3.38.147  International Notices

Manual Transmittal

October 29, 2014

Purpose

(1) This transmits revised IRM 3.38.147, IMF International Tax Returns and Documents - International Notices.

Material Changes

(1) Editorial changes have been made throughout this IRM.

(2) IRM 3.38.147.2 – Added Form 8962 Premium Tax Credit (PTC) to list of forms.

(3) IRM 3.38.147.3.3 - Added verbiage for Nonresident Aliens taxpayer must also have a dependent child with a valid SSN or ITIN to qualify.

(4) IRM 3.38.147.4.3 - Added new section Reviewing AMS Transcripts reference when working AMS.

(5) IRM 3.38.147.3.15 - New sub section added for Premium Tax Credit Form 8962.

(6) IRM 3.38.147.4.1(6) - Added information on Math Error Notices a TPNC 311 and TPNC 111 when converting returns.

(7) IRM 3.38.147 .4.3 - Updated and corrected math formula.

(8) IRM 3.38.147.5(8) - Listing of the U.S. territories considered living in the U.S. cannot claim foreign earned income exclusion on Form 2555 and what actions to take.

(9) IRM 3.38.147.5(15) - Updated chart with 2014 exclusion amount for F2555.

(10) IRM 3.38.147.6(3) - Added a note on the qualifications that does not require Form 1116.

(11) IRM 3.38.147.7(2) - Added a list if Taxpayers files Form 1040NR/Form 1040NR-EZ.

(12) IRM 3.38.147.7(3) - Added a list for Taxpayers that are nonresident to file Form 1040NR/Form 1040NR-EZ.

(13) IRM 3.38.147.7 (8) - Added that the Standard Deduction for Certain Filers that are Nonresident aliens who file Form 1040NR/Form NR-EZ are not entitled to the following credits.

(14) IRM 3.38.147.7.1(4) - Added verbiage to include income on Form 1042-S with Income Codes 15 through 19 on Form 1040NR or Form 1040NR-EZ.

(15) IRM 3.38.147.7.3(3) - Added clarification if wage income is reported or not reported on line 8 of Form 1040NR.

(16) IRM 3.38.147.7.3(5) - Added verbiage on the year when exemptions are subject to the “phase out”.

(17) IRM 3.38.147.7.3.3(2) - Added verbiage on total itemized deductions on Schedule A is subject to a “phase out” based on adjusted gross income on Line 36 of Form 1040NR.

(18) IRM 3.38.147.7.4(1) – Added clarification if wage income is reported or not reported on line 3 of form 1040NR/1040NR-EZ.

(19) IRM 3.38.147.7.5(2) - Added “Note: Gambling income of residents of Malta is taxed at 10 percent”.

(20) IRM 3.38.147.9.1(1) - Added “Note: A godchild is not a qualifying descendent.

(21) IRM 3.38.147.9.4(3) - Changed amount from $12,970 to $13,190.

(22) IRM 3.38.147.12 - Renamed as “United States Territories”.

(23) IRM 3.38.147.12(12) – New regarding “Form 8959 Additional Medicare Tax”.

(24) IRM 3.38.147.12(13) – New regarding “Form 8960 Net Investment Income Tax (NIIT) – Individuals, Estates and Taxes.

(25) IRM 3.38.147.12(14) – New clarifies who in Puerto Rico and American Samoa may be liable for the “Net Investment Income Tax (NIIT) Form 8960.

(26) IRM 3.38.147.13.1(1) a - Revised verbiage for Blocking Series. IPU 14U1095.

(27) IRM 3.38.147.13(3) -New clarifies to whom a taxpayer filing joint should file with U.S. Virgin Islands or U.S.

(28) IRM 3.38.147.14.1(1) a - Revised verbiage for Blocking Series. IPU 14U1095.

(29) IRM 3.38.147.14.2(1) - Added bullet explaining what income is reported when taxpayers file with the Guam government.

(30) IRM 3.38.147.14.2(3) - New clarifies to whom a taxpayer filing joint should file with Guam or U.S.

(31) IRM 3.38.147.14.3(1) a - Revised verbiage for Blocking Series. IPU 14U1095

(32) IRM 3.38.147.14.4(1) - Added bullet clarifying what income is reported when taxpayer files with CNMI government.

(33) IRM 3.38.147.14.4(4) - Explains to whom a taxpayer filing joint should file with the CNMI government or U.S.

(34) IRM 3.38.147.14.5(1) a - Revised verbiage for Blocking Series. IPU 14U1095.

(35) IRM 3.38.147.21.1 - Added a caution note to not use MeF W-2s to substantiate withholding. IPU 14U0790 .

(36) IRM 3.38.147.22.3(4) - Revised Pension and Annuities table to have what is in Publication 901 and Code and Edit IRM. IPU 14U0183 .

Effect on Other Documents


IRM 3.38.147 dated October 16, 2013 (effective January 1, 2014) is superseded. This IRM also incorporates IPUs 14U0790 and 14U1095.

Audience

Employees in Notice Review

Effective Date

(01-01-2015)

Signed by
Paul J. Mamo
Director, Submission Processing
Wage and Investment Division

3.38.147.1  (01-01-2015)
Overview

  1. This section of the Internal Revenue Manual (IRM) contains specific instructions for reviewing Computer Paragraphs (CPs) associated with IMF International Returns.

    1. IRM 3.14.1, IMF Notice Review must be used when specific instructions are not outlined in IRM 3.38.147.

3.38.147.1.1  (01-01-2015)
Related References

  1. Publications relating to International issues can be used as technical reference material. Following is a list of the most common Publications used.

    • Publication 3, Armed Forces' Tax Guide

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

    • Publication 80, (Circular SS), Federal Tax Guide for Employers in the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands

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

    • Publication 850, English-Spanish Glossary of Words and Phrases Used in Publications Issued by the Internal Revenue Service

    • Publication 901, U.S. Tax Treaties

    • Publication 915, Social Security and Equivalent Railroad Retirement Benefits

    • Publication 970, Tax Benefits for Education

    • Publication 1321, Special Instructions For Bona Fide Residents Of Puerto Rico Who Must File a U.S. Individual Income Tax Return (Form 1040 or 1040A)

  2. The following manuals can provide additional information on International returns:

    • IRM 3.17.79, Accounting and Data Control - Accounting Refund Transactions

    • IRM 3.21.3, International Returns and Documents Analysis - Individual Income Tax Returns

    • IRM 3.22.3, International Error Resolution - Individual Income Tax Returns

    • IRM 21.8.1, International - IMF International Adjustments

3.38.147.1.2  (01-01-2015)
Program Responsibility

  1. International IMF related documents are processed exclusively in Austin Submission Processing Campus (AUSPC), which has the responsibility for reviewing notices and transcripts.

  2. Service officials and management must communicate security standards contained in IRM 1.4.6, Manager's Security Handbook, to subordinate employees and establish methods to enforce them.

  3. Employees are responsible for taking required precautions in providing security for documents, information and property which are handled in performing official duties.

3.38.147.2  (01-01-2015)
IMF International Tax Returns and Forms

  1. International Individual Income Tax Returns are identified by the presence of one of the following:

    • An address outside the 50 United States and Washington D.C. (This does not include APO/FPO addresses.)

    • Form 1040CM, CNMI Territorial Individual Income Tax Return ,

    • Form 1040, Guam Individual Income Tax Return

    • Form W-2AS, American Samoa Wage and Tax Statement

    • Form W-2CM, Commonwealth of the Northern Mariana Islands Wage and Tax Statement

    • Form W-2GU, Guam Wage and Tax Statement

    • Form W-2VI, U.S. Virgin Islands Wage and Tax Statement

    • Form 499R-2/W-2PR, (Puerto Rico Withholding Statement )

    • Form 1040NR - U.S. Nonresident Alien Income Tax Return

    • Form 1040NR-EZ - U.S. Income Tax Returns for Certain Nonresident Aliens With No Dependents

    • Form 1040-PR - Planilla para la Declaración de la Contribución Federal sobre el Trabajo por Cuenta Propia (Incluyendo el Crédito Tributario Adicional por Hijos para Residentes Bona Fide de Puerto Rico)

    • Form 1040-SS - U.S. Self-Employment Tax Return

    • Form 1042-S - Foreign Person's U.S. Source Income Subject to Withholding

    • Form SSA-1042S - Social Security Benefit Statement

    • Form RRB-1042S - Payments by the Railroad Retirement Board

    • Form 2555 - Foreign Earned Income

    • 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 Northern Mariana Islands

    • Form 8804 - Annual Return for Partnership Withholding Tax (Section 1446)

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

    • 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 8813 - Partnership Withholding Tax Payment Voucher (Section 1446)

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

    • Form 8854 - Initial and Annual Expatriation Information Statement

    • Form 8898 - Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession

    • Form 8962 - Premium Tax Credit (PTC)

    • Form 1040 - U.S. Individual Income Tax Return

    • Dual - Status - Form 1040 and Form 1040NR filed together for the same tax year; "Dual- Status" or "D/S" indicated on the return. Always leave Form 1040 and Form 1040NR/EZ for the same taxpayer together.

