-S with Income Code 14 from Office of Personnel Management, U.S. tax law holds that these benefits represent U.S. - sourced, taxable income unless U.S. tax law is overridden by a tax treaty between the U.S. and the country in which the NRA recipient is a resident.

  4. SBA/SBP paid to nonresident aliens who reside outside the U.S. are taxed (or not taxed) according to the treaties that the U.S. has with the countries in which the taxpayer resides. See the chart below for explanation.

    TAXABILITY OF SURVIVOR BENEFIT PLAN/RETIRED SERVICEMAN’S FAMILY PROTECTION PLAN –NON-RESIDENT ANNUITANTS RESIDING OUTSIDE THE UNITED STATES
      A B C
    RULE If the SBP annuitant resides in the country of and then the SBP annuity is
    1 Australia, Belgium, Cyprus, Egypt, Finland, France, Germany, Iceland, Kazakhstan, Korea, Morocco, Netherlands, New Zealand, Norway, Pakistan, Romania, Sweden, Russia, Trinidad and Tobago, and United Kingdom is a citizen of the country in which residing not taxable 0% (see note below)
    2 China, Estonia, Hungary, India, Ireland, Italy, Latvia, Lithuania, Luxembourg, Mexico, Portugal, Spain, South Africa, Switzerland, Thailand, Turkey, And Venezuela is a national of the country in which residing

    Note:

    All countries not listed above are taxed at the 30% rate.

3.38.147.23  (01-01-2014)
Form 1042/Form 1042-S

  1. Form 1042 and Form 1042-S are used by withholding agents to report tax withheld at source on certain income paid to nonresident alien individuals, foreign partnerships, or corporations not engaged in trade or business in the U.S.

  2. Form 1042-S are withholding documents which identify, by type, income which is subject to U.S. tax withholding and which is paid to nonresident aliens by U.S. Payor.

  3. Box 1, Income Code: The appropriate 2-digit income code will be reported in Box 1 (see Pub. 515 for more information on individual codes). Effectively connected income will be reported on Page 1, Form 1040NR, or on Form 1040NR-EZ. exemption code “01” must appear in Box 6 in order to claim income as effectively connected. Non-effectively connected income will be reported on Schedule NEC, Page 4, Form 1040NR. (See International Job Aid 2510-001 for specific Income Codes)

  4. Gambling winnings, Income Code 28, is always non-effectively connected income.

  5. Income Codes 15 through 20 (42 and 43 for TY 2011/2012) will usually have a treaty exemption. Verify the tax treaty using Pub. 901, Table 2.

    Note:

    If Income Code 15 and exemption Code 04 are present and the Form 1042-S was issued by a college or university or it is a zero return or Form 1042-S has no withholding, accept the entry.

  6. All other income codes have tax rates that may be verified using Pub. 901, Table 1. They do not require treaty exemptions.

  7. Taxpayers who file a Schedule C for business expenses against income that has been reported on a Form 1042-S are permitted to do so when Box 1 on the Form 1042-S contains one of the following codes: 16, 18, 35 or 50. If one of these codes is not present, check for the presence of a Form 1099 and/or for an indication that the Schedule C is being claimed against other income. If none of the above conditions are present, disallow the Schedule C expenses and assign the appropriate TPNC.

  8. Box 3, Withholding Allowances: This box should only be completed if the Income Code is 15 through 20. The taxpayer will subtract the Box 3 amount from the Box 2 amount and enter it in Box 4. The amount on line 31 cannot exceed the amount on Form 1042-S, Box 3 ( and/or statements).

    • If the amount on Line 31 is less than or equal to the amount on Line 12, allow the amount in Box 3, or from the statement for school related expenses.

    • If the amount on Line 31 is greater than the amount on Line 12, allow the amount on Line 12.

  9. Box 5, Tax Rate: The rate of withholding in Box 5 applies to the income in Box 2 or Box 4. The Income Code in Box 1 determines the correct rate of withholding regardless of the entry in Box 5. Most non-effective income is taxed at the 30% rate unless a treaty applies.

  10. Withholding from Form 1042-S should be reported on line Form 1040NR, line 61d, or Form 1040NR-EZ, line 18b. If the withholding is present on Form 1042-S, but was not reported, adjust to add withholding.

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

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

  11. Signing Bonuses for Baseball Players — Several Major League Baseball Teams in the United States have paid signing bonuses to baseball players. The team withheld taxes at 30% and issued the taxpayer Form 1042-S.

    • If the taxpayer reports the income as not effectively connected income on Form 1040NR, line 53, follow taxpayer intent.

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

3.38.147.23.1  (01-01-2014)
Form 1042/Form 1042-S Exemption Codes

  1. An exemption Code identifies which type of exemption from withholding the recipient claimed.

  2. The most common exempt Codes are identified below:

    • Exempt Code 00 - Box 6 is blank; no exemption from withholding claimed.

    • Exempt Code 01- Income effectively connected with a U.S. trade or business.

    • Exempt Code 02 - exempt under an Internal Revenue Code (IRC) section (income other than portfolio interest.) See table below.

      If Then
      Taxpayer has not entered income or exemption on Form 1040NR/NR-EZ Accept taxpayer's figures
      Taxpayer shows the amount as income and exemption or as a tax treaty on page 1 Adjust to disallow income and exemption
      Taxpayer reported gross income (box 2, Form 1042-S) and exempt withholding allowance (box 3, Form 1042-S) Adjust to disallow those amounts and accept the net income (box 4, Form 1042-S)
      Taxpayer reports all or part of net income (box 4, Form 1042-S) as taxable income Accept taxpayer's figures
      Form 1040NR prepared by USAID Accept the return as filed

    • Exempt Code 04 - exempt under a tax treaty. See table below.

      If Then
      Taxpayer has entered a valid treaty article on Page 5, and reported the exempt income on Line 22, Form 1040NR or Line 6, 1040NR-EZ Accept taxpayer's figures
      Taxpayer has included the exempt amount as taxable income (i.e. Line 8, wages) and has not exempt or deducted it elsewhere on Page 1 of the return Adjust to exempt the exempt income
      Taxpayer has entered the exempt amount on Line 12 and deducted the amount on Line 30, on Form 1040NR or the exempt amount on Line 5, and deducted the amount on Line 8 on Form 1040NR-EZ Adjust to disallow both amounts
      Taxpayer did not identify a valid article number ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡


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