    • Nonresident Alien (NRA), primary or both taxpayers are NRA

      Exception:

      Primary taxpayer is an NRA without an SSN/ITIN, however, the secondary taxpayer has an Social Security Number (SSN)/ Individual Taxpayer Identification Number (ITIN) and reporting income

    • International Tax Treaty - Taxpayer indicating exemption or exclusion of tax and/or income due

    • American Indian Treaty - Returns are not considered International returns. These must be renumbered as a domestic return

    • Treaty Trader

    • Fulbright Grantee

    • IRC Section 911, IRC Section 913, IRC Section 931, or IRC Section 933 notated anywhere on the return

  2. International returns are assigned specific Document Locator Numbers (DLN) beginning with 20 or 21.

  3. Returns showing Army Post Office (APO), Fleet Post Office (FPO) and Diplomatic Post Office (DPO) addresses are considered domestic returns and will reflect the appropriate DLN.

  4. Returns assigned DLN beginning with 20 are:

    • Form 1040 with foreign addresses

    • Form 1040 with Form 2555 and Form 2555-EZ (regardless of address)

    • Form 1040NR, 1040NR-EZ.

  5. Returns assigned DLN beginning with 21 are:

    • Form 1040 with U.S. territory address

    • Form 1040A with U.S. territory address

    • Form 1040-PR (in Spanish)

    • Form 1040-SS

    • Form 1040 with Form 5074, Form 4563

    • Form 1040 with Form 8689

  6. Foreign returns received at other offices (campus, territory, etc.) are transshipped.

  7. All remittances are processed in the office/campus where received.

  8. All transshipped returns reflect an original received date.

3.38.147.3  (01-01-2015)
General Information

  1. Basic review of international returns varies slightly from domestic. Documents are compared to the computer generated documents, computer paragraph notice and information contained on the Online Notice Review (OLNR) system or the Account Management Services (AMS) system for the Priority Refund Transcripts.

  2. Compare the Document Locator Number (DLN) on the return with the DLN on the NRPS package.

  3. Compare the name and address on the tax return to the name on the notice or entity portion of the refund transcript.

  4. Verify the signature(s) on Form 1040NR, Form 1040NR-EZ. Only one signature is required. There is no box for a spouse's signature. A notation of "Attorney-in-Fact" in the signature area is an acceptable substitute for the signature. Do not correspond for taxpayer's signature if the notation is on the return.

  5. Facsimile signatures are acceptable.

3.38.147.3.1  (01-01-2015)
Definitions

  1. Alien - Any person who is not a U.S. citizen or U.S. National. For income tax purposes, aliens are classified as Resident or Nonresident.

  2. Bona Fide Residence - A residence established in a foreign country or countries for an uninterrupted period which includes an entire calendar year that extends into the current tax year.

  3. Domicile - A fixed or permanent place of living for an indefinite length of time. A domicile can be different from the taxpayer's residence.

  4. Dual-Status -Refers to aliens who are both U.S. Resident Aliens and Nonresidents Aliens of the U.S. within the same tax year. .

  5. Effectively Connected Income - Any compensation received for personal services in the U.S. Any earned income derived from an office or fixed place of business in the U.S. Generally applies to nonresident.

  6. Excludable Income - Any income that can be omitted from taxable income such as , Form 4563 exclusions and exclusions due to tax treaty conventions and other exclusions provided by IRC Section.

  7. Foreign Tax Treaties - Country-specific treaties designed to avoid international double taxation and to prevent tax evasion.

  8. Fulbright Grant - A grant under the Mutual Educational and Cultural Exchange Act of 1961. It can be received for teaching and research duties, or by students.

  9. Green Card Test - A taxpayer is a lawful permanent resident of the U.S. at any time during the calendar year, if that person has been issued an alien registration card, (also known as a "green card" ).

  10. Nonresident Alien - An alien who is temporarily residing in the U.S., a resident alien who has abandoned permanent residence in the U.S. or an alien who has never been in the U.S.

  11. Non-Effectively Connected Income - Nonresident aliens' income received from sources within the U.S. which are not connected with a U.S. trade or business.

  12. Physical Presence Test - A test to determine if a taxpayer qualifies for the foreign earned Income exclusion. Generally, the taxpayer must be physically present in a foreign country and countries for a minimum of 330 days during a consecutive 12 month period that includes part of the current tax year.

  13. Principal Residence - Usually the home in which a taxpayer resides for the majority of the tax year.

  14. Resident Alien - Aliens admitted to the U.S. under permanent immigration visas that meet the "green card test" or the "substantial presence test" for the calendar year.

  15. Schedule NEC - Tax on Income Not Effectively Connected With a U.S. Trade or Business (page 4 of Form 1040NR).

  16. Schedule OI - Other Information (page 5 of Form 1040NR or page 2 of Form 1040NR-EZ).

  17. IRC Section 911 - This Section allows U.S. citizens and resident aliens to claim an exclusion for income earned in a foreign country or countries. and certain housing costs. Taxpayers use Form 2555 and Form 2555-EZ to claim this exclusion.

  18. IRC Section 931 - Section of the Internal Revenue Code that allows bona fide residents of American Samoa to exclude income using Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa.

  19. IRC Section 932 - Section of the Internal Revenue Code that coordinates the U.S. and U.S. Virgin Islands income tax systems

  20. IRC Section 933 - Section of the Internal Revenue Code that allows U.S. citizens who are bona fide residents of Puerto Rico to exempt income from sources within Puerto Rico .

  21. IRC Section 935 - Section of the Internal Revenue Code that allows bona fide residents of the Commonwealth of the Northern Mariana Islands or Guam to file a single income tax return wit the CNMI or Guam to report worldwide income.

  22. Substantial Presence Test - A rule applied in determining if an alien is a U.S. Resident for tax purposes. Generally, an individual meets the substantial presence test if the individual was in the United States for at least 31 days during the current calendar year and was present in the United States for at least 183 days during the current year and the two preceding calendar years (when multiplied by the applicable multiplier provided in IRC Section 7701(b)(3)(A).

    Note:

    For purposes of the substantial presence test, an individual does not count days of temporary presence in the United States under certain visas.

  23. Tax Home - A taxpayer's principal place of business, employment, station or post of duty, regardless of where the taxpayer maintains his or her residence. Individuals born in the U.S. territories are U.S. citizens, except in the case of American Samoa, where such individuals are U.S. Nationals who are treated as U.S. citzens for that purposes.

  24. Treaty Trader - Nonresident Alien who has entered the U.S. on an "E-1" visa.

  25. U.S. National - An individual who, although not a U.S. citizen, owes his or her allegiance to the United States. For tax purposes, U.S. national refers to American Samoans and Northern Mariana Islanders who chose to become U.S. nationals instead of U.S. citizens.

  26. Visa - An endorsement written or stamped on a passport granting entry into a country.

  27. Withholding Agent - Any person (e.g., individual trust, partnership, estate, corporation, government agency, non-profit organization or private organization), whether foreign or domestic, required to withhold income tax on U.S. source income received by a nonresident alien, foreign partnership corporation, and various other organizations. A withholding agent is responsible for submitting the withholding information on Form 1042 and providing the income recipient information on Form 1042-S.

3.38.147.3.2  (01-01-2015)
Background

  1. U.S. citizens living or traveling outside the United States are generally required to file U.S. income tax returns and report worldwide income.

  2. An alien individual is a Resident alien if the individual meets the "green card test" or the "substantial presence test" for the calendar year, or makes the election to be taxed as a resident alien under IRC Section 6013(g) or IRC Section 6013(h). Resident aliens are generally required to file U.S. Income Tax Returns and pay U.S. Tax on worldwide income.

  3. If an alien individual does not meet either of these tests (or does not make an election), the individual is a nonresident alien. A nonresident alien must file Form 1040NR, U.S. Nonresident Alien Income Tax Return, to report and pay U.S. Tax on certain types of income. An individual who is classified as a resident alien under the green card test or substantial presence test and is also a resident in another country, may be treated as a nonresident alien under the residency tie breaker rules of an applicable income tax treaty.

    Note:

    However, a nonresident alien may elect under certain circumstances to be treated as a resident alien for all or part of the year.

  4. The United States may tax the income of a nonresident alien individual (who is neither a U.S. citizen nor resident alien) in one or both of the following ways:

    1. Fixed Determinable, Annual or Periodical Income (FDAP) - If the nonresident alien earns U.S. source FDAP that is not Effectively Connected Income (ECI), the U.S. may impose a statutory 30 percent gross basis tax (unless the item of income is exempt or subject to reduced rate of withholding pursuant to a code or income tax treaty).

    2. Effectively Connected Income (ECI) - If a nonresident alien conducts a U.S. trade or business, then the U.S. may tax such person's income that is effectively connected with the trade or business. ECI is taxed at the same individual graduated tax rates that apply to U.S. taxpayers. However, some types of ECI are exempt from tax under an income tax treaty.

3.38.147.3.3  (01-01-2015)
Filing Status

  1. Resident aliens can use the same filing status available to U.S. citizens.

  2. Nonresident aliens may use the following Filing Status Codes as listed by country:

    Nonresident Aliens Form 1040NR Filing Status checked by Taxpayer Allowable Filing Status
    Canada 1, 3 or 6 1, 3, 5 or 6
    Mexico 1, 3 or 6 1, 3, 5 or 6
    South Korea 2, 4 or 6 1, 3, 5 or 6
    U.S. National 1, 3 or 6 1, 3, 5 or 6
    India 2 or 5 1, 3 or 6
    All other countries 2 or 5 1 or 3
  3. Married Filing Joint for Nonresident Aliens- A nonresident alien married to a U.S. citizen or resident alien is taxed at citizen/resident rates if that person files married filing joint and discloses all worldwide income on the return. This includes situations where one spouse begins the year as a nonresident alien and ends the year as a resident, and the other spouse ends the year in nonresident status. Both taxpayers must have a valid SSN or ITIN [IRC Section 6013(g) or IRC Section 6013(h)].

  4. Special Provisions- Married residents living in Canada, Mexico, South Korea and U.S. Nationals who are living apart from their spouses "may file as single" if they meet certain requirements.

    Note:

    This provision sometimes referred to as the "abandoned spouse" provision, also applies to U.S. citizens. Aliens who qualify for this provision must be from the specific categories listed on the instruction for Form 1040NR. These are the only aliens who may claim exemptions for their children. All other married nonresident aliens must file as other married nonresident alien and are taxed under the "married filing separate" rates.

  5. Qualifying Widow(er) for Nonresident Aliens - An nonresident alien can claim this filing status only if they are a U.S. National or a resident of Canada, Mexico, or South Korea and the spouse's date of death was no more than two years prior to the tax year. The taxpayer must also have a dependent child with a valid SSN or ITIN to qualify.

3.38.147.3.4  (01-01-2015)
Exemptions

  1. Resident aliens may claim personal exemptions and exemptions for dependents in the same way as U.S. citizens.

  2. Exemptions under Article 4 (7) of the U.S. tax treaty with South Korea allow for a prorated exemption for a taxpayer's spouse and children. The spouse and children claimed must live with the nonresident alien in the United States at some time during the tax year. Exemptions are based on the ratio of U.S. source income effectively connected to total gross income for the entire year. Use the following formula to determine the prorated exemption amount:

    • (U.S. Income / Worldwide Income) X exemption amount = Prorated exemption amount

    Example:

    (9,000 / 12,000) x 11,850 =8,888

  3. Nonresident aliens from Canada, Mexico and U.S. nationals are allowed to claim their spouse, children and other dependents as exemptions. The spouse must not have gross income for U.S. tax purposes and must not be claimed as a dependent on another U.S. taxpayer's return. Nonresident taxpayers from Japan may claim exemptions for spouse, children and other dependents for Tax Year 2005 and prior.

  4. Nonresident aliens from all other countries may claim only one exemption for self.

  5. Residents of India who entered the U.S. as students or business apprentices and who are eligible for the benefits of Article 21(2) of the United States-India Income Tax Treaty may be able to claim exemptions for their spouse and dependents.

    1. An Indian resident may claim the exemption for the spouse only if that spouse had no gross income during the tax year and is not the dependent of another taxpayer.

    2. The taxpayer may claim exemptions for each dependent not admitted to the United States on F-2, J-2, or M-2 visas if they meet the same rules that apply to U.S. citizens.

    3. Exemptions can only reduce income that is effectively connected with a U.S. trade or business. Exemptions do not reduce any income which is subject to the 30percent gross basis FDAP tax.

  6. For more information on exemptions refer to IRM 21.8.1.11.6.3, Nonresident Aliens and Self-Employment Tax .

3.38.147.3.5  (01-01-2015)
Deductions

  1. Resident aliens may claim the same itemized deductions as U.S. citizens using Schedule A of Form 1040. Resident aliens may claim the standard deduction for their particular filing status if they do not itemize.

  2. Nonresident aliens must itemize deductions.

    Exception:

    Students and business apprentices who are residents of India may claim a standard deduction in lieu of itemized deductions.

  3. Taxpayers excluding income under IRC Section 933 (Puerto Rico) or IRC Section 931 (Form 4563) may prorate their itemized deductions or standard deduction.

3.38.147.3.6  (01-01-2015)
Taxpayer Identification Number

  1. Social Security Number (SSN) - Generally signifies the filer is a U.S. citizen or resident alien and taxed on worldwide income. Compare the SSN on the notice with the return.

  2. Individual Taxpayer Identification Number (ITIN) -Beginning in January 1, 1997, taxpayers can apply for an ITIN when they are not eligible to obtain an SSN. As of January, 2004, taxpayers must generally file an income tax return with their ITIN application. For the exceptions to the requirement to include a tax return, see the instructions to Form W-7, Application for IRS Individual Taxpayer Identification Number. ITIN numbers start with nine (9) with fourth and fifth digits in the range of:

    • 70-88

    • 90-92

    • 94-99

    Note:

    Generally, these taxpayers are nonresident aliens (NRA) who are taxed at a flat statutory rate or reduced treaty rate.

  3. Internal Revenue Service Number (IRSN) – These numbers are used for internal processing only when the taxpayer does not qualify for an SSN or ITIN. An IRSN will start with a nine (9) with fourth and fifth digits as 18 for the Austin campus. Other campuses will use a unique fourth and fifth digit for each campus number. See IRM 21.6.2.1(2), Adjusting TIN-Related Problems Overview for a list of other IRSN fourth and fifth digits. An IRSN is always invalid.

  4. ITIN and Adoption of Foreign Child-A taxpayer who adopts a foreign child can use a valid SSN or an ITIN, Individual Taxpayer Identification Number, to claim a credit or exemption. Upon entry into the United States of the foreign child, the adopting taxpayer should apply to the Social Security Administration (SSA) for a valid SSN for the child. If SSA rejects the application, the taxpayer may apply to the IRS for an ITIN for the child, using Form W-7.

  5. Temporary Taxpayer Identification Number (TTIN) -This is also known as an IRSN. A literal “T” replaces the first digit.

  6. Adoption Taxpayer Identification Number (ATIN) -May be used to claim a credit or exemption for an adopted child when the child cannot obtain an SSN. The ATIN, which may be applied for using IRS Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions may ONLY be used to claim a credit or exemption for a child who was a U.S. citizen, resident, or national when the adoption process commenced and who was adopted domestically through an authorized adoption agency/agent.

3.38.147.3.7  (01-01-2015)
IMF International Key Codes

  1. During the selection process, the first selection criterion is named the Primary Selection Key. If a second criterion is selected, it is named the Secondary Selection Key.

  2. After a Secondary Selection Key, the selection process is terminated for any remaining selection criteria both within the category and in remaining categories.

  3. International key codes are valid for Austin Submission Processing Campus (AUSPC) only.

3.38.147.3.7.1  (01-01-2015)
NRPs International Selection Keys

  1. Listed are the International Selection Keys used:

    KEYS LITERAL
    300 Credit for the Elderly or Disabled not allowed for nonresident aliens
    301 Disallowed Foreign Earned Income Exclusion- no response to request for number of days in U.S.
    302 Disallowed foreign earned income exclusion on F2555/EZ - did not use FI WS or Math Error
    303 Changed return for incorrectly compute foreign income
    304 Changed foreign earned income exclusion (F2555/EZ) - Exclusion lim is $87,600
    305 Error figuring foreign earned income/housing exclusion/ded F2555
    307 Credit for the Elderly or Disabled not allowed for nonresident aliens
    308 Changed foreign income exclusion
    309 Disallowed foreign earned income exclusion (F2555/EZ) - did not meet tests
    310 Disallowed foreign earned income exclusion - resident of U.S. Possession
    311 Processed F1040NR as your tax form
    312 Changed foreign tax Credit - Credit computed on income excluded on F2555/EZ
    313 Foreign Tax Credit income - not allowed
    314 Disallowed Foreign Earned Income Exclusion - Income earned in Cuba IAQ or Libya
    321 Changed dual status return - joint tax return not allowed
    322 Recomputed tax using single rate - dual status return cannot file as HOH
    324 Disallowed the STD DED - dual status return
    325 Recomputed tax - income from dual status statement combined incorrectly on return
    326 Changed tax due
    328 Changed dual status return using F1040NR - no response to request for dates in U.S.
    329 Recompute total tax on 1040-SS - addition error
    330 Self-employment tax changed
    331 Changed amount of excess social security tax withheld
    332 Disallowed additional child credit on 1040-SS - missing form
    337 Recompute household employment taxes on 1040-SS - insufficient income on schedule H
    338 Recompute household employment taxes on 1040-SS - error on schedule H tax computation or transfer
    339 Disallowed additional child credit on 1040-SS - child exceed age limit
    340 Child Tax Credit not allowed
    341 Changed return for F8689 error
    343 Earned Income credit not allowed
    345 Excess social security tax not allowed - missing forms
    346 Recompute total payments on 1040-SS - addition error
    348 Installment payment for First-Time Homebuyer credit added to return
    349 Installment payment for First-Time Homebuyer credit changed
    351 Information transferred to F1040/certain items require F1040
    352 Amount changed for additional medicare tax/error computing F8959
    357 Additional Medicare Tax amount changed due to error
    359 Recompute total tax on 1040-PR addition error
    361 Recompute excess social security tax or tier 1 RRTA withheld on 1040-PR computation error
    362 Disallowed additional child credit on Form 1040PR missing form
    363 Premium Tax Credit changed due to error on F8962
    364 Advance Premium Tax Credit Repayment changed due to error on F8962
    367 Recompute household employment taxes on 1040-PR - insufficient income on schedule H
    368 Recompute household employment taxes on 1040-PR - error on schedule H tax computation or transfer
    369 Disallowed additional child credit on 1040-PR - Child exceeds age limit
    370 Net Investment tax changed due to error on F8960
    371 Net Investment tax changed due to error on F8960
    372 Net Investment tax changed due to error on F8960
    373 Net Investment tax changed due to error on F8960
    374 Refund or amount owed changed based on correspondence response
    375 Recompute excess social security tax or tier 1 RRTA withheld on 1040PR Form W2 missing
    376 Recompute total payment on 1040-PR - addition error
    377 Ineligible to claim health coverage tax credit
    378 Net investment tax changed due to error on F8960
    380 Recompute total payments on return based on telephone excise tax refund requested for year other than 2006
    381 Recompute health coverage tax credit on Form 1040-PR due to error on Form 8885
    382 Disallowed part or all of health coverage tax credit on 1040-PR due to ineligibility or error on Form 8885
    383 Recompute return - additional child tax credit figured incorrectly
    384 Earn income inclusion F2555 cannot exceed foreign earned income
    385 Recompute total income to include foreign earned income
    386 Disallowed Form 2555, Form 2555-EZ Foreign Earned Income because 1040NR filed
    388 Premium Tax Credit changed due to error on F8962
    389 Premium Tax Credit changed due to error on F8962
    390 Premium Tax Credit changed due to error on F8962
    391 Premium Tax Credit changed due to error on F8962
    392 Premium Tax Credit changed due to error on F8962
    393 Form 1040NR/1040NR-EZ ineligible for recovery rebate credit
    394 Disallowed itemized deductions - missing/incomplete P3 Form 1040NR
    395 Changed additional child tax credit computation or transfer error
    400 Disallowed adjustment for tuition and fees on 1040NR
    401 Disallowed exempt(s) for other Dep (s) - Non-resident alien
    402 Disallowed exempt (s) for other Dep (s) - residents of S Korea or Japan
    403 Removed U.S. Bank INT Income from taxable income (F1040)
    404 Included cap gains from F8288-A on F1040
    406 Disallowed Exempt for Treaty - No response to request for Info
    408 Disallowed Tax Treaty Exemp - Question 'L' or 'J' not answered
    409 Disallowed Tax Treaty Exemp - invalid tax treaty claimed
    410 Treaty exemption disallowed
    413 Incorrectly transferred amount of tax from F1040NR
    415 Disallowed scholarship or fellowship exclusion - supporting statement missing
    416 Changed scholarship or fellowship exclusion - exclusion cannot exceed amt received
    418 Disallowed STD. DED (F1040NR/NR-EZ)
    419 Disallowed itemized DED not effectively connected to U.S. trade/business
    420 Itemize deductions not allowed on F1040NR-EZ
    422 TP liable for SE Tax
    423 Child Tax Credit not allowed due to country of residence
    424 Disallowed educ credit - no resident alien
    426 Changed tax on income not effectively connected (F1040 NR) - computation error
    427 Changed tax on income not effectively connected (F1040NR PG 2) - XFER from Pg 4 error
    428 Recomputed tax using correct tax treaty rate
    429 Recomputed tax using 30% (or lower treaty) rate
    430 Disallowed tax withheld - supporting docs (W-2, 1042-S, 1099) missing
    432 Disallowed income tax withheld at source F1042-S missing
    433 Disallowed partnership under S1446 with holding - F8805 and/or F1042-S missing
    434 Disallowed F8288-A credit IRS has no record of payment
    435 Disallowed U.S. tax withheld on dispositions of U.S. real prop INT F8288-A and/or F1042-S missing
    436 Changed F8288-A credit on return amount does not match F8288-A
    438 Disallowed foreign withholding claimed on return
    439 Disallowed health insurance credit F8885 shows not eligible
    440 Disallowed Health Insurance credit - no response to info request
    441 Disallowed F8805 or F1042-S credit SSN on F1040NR and credit Doc mismatch
    442 Changed return copy of green card and signed declaration not received
    443 Disallowed refund of tax withheld on SS benefits 30% or tax treaty rate
    445 Changed state and local taxes computation error
    447 Changed tax on gambling winnings 30% rate applies
    448 Changed tax on gambling winnings gambling winnings exempt under tax treaty
    449 Adjusted taxable income on 1040NR exemption amount figured incorrectly
    450 Adjusted taxable income on 1040NR-EZ exemption amount figured incorrectly
    451 Adjusted tax by allowing personal exemption on 1040NR-EZ
    456 Disallowed tax treaty exemption max time allowed exceeded for treaty article
    457 Adjusted return total exemption amount computed incorrectly on 1040NR-EZ
    458 Adjusted return personal exemption allowed on 1040NR-EZ
    463 Changed amount claimed as child care and or additional child care credit
    465 Disallowed amount claimed as child care and or additional child care credit
    466 Changed amount claimed as child care and or additional child care credit
    470 Changed SE Tax not qualified to use OPT computation method on SCH SE
    472 Removed SE Tax SE Income LT. $434
    473 Changed SE Tax (F1040-SS) computation error
    474 Changed SE Tax (F1040-SS) refund/amt you owe computation error
    475 Changed add'l child tax credit dep TIN(S) missing
    476 Changed add'l child tax credit dep name(s) or TIN(S) invalid
    477 Disallowed add'l child tax credit TP has LT 3 qual children
    478 Adjusted 1040NR-EZ missing requested explanation for itemized deductions
    479 Adjusted 1040NR-EZ Itemized deductions only include state/local tax paid
    480 Changed amount claimed as total itemized deductions
    481 Premium Tax Credit not allowed when filing married and separately
    482 Premium Tax Credit not allowed when income > poverty level
    483 Premium Tax Credit no allowed no exemptions
    485 Changed SE Tax not qualified to use OPT method d on F1040-PR
    487 Removed SE Tax - SE Income LT $434
    488 Changed SE Tax on Form 1040-SS computation error
    489 Changed DE Tax refund/amt you owe computation error on 1040PR
    490 Changed additional child tax credit dependent TIN(S) missing
    491 Changed additional child tax credit dependent name(s) and/or TIN(s) invalid
    492 Disallowed add'l child tax credit TP has LT 3 qual children
    493 Changed add'l child tax credit one or more children born after tax period
    494 Adjusted 1040PR part of tax treaty exemption exceeds maximum
  2. For Information on Selection Keys not shown in the above chart, refer to IRM 3.14.1.3.1, Notice Selection Process.

3.38.147.3.8  (01-01-2015)
Classification of Income

  1. Earned Income is payment for personal services performed. It includes salaries, wages, commissions, bonuses, professional fees, tips, etc.

  2. Unearned income includes the following: dividends, interest, capital gains, gambling winnings, alimony, social security benefits, pensions, annuities, etc.

  3. Some types of income fall into more than one category: business profits, royalties, rents, net operating loss (NOL) etc.

3.38.147.3.9  (01-01-2015)
Prior Year Returns

  1. Use the prior year tax forms, tax tables and tax rate schedules to verify amounts for the tax computation method most beneficial to the taxpayer.

  2. Returns for December 31, 2011 and prior require manual computation of exemption, standard deduction, itemized deductions and most credits.

  3. Tax treaties can vary year to year. For prior tax years, make sure to check treaty validity using prior year Publications. Refer to IRM 3.38.147.3.11(3) and (4), Tax Treaty - General Information .

3.38.147.3.10  (01-01-2015)
Types of Visas

  1. Visas are assigned based on immigrant or non-immigrant status. Visas are generally assigned to non-immigrants admitted temporarily to the U.S. for a specific purpose and period of time.

  2. The method of taxation for a visa holder depends primarily upon whether the individual is classified as a resident or a nonresident alien.

  3. If a visa holder is determined to be a nonresident alien, taxpayer is taxed on all U.S. source income and on all income that is effectively connected with the conduct of a trade or business in the U.S. Non-effectively connected foreign source income is not taxed. Resident aliens are taxed the same way as citizens.

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

    1. F Visa The "F" Visa is issued only to alien students who have already been accepted as registered students by an accredited educational institution approved by the Attorney General.

    2. H-1B The "H-1B" visa is issued to temporary workers in a professional specialty occupation.

    3. J Visa In order to enter the United States on a "J" Visa, an individual must qualify as a teacher or professor who is entering the United States temporarily as a participant in a program designated by the Secretary of the State, for the purpose of teaching, instructing, or lecturing. These individuals are commonly referred to as "exchange visitors" . An alien professor or teacher temporarily present in the United States on a "J" Visa is admitted for an initial period of two years.

    4. L-1B The "L-1B" visa is issued to temporary workers with specialized knowledge of an industry.

    5. M Visa The "M" Visa is issued only to alien students who have already been accepted as registered students by an established vocational or other recognized nonacademic institution, other than in language training programs.

    6. Q Visa The "Q" Visa is issued to alien students whose employment or training affords the opportunity for cultural sharing with the American Publicationlic. They are allowed to work in the United States for a specific employer in an approved cultural exchange program. The employer must be the petitioner through whom the alien obtained the "Q" Visa.

    7. TN Visa A product of the North American Free Trade Agreement (NAFTA), the "TN" Visa allows the temporary entry into the United States of Canadian and Mexican citizens who are professional business persons to render service for remuneration. While non-immigrant visas, prior petition by employer and labor certification ARE required for Mexican citizens, they ARE NOT required for Canadian citizens. All applicants must show proof of citizenship and professional engagement in one of the occupations listed in the qualifying occupation schedule.

    8. TD Visa (NAFTA)The "TD" Visa allows the temporary entry into the United States of the dependents of "TN" Visa holders. These dependents must be either the spouses or minor children of the certified "TN" Visa holders.

3.38.147.3.11  (01-01-2015)
Tax Treaty - General Information

  1. The United States has income tax treaties with a number of countries. Under these treaties, residents of foreign countries are (if eligible) taxed at a reduced rate, or are exempt from U.S. income taxes on certain items of income received from sources within the United States. These reduced rates and exemptions vary among countries and specific items of income. The term "resident" is defined under the relevant treaty and some treaties require a physical presence within the foreign country such that citizenship alone may not establish "residency" .

  2. Tax treaties reduce the U.S. taxes of residents of foreign countries. With certain exceptions, they do not reduce the U.S. taxes of U.S. citizens or resident alien. U.S. citizens and resident alien are subject to U.S. income tax on their worldwide income. Caution: If the taxpayer writes “Republic of China”, this is Taiwan and we do not have a tax treaty with this country.

  3. All treaty information for effectively connected income reported on Form 1042-S, Income Code 15 through 19, should be provided on Item L, Schedule OI on page 5 of Form 1040NR or Item J, Schedule OI, page 2 of Form 1040NR-EZ. Taxpayers should not include amounts exempt by treaty on Line 8, Form 1040NR or Line 3, Form 1040NR-EZ. The treaty amounts should be included on Line 22, Form 1040NR or Line 6, Form 1040NR-EZ.

  4. Tax treaties can vary year to year. Make sure to check treaty validity using Publication 901, U.S. Tax Treaties, Publication 915, Social Security Benefits and Equivalent Railroad Retirement Benefits, Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities and/or IRS web page .

  5. For a claim of a treaty exemption to be valid, the taxpayer must provide the name of the country of which they are a resident, the relevant treaty article, and the amount of “exempt” income during the tax year.

    Note:

    Exemption Code 04 on a Form 1042-S does not count as a valid treaty exemption except when issued by a college or university with Income Code 15 and there is no withholding.

  6. Article XXV refers to a tax treaty between the United States and Canada based on a Non-Discrimination provision which allows citizens/residents of Canada to figure their 1040NR tax based upon a hypothetical 1040 tax computed on married filing joint tax rates. The taxpayers must include worldwide income in their 1040 tax computation. Article XXV returns can be recognized by any of the following on Form 1040NR:

    • Two names are present in the entity section of the return; or

    • Form 1040 or statement is attached with a hypothetical married filing joint tax rate computation; or

    • Statement attached indicating that a special computation permitted by the U.S./Canada Tax Treaty has been used; or

    • A notation of XXV is found on the return or attachments

      Note:

      Single taxpayers are not eligible to claim the benefits of Article XXV or to use the Tax rates for Head of Household. When the Article is claimed and the necessary information is not included, the Form 1040NR is to be processed using Filing Status Code 1 for single.



    • Use the following formula to figure the computation for Article XXV:
      (Form 1040NR Taxable income/Form 1040 Taxable Income) X 1040 Tentative Tax = Tax

      Note:

      Alternative Minimum Tax may still apply.

    Reminder:

    If there was a previous math error, hypothetical married filing joint tax must be recomputed using correct TXI and tax from Form 1040 and Form 1040NR.

  7. The taxpayer may not exempt income by claiming “Tiebreaker” under Article IV. Article IV is not a valid article for exemption.

  8. Under certain circumstances, tax treaties between the United States and all countries may be claimed on Form 1040. The amount must be reported as income on line 7 and as a negative amount on line 21 along with the relevant tax treaty article. It must be related to teaching, studying, or training.

3.38.147.3.12  (01-01-2015)
Extension of Time to File International Returns

  1. U.S. citizens and resident aliens who file calendar year returns are required to file a tax return by April 15. However, taxpayers who are overseas on the due date receive an automatic extension of two months (until June 15 for calendar year filers).

  2. If taxpayers are unable to file their return by the due date, they can generally get an automatic 6 month extension of time to file using a Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. For taxpayers who are overseas on the due date of their return, the 2 month period mentioned above (until June 15 for calendar year taxpayers) and the 6 month automatic extension period start at the same time. In other words, for taxpayers who are overseas, if taxpayers are unable to file their return within the automatic 2 month extension period they can generally get an additional 4 months using a Form 4868 (for a total of 6 months).

  3. The extension of time to file only applies to the calculation of penalties. Interest accrues from the due date of the return.

  4. If taxpayers file a Form 2350, Application for Extension of Time to File U.S. Income Tax Return For U.S. Citizens and Resident Aliens Abroad Who Expect to Qualify for Special Tax Treatment, such as the foreign earned income exclusion under IRC Section 911, they are generally granted an extension to a date thirty days after the date on which the taxpayer expects to meet the criteria. Taxpayers who expect to meet the requirements based on bona fide residence or physical presence in a foreign country can request an extension until they qualify.

  5. Nonresident Aliens with wage income subject to Form W-2, Wage and Tax Statement withholding have an original due date of April 15.

  6. Nonresident Aliens without wage income subject to W-2 withholding have an original due date of June 15.

  7. Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, provides for a 6 month extension.

  8. The extension provisions apply to fiscal as well as calendar year filers.

  9. Any extension request beyond December 15 for a calendar year filer requires approval.

  10. In addition to the automatic extensions requested using a Form 4868, taxpayers who are overseas may request a discretionary 2 month additional extension of time to file their returns (to December 15 for calendar year taxpayers). Taxpayers must send the IRS a letter explaining the reasons why the additional 2 months is needed.

    1. Nonresident Aliens required to file a Form 1040NR for the first time or for the preceding year, must file no later than 16 months after the due date of the current year return.

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

    3. Nonresident Aliens unsure about their status may file protective claims no later than the deadline.

  11. Taxpayers in U.S. territories with a U.S. income tax filing required are required to file by April 15th for calendar year filers. Taxpayers are allowed an automatic 2 month extension if they are U.S. citizens or resident aliens and are living outside the U.S. or Puerto Rico and the main place of business or post of duty is outside the U.S. or Puerto Rico on the due date of the return.

    • They are U.S. citizens or residents in military service on duty outside the U.S. and Puerto Rico.

    • Taxpayers in U.S. territories must file Form 4868 to receive the 6 month extension.

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

3.38.147.3.13  (01-01-2015)
Taxpayer Correspondence/Reply Procedures

  1. Follow procedures in IRM 3.14.1.7.4, Taxpayer Correspondence/Reply Procedures with the exception of suspending your case for 60 days instead of 45 days.

3.38.147.3.14  (01-01-2015)
Funny Box IVO (Integrity and Verification Operation) - RICS

  1. Refer to IRM 3.14.1.6.9.5, Funny Box IVO for listing of identity theft criteria.

3.38.147.3.15  (01-01-2015)
Premium Tax Credit (PTC) Form 8962

  1. Starting in 2014, individuals and families can take a new premium tax credit to help them afford health insurance coverage purchased through an Affordable Insurance Marketplace. The Form 8962 allows taxpayers to compute and claim the premium tax credit on their tax return. If the taxpayers have received the benefit of the advanced premium, the taxpayers can reconcile the total credit allowed to the advanced payment so that they may either claim any additional credit allowed on their tax return or repay the excess benefit received from advanced payments made to the insurer.

3.38.147.4  (01-01-2015)
Taxpayer Notices, AMS Transcripts and Adjustments

  1. Notices and error messages are printed in either English or Spanish based on document codes in the DLN. The IMF Notice Review International Job Aid 2510-001 to see Tax Returns for complete listing of Taxpayer Notice Codes (TPNC).

    • For Form 1040-PR, printed in Spanish, document code 27 will appear in the 4th and 5th digits of the DLN.

    • For Form 1040-SS, printed in English, document code 26 will appear in the 4th and 5th digits of the DLN.

  2. When inputting an adjustment or transferring credit, input the appropriate International File Location Code (FLC) for all international returns.

3.38.147.4.1  (01-01-2015)
Math Error Notices

  1. Use Online Notice Review (OLNR) and Integrated Data Retrieval System (IDRS) tax module data to determine disposition of notice.

  2. Follow guidelines in IRM 3.14.1, IMF Notice Review.

  3. Verify name, address, taxpayer identification number (TIN), tax period and DLN as shown on the return with information contained in the notice.

    1. If correction of the tax period involves reprocessing the document to the correct period, see IRM 3.14.1.6.22, Reprocessing Returns

    2. A DLN mismatch may simply be a "wrong pull" or it could indicate a slipped or mixed block. See IRM 3.14.1.6.9.5, Slipped Blocks and Mixed Data Blocks, IMF Notice Review, for processing instructions for slipped or mixed blocks.

  4. Math Error - Review math error explanation for accuracy and verify from the point of error including previous lines and attachments that affect the point of error or other parts of the return.

  5. Estimated Tax (ES) Discrepancy- See IRM 3.14.1.6.13.2,Estimated Tax Discrepancy Notice Disposition for notice disposition and case resolution.

    Note:

    There are no ES Discrepancy notices in Spanish. ES Discrepancy notices will generate as CP 711, CP 712, and CP 713. Be aware of double credit situations where the taxpayer puts his estimated tax payments on the excess FICA Line of the Form 1040-PR, Line 8 or Form 1040-SS, Line 8.

  6. TPNC 311 will be assigned by ERS whenever a return is converted, during processing, from a Form 1040NR-EZ to Form 1040-NR. TPNC 111 notifies the taxpayer that their return was converted, and also causes the default TPNC literals to generate during printing. If TPNC 311 is not present on a notice for a converted return, retype the notice and add TPNC 311 as the first TPNC.

3.38.147.4.1.1  (01-01-2015)
Reviewing CP 14

  1. Due to a systemic error, tax per taxpayer must be reviewed, (CC, RTVUE, TRDBV or Control D). If a math error is detected, follow the procedures below to set the initial math error on the module.

  2. Recompute the tax and/or credits on the return and adjust, if necessary.

  3. Input the adjustment using Blocking Series 77 or 78, Source Code 6, and Hold Code 3.

  4. If the return meets the conditions for a non-computed return, follow instructions in IRM 3.14.1.6.16.3, Converting Another Notice to a CP 51 and retype the notice as a CP 51. Otherwise, retype the notice to the appropriate math error notice and send the appropriate TPNC(s).

  5. Input a history item, using CC ACTON (ex. CP14TOCP11).

3.38.147.4.2  (01-01-2015)
Labeling Notices

  1. Follow guidelines in IRM 3.14.1.7.8.5, Labeling Notices.

  2. For Form 1040-PR, labels will convert to Spanish on the actual notice.

3.38.147.4.3  (01-01-2015)
Reviewing AMS Transcripts

  1. Refer to IRM 3.14.1.6.14, Review Priority Refund Transcripts in Account Management Services (AMS), when working AMS transcripts.

3.38.147.5  (01-01-2015)
Form 2555/Form 2555-EZ, Foreign Earned Income

  1. A U.S. citizen, U.S. resident alien, or nonresident alien (filing Dual-Status return) living in a foreign country, may exempt foreign earned income on Form 2555/Form 2555-EZ.

  2. Taxpayers who have earned income from a foreign country or countries can file Form 2555 and Form 2555-EZ to exempt foreign earned income from U.S. income tax.

  3. Form 2555 and Form 2555-EZ is filed with a Form 1040.

  4. A taxpayer living and working in a restricted country cannot claim the benefits under IRC Section 911 on Form 2555 and Form 2555-EZ:

    Note:

    As of June 11, 2013 Cuba is the only country on the Restricted List.

    Restricted Country Beginning Date Ending Date
    Cuba

    Exception:

    If a nonmilitary taxpayer files a Form 1040 with a Form 2555 to exclude income earned from Guantanamo Bay, allow the exclusion.

    January 1,1987 Still in Effect
    Iraq January 1, 1987 July 29, 2004
    Libya January 1, 1987 September 20, 2004
  5. Individuals whose activities in Iraq and Libya are or were permitted by a specific or general license by the Department of the Treasury's Office of Foreign Assets Control (OFAC) were not in violation of U.S. law. Accordingly, the restrictions did not apply to such individuals with respect to the activities permitted by the license. OFAC issued General License No. 1 with respect to IRAQ pursuant to the Executive Order 13315 to allow transactions occurring after May 23, 2003.

    1. Follow the If/Then chart below:

    If Then
    The income was earned in one of the above listed countries and the income was not X-ed in processing Adjust the income to remove the exempt amount on Line 21, Form 1040 and send TPNC 314
  6. Form 1040 with 255 and Form 2555-EZ received from taxpayers employed by Raytheon, Christchurch, New Zealand, Antarctic Support Associates or Honeywell International Inc., take the following action if not identified in processing:

    • Adjust Line 21, Form 1040 to exclude the foreign earned income exclusion amount

    • Ensure the taxpayer included the earned income on the applicable Lines: 7, 12, 18 or 21

    • See assigned TPNC 100 in Job Aid 2501-001.

  7. U.S. Government Employees may not exclude income received from the U.S. Government or its agencies on Form 2555/Form 2555-EZ.

    • Amounts paid by the American Institute in Taiwan are not foreign earned income for purposes of the foreign earned income exclusion, the foreign housing exclusion or the foreign housing deduction.

  8. Taxpayers living and working in a U.S. territory listed below are considered to live in the United States and cannot claim the foreign earned income exclusion on Form 2555.

    • American Samoa

    • Antarctica

    • Baker Island

    • Commonwealth of the Northern Mariana Islands

    • Guam

    • Howland Island

    • Jarvis Island

    • Johnston Island

    • Kingman Reef

    • Midway Islands

    • Palmyra Atoll

    • Puerto Rico

    • U.S. Virgin Islands

    • Wake Island

    Take the following action if not identified in processing:

    • If the exclusion is claimed and the taxpayer’s primary home is in a U.S. territory, disallow the exclusion

    • Adjust the total income to include the foreign earned income exclusion amount

    • Assign TPNC 310

    Exception:

    If a return has an address in the Palau Islands , The Federated States of Micronesia (FSM) and RePublicationlic of the Marshall Islands (RMI) and Form 2555/Form 2555-EZ is attached, allow the exclusion.

  9. United States citizens and resident aliens who live abroad and have earned income from a foreign country may exempt income from U.S. tax if their tax home is in a foreign country and one of the following conditions apply:

    • To qualify for bona fide residence, the taxpayer must reside in a foreign country for an uninterrupted period that includes an entire tax year that extends into the tax period of the return.

      Note:

      An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis.

      Example:

      For tax year 2014, the taxpayer enters bona fide dates of 11/01/11 to 10/15/2014. The taxpayer completed an uninterrupted period of residence for a full tax year (2013) and therefore meets the bona fide residence test. The taxpayer would also qualify for tax years 2012 and 2013.

      Example:

      For tax year 2014, the taxpayer enters bona fide residence dates of 10/01/2013 to 11/ 30/2014. The taxpayer did not complete an uninterrupted period of residence for a full tax year (2013 or 2014) and therefore does not meet the bona fide residence test in either year.

      The taxpayer satisfies the physical presence test in a foreign country or countries by actually residing in any one country or a combination of them for at least 330 full days within any consecutive 12 month period. This qualifying period does not have to be a calendar year, but may cover part of two years. Part of the 12 month time period must be within the tax period of the return.

      Note:

      The requirements for a full taxable year or 330 days will be waived if the taxpayer indicates he/she was forced to leave a certain country because of war, civil unrest, civil insurrection, hostile fire, etc. (refer to Publication 54 for which countries qualify each year).

  10. If the taxpayer has a partial tax year that falls within the qualifying period, the exclusion must be prorated for the partial year.

  11. If married filing jointly with deductible or excludable income for both taxpayers, a separate Form 2555 and, Form 2555-EZ is required for each spouse. Generally, only one spouse Treas. Reg. 1.911-5(a)(3)(ii) can claim a housing exclusion or housing deduction.

  12. For tax years 2006 and later: when the taxpayer uses this exclusion, the tax must be manually figured using the Foreign Earned Income Tax Worksheet (Form 1040 Instructions). If necessary, recompute tax and retype notice appropriately.

    Reminder:

    Special instructions apply when capital gain excess is present.


  13. When recomputing credits, Form 2555 and Form 2555-EZ exclusions and deductions are often included in modified AGI.

  14. If returning back to taxpayer's figures, void or label the notice as appropriate.

  15. Excludable foreign earned income cannot exceed the limit as shown below:

    Taxable Years Maximum Exclusion
    2014 $99,200
    2013 $97,600
    2012 $95,100
    2011 $92,900
    2010 $91,500
    2009 $91,400
    2008 $87,600
    2007 $85,700
    2006 $82,400
    2002 - 2005 $80,000

3.38.147.5.1  (01-01-2015)
Form 2555, Foreign Earned Income Exclusion

  1. The taxpayer is entitled to the following exclusions and/or deductions on Form 2555:

    • Foreign Earned Income Exclusion (Part VII)

    • Housing Exclusion if housing is provided by employer (Part VIII),

    • Housing Deduction if housing is paid for with self employment earnings (Part IX)

  2. Form 2555 must be attached to a Form 1040.

  3. Foreign earned income shown on line 26 of Form 2555 must be shown as income on Form 1040 on Lines 7, 12, 18 or 21.

    1. Adjust if income is not claimed.

    Note:

    If the taxpayer is reporting a loss on Schedule C, and included the income on Form 2555(s), adjust the exclusion on line 21 of the Form 1040.

  4. Indications of a Form 2555 attached to Form 1040 are:

    • Annotation of "IRC Section 911 exclusion" written on the front page

    • Annotation of "See Form 2555"

    • Taxpayer claiming "Overseas Housing Exclusion" (Line 21)

    • Taxpayer claiming "Overseas Earned Income Exclusion" (Line 21)

    • Taxpayer claiming "Overseas Housing Deduction" (Line 36)

  5. A taxpayer qualifies for foreign earned income Exclusion if the taxpayer:

    1. has "tax home test" and

    2. is a bona fide resident for an uninterrupted period (regardless of physical presence) with includes an entire tax able year or

    3. has been physically present in a foreign country 330 days out of 12 consecutive months

    4. has a partial tax year that falls within the qualifying period; the exclusion must be prorated for the partial year.

3.38.147.5.2  (01-01-2015)
Form 2555-EZ, Foreign Earned Income Exclusion

  1. Taxpayers may only use Form 2555-EZ if they have foreign earned income and meets all of the following conditions :

    • Taxpayer is a U.S. citizen or resident alien;

    • Taxpayer has earned wages/salaries in a foreign country or countries;

    • The foreign earned exclusion is not greater than the allowable amount; and

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

  2. Taxpayers case can use Form 2555, but not Form 2555-EZ: if

    • Taxpayers have self-employment income;

    • Taxpayers claim business/moving expenses;

    • Taxpayers claim foreign housing exclusion.

    Reminder:

    Foreign earned income claimed on line 17 of Form 2555-EZ must be included as income on line 7 of Form 1040; exclusion from line 18 of Form 2555-EZ is then shown as an adjustment to income on line 21 of Form 1040.

3.38.147.6  (01-01-2015)
Foreign Tax Credit, Form 1116

  1. Taxpayers may take a credit for taxes paid or accrued during the tax year to a foreign country or certain U.S. territories and any political subdivision, agency or instrumentality of the country or territory.

  2. Taxpayers may claim credit on Form 1116 , Foreign Tax Credit, or deduct foreign income taxes paid on Schedule A, Itemized Deductions, but not both.

  3. Form 1116 is filed to claim credit for income taxes paid to another government.

    Note:

    If Foreign Tax Credit is $300 or less ($600.00 or less for married filing joint), Form 1116 is NOT required.

  4. In order to qualify for a credit, the foreign tax must be either an income tax or a tax in lieu of an income tax.

  5. Foreign real property taxes qualify for a deduction, but not for a credit.

  6. Other foreign taxes such as sales, transaction, or personal property taxes do not qualify for a credit or deduction unless incurred in connection with a trade or business.

  7. Foreign Tax Credit is a non-refundable credit.

  8. Excess foreign tax credits may be carried back 1 year (2 years for foreign taxes paid or accrued in tax years beginning before 10/23/2004) and then forward 10 years (5 years for foreign taxes paid or accrued in tax years ending before 10/23/1999).

    Note:

    Carryback is always applied to the earliest year as a Foreign Tax Credit and can never be claimed as a Foreign Tax Deduction.

  9. Taxpayers have a ten-year period during which they may file for refund of U.S. income tax paid, based on their recalculation of a Form 1116, Foreign Tax Credit. This would occur in situations where a taxpayer accrues more foreign tax than originally claimed as a credit. The ten-year limitation applies to a change in the amount of the credit because of:

    • Math errors made computing foreign taxes.

    • Discovery of qualified foreign taxes that were not originally reported.

      Note:

      Refund of limitations period is not to be confused with the five year or ten year carry forward and two year or one year carryback periods. Refer cases involving foreign tax credit carry back to Examination Classification. Only when over $10,000.00 See IRM 21.5.9, Carryback for additional carryback information.

  10. The return due date (the year in which the foreign taxes were paid or accrued) marks the beginning of the ten-year period.

  11. If Foreign Tax Credit is more than $300 (more than $600 for married filing joint) and the taxpayer has income other than interest and dividend foreign source income, Form 1116 is required. Send TPNC 313 if Form 1116 was either incomplete or not attached.

  12. The taxpayer cannot use the same income for both a foreign tax credit and exclude the income using Form 2555 and Form 2555-EZ, IRC Section 933 (Puerto Rico) or IRC Section 931 (Form 4563). If the amount on Line 1a, Form 1116, equals the amount on Line 26, Form 2555 (Line 18, Form 2555-EZ), and Line 12, Form 1116, is blank or zero, disallow the foreign tax credit. Send TPNC 312.

    Note:

    Do not adjust Form 1116 credit when making an adjustment to the return, unless the situation above applies.

  13. 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

3.38.147.6.1  (01-01-2015)
Foreign Tax Deduction, Schedule A

  1. A taxpayer may take a deduction for taxes paid or accrued during the year to;

    • a foreign country or certain U.S. territories .

    • any political subdivision, agency or instrumentality of the country or territory.

  2. This deduction is claimed on Line 8, Schedule A.

  3. Taxpayers may not claim both a foreign tax deduction on Schedule A and a credit on Form 1116 for foreign income taxes in the same year. The Foreign Tax Credit or deduction may not be figured on income that has been excluded on Form 2555 and Form 2555-EZ.

3.38.147.7  (01-01-2015)
Form 1040NR/Form 1040NR-EZ, Nonresident Alien Income Tax Return

  1. If a taxpayer is not a citizen of the United States, specific residency tests apply to determine if the taxpayer is a resident or nonresident alien for tax purposes.

  2. Form 1040NR/ Form 1040NR-EZ is filed whether or not the taxpayer:

    • Is engaged in trade or business within the United States.

    • Has income that did not come from U.S. sources

    • Has income that is tax exempt

  3. Form 1040NR/ Form 1040NR-EZ is filed by a nonresident alien who::

    • Has U.S. source income.

    • Is temporarily present in the United States.

    Note:

    If the return indicates taxpayer was a resident in the U.S. the entire year, review the complete return and attachments for additional information to support taxpayer's claim.

  4. One of the most important concepts involved in the taxation of a nonresident alien is whether income is effectively connected to a U.S. trade or business. Effectively connected income includes primarily U.S. source income. However, if the taxpayer has an office or fixed place of business in the United States, foreign source income of the taxpayer may also be effectively connected income.

  5. A nonresident alien may elect under IRC Section 6013(g) or IRC Section 6013(h) to file a 1040 return jointly with a U.S. citizen or resident alien spouse. See Publication 519.

  6. Certain types of income are subject to special treatment and sometimes exempt from U.S. income tax. If such income is not effectively connected with the conduct of a trade or business within the United States. See IRC Section 871(i)(2)(A). Some of the situations include the following:

    • Scholarship or fellowship income may be exempt. An individual who receives a qualifying scholarship or fellowship can exempt (by tax treaty) or exclude (by IRC Section 117) some or all of his/her grant from gross income if certain requirements are met.

    • Income can no longer be split under community property provisions.

    • Nonresident aliens who work for certain international organizations or foreign governments may exempt income under IRC Section 893 - Compensation of Employees of Foreign Governments or International Organizations.

    • Wages a nonresident alien earns from a foreign employer for services performed in the U.S. are normally effectively connected income. However, the nonresident alien may be entitled to a $3,000 income exemption. A larger exemption may be available under an applicable treaty.

    • Interest paid to nonresident aliens from U.S. bank accounts is not taxable. If a supporting statement indicates bank interest, delete the line 9a bank interest entry and assign TPNC 403.

  7. Additional taxes and liabilities include:

    • Alternative Minimum Tax (the gain from the sale of U.S. real property)

    • Tax on income not-effectively connected with a trade or business in U.S.

    • Social Security and Medicare tax on tip income

    • Tax on IRA and other retirement plans

    • Transportation tax

    • Household employment tax

  8. Nonresident aliens who file Form 1040NR/Form NR-EZ are not entitled to the following credits:

    • Earned Income Credit (Schedule EIC)

    • Standard Deduction for Certain Filers (Schedule L) (Student and Business Apprentices of India can use the Publication 519 worksheet)

    • Tuition and Fees (Form 8917)

    • American Opportunity and Lifetime Learning Credits (Form 8863)

    • Making Work Pay (MWP) (Schedule M)

    • First Time Home Buyer Credit (FTHBC) (Form 5405)

      Note:

      Taxpayers who received the FTHBC in 2008 can claim the repayment on Form 1040NR.

3.38.147.7.1  (01-01-2015)
Effectively Connected Income (ECI)

  1. Effectively Connected Income includes:

    • U.S. Source FDAP Type Income - The following classes of FDAP income may also be Effectively Connected Income:

    1. salaries

    2. wages

    3. premiums

    4. annuities

    5. compensation (including wages, tips, commissions, fees, deferred compensations, pensions, social security)

    6. winnings (including fellowships and scholarships)

    7. other FDAP income to the extent it satisfies the asset use or business activities tests which are used to establish a connection with the income and U.S. trade or business activity.

    • Residual Force of Attraction Rule - All other U.S. sourced income (that is, income that would not otherwise be classified as FDAP type income) is effectively connected income. This includes primarily U.S. sourced capital gains and U.S. sourced income from the sale of inventory. This type of income may be exempted under an income tax treaty to the extent it is not attributable to a U.S. permanent establishment of the taxpayer.

    • Foreign Sourced Income - Certain foreign sourced income that is derived through an office or fixed place of business in the United States may be effectively connected income.

      Note:

      Income earned through a partnership, estate or trust may be classified as effectively connected income if either the partnership, estate, trust, partner or benefactor is engaged in a U.S. trade or business.

  2. Effectively Connected Income is generally not subject to withholding if the taxpayer has complied with applicable documentation requirements, but is taxed on a net basis at graduated rates.

    Exception:

    The following types of effectively connected income are subject to withholding (1) Wages; (2) a nonresident alien partner's distributive share of the partnership's effectively connected income; and (3) the amount realized by a nonresident alien on the sale of U.S. real property (including stock in a U.S. real property holding company). Wages paid to nonresident aliens are subject to IRC Section 3402 withholding in generally the same way as for U.S. citizens and residents if the wages are effectively connected with the conduct of a U.S. trade or business.

  3. Effectively Connected Income is reported on page 1 of Form 1040NR lines 8 through 23 or page 1 of Form 1040 NR-EZ, lines 3 through 5. A return that shows effectively connected income on page 1 of Form 1040NR is processed with Document Code 73.

    • All income sources are connected to U.S. trades or businesses, and all wages, compensation, interest, dividends, etc., and withholding are derived from Form W-2, Form W-2G, Form 1042-S (with exemption Code 01 ONLY in box 6) or Form 1099.

  4. Income included on Form 1042-S with Income Codes 15 through 19 is personal service income reported as effectively connected income on page 1 of Form 1040NR or Form 1040NR-EZ.

  5. Gain or loss on the disposition of a U.S. real property interest is taxed as if the gain or loss were effectively connected with the conduct of a U.S. trade or business. Gains and losses are reported on Schedule D with Form 1040, line 13 and Form 1040NR, line 14. Also, net gains may be subject to the Alternative Minimum Tax, Form 6251. See Publication 519 for more information.

  6. If a nonresident alien disposes of U.S. real property interests at a gain, the taxpayer must make a special computation on Alternative Minimum Tax Form 6251. The taxpayer will also enter Return Processing Instruction (RPI) on the dotted line next to line 30.

3.38.147.7.2  (01-01-2015)
Fixed or Determinable Annual or Periodical (FDAP) (and other Non-Effectively Connected Income Subject to U.S. Withholding)

  1. The following types of income are subject to U.S. withholding at 30 percent (unless reduced by an applicable treaty or other code provision) to the extent the income is (1) U.S. sourced, and (2) NOT effectively connected to a U.S. trade or business:

    • interest

    • dividends

    • rents

    • premiums

    • social security benefits

    • annuities

    • winnings

    • fellowships and scholarships

    • royalties (including contingent gains from the sale of intellectual property)

    • other fixed or determinable, annual or periodical income

    • capital gains to the extent the nonresident alien is present in the United States for 183 days or more during the tax year.

      Note:

      Portfolio interest and certain gambling winnings are exempt.

    1. Up to $3,000 of income from the performance of personal services performed in the United States is exempted from U.S. tax if the following conditions are met.

    • Services are performed for either a foreign employer who is not engaged in a U.S. trade or business, or for a foreign office of a U.S. citizen or resident; and

    • The nonresident alien is present in the United States during the tax year for 90 days or less. This income is exempted from FDAP withholding because it does not constitute U.S. sourced income and is not considered effectively connected income

  2. With certain exceptions, U.S. source non-effectively connected income is reported on Schedule NEC, page 4 of Form 1040NR. It is generally subject to U.S. withholding tax at a flat 30 percent rate (or a lower treaty rate). No deductions are allowed against such income.

3.38.147.7.3  (01-01-2015)
Form 1040NR

  1. Income reported on Form 1040NR is classified as effectively connected or non-effectively connected income.

  2. Effectively connected income is reported on page 1 of Form 1040NR and taxed at graduated rates with exemption from withholding.

  3. Form 1040NR effectively connected income is income from wages, interest, dividends, connected with U.S. trade or business, etc.

    1. If wage income is reported on line 8, the return must be assigned Doc Code 73

      Note:

      The due date of the Form 1040NR is the fifteenth (15th) day of the fourth (4th) month (04-15-XX) following the close of the tax period.

    2. If no wage income is reported on line 8, the return is assigned Doc Code 72

      Note:

      The due date of the Form 1040NR is the fifteenth (15th) day of the sixth (6th) month (06-15-XX) following the close of the tax period

  4. Non-effectively connected income is reported on Schedule NEC, Page 4 of Form 1040NR and is taxed at a flat rate of 30 percent or a lower treaty rate.

  5. Exemption are subject to a "phase out" based on adjusted gross income on Line 36 of Form 1040NR. Exemptions were not subject to the "phase out" in tax years 2010 to 2012.

  6. Deductions must be itemized and limited to state and local income taxes, gifts to U.S. charities, casualty or theft losses, expenses and other miscellaneous deductions.

  7. Students and business apprentices who are residents of India may be able to claim a standard deduction. The return is sometimes annotated "Standard Deduction allowed under U.S.-India Income Tax Treaty" on Line 37 of the Form 1040NR.

3.38.147.7.3.1  (01-01-2015)
Filing Status

  1. The following table provides allowable filing status codes (FSC) for Form 1040NR:

    Form 1040NR Filing Status Box Checked by Taxpayer Description Code and Edit Changes Filing Status Code to
    1 Single resident of Canada, Mexico or a U.S. National 1
    2 Other single nonresident alien 1
    3 Married resident of Canada, Mexico or U.S. National and spouse's exemption is not claimed. Residents of India who are business or student apprentices are included 3
    3 Married resident of Canada, Mexico or U.S. National and spouse's exemption is claimed. Residents of India who are business or student apprentices are included 6
    4 Married resident of South Korea and spouse's exemption is not claimed. 3
    4 Married resident of South Korea and spouse's exemption is claimed. 6
    5 Other married nonresident alien 3
    5

    Exception:

    Qualifying India Treaty (students and business apprentices only)

    Only if the spouse is claimed 6
    6 Qualifying widow w/dependent child for 2 years after year of death 5
    No box is checked Filing Status depends on tax. Look for fiduciary notation. 1 or 3
    Multiple boxes are checked   Use the filing status "1" , "3" ,"5" , "6" which corresponds to the taxpayer's taxable income (tax rate chart) as long as the criteria for that status is met.

3.38.147.7.3.2  (01-01-2015)
Exemptions

  1. The following table provides the allowable exemptions for foreign taxpayers:

    Box 1 Self, children and dependents
    Box 2 Self only
    Box 3 Self, spouse and/or children and dependents
    Box 4 Self, spouse and dependents who lived with taxpayer
    Box 5 Self only

    Exception:

    India (students/business apprentices) self, spouse, and/or children, and dependents

    Box 6 Self and Dependents

3.38.147.7.3.3  (01-01-2015)
Deductions

  1. The taxpayer can ONLY itemize deductions, on Schedule A, Page 3, against income items on Lines 8 through 23. Itemized deductions are not allowed on non-effectively connected income. Deductions are allowed against effectively connected income only to the extent the taxpayer timely files his or her return pursuant to IRC Section 874(a).

  2. Total itemized deductions on Schedule A is subject to a “phase out” based on adjusted gross income on Line 36 of Form 1040NR. Schedule A was not subject to the “phase out” in tax years 2010 to 2012.

  3. Deductions on Schedule A are limited to the following:

    • State and local income tax withheld claimed by the taxpayer and supported by attached W-2(s) is allowed on Form 1040NR Schedule A.

    • Deductible contributions are limited to U.S. Religions, Charitable, Scientific, Literary, Educational and Humanitarian purposes.

    • Other deductions include casualty or theft losses, expenses and other miscellaneous deductions. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • Nonresident aliens cannot offset incurred gambling losses against gross winnings (except Canada).

  4. Students and business apprentices who are residents of India may be able to claim a standard deduction. The return is sometimes annotated "Standard Deduction allowed under U.S.-India Income Tax Treaty" on Line 37 of the Form 1040NR. For TY 2008 through 2010, they may also use the worksheet in Publication 519, which is a version of Schedule L.

3.38.147.7.4  (01-01-2015)
Form 1040NR-EZ

  1. Income reported on Form 1040NR-EZ is classified as effectively connected income only.

    1. If wage income is reported on line 3, the return must be assigned Doc Code 73

      Note:

      The due date of the Form 1040NR is the fifteenth (15th) day of the fourth (4th) month (04-15-XX) following the close of the tax period.

    2. If no wage income is reported on line 3, the return is assigned Doc Code 72

      Note:

      The due date of the Form 1040NR is the fifteenth (15th) day of the sixth (6th) month (06-15-XX) following the close of the tax year.

3.38.147.7.4.1  (01-01-2015)
Filing Status

  1. The following table provides allowable filing status codes (FSC) for Form 1040NR-EZ:

    Form 1040NR-EZ Filing Status Box Checked by Taxpayer Description Code and Edit Changes Filing Status Code to
    1 Single nonresident alien 1
    2 Married nonresident alien 3
    No box is checked Filing Status depends on tax. Look for fiduciary notation. 1
    Multiple boxes are checked   1

3.38.147.7.4.2  (01-01-2015)
Exemptions

  1. The only exemption allowed on Form 1040NR-EZ is "self" .

3.38.147.7.4.3  (01-01-2015)
Deductions

  1. Standard deduction is not allowed on Form 1040NR-EZ.

    Exception:

    Only residents of India (students and business apprentices) are allowed to claim the standard deduction allowance for filing status single (FS 1) or married filing separately (FS 3). These taxpayers may claim either the standard deduction allowance or itemized deductions, but may not claim both.

  2. Only state and local income tax withheld claimed by the taxpayer and supported by attached W-2(s) and/or Form 1042-S is allowed on Form 1040NR-EZ, Line 12.

  3. If deductions other than those listed in (2) above are included in Line 12; take the following action:

    • Input REQ54 to remove those items.

    • Send TPNC 196

3.38.147.7.5  (01-01-2015)
Gambling Income

  1. Gambling winnings are subject to 30 percent withholding. Lottery winnings are not exempt. Winnings subject to withholding tax are not reduced by gambling losses. Gambling winnings are non effectively connected unless documentation is submitted to prove an nonresident alien is a professional gambler.

    Exception:

    Effective January 1,1996, residents of Canada may claim gambling losses, but only to the extent of gambling winnings. These taxpayers should report both their total gambling winnings and their total gambling losses on the These taxpayers should report both their total gambling winnings and their total gambling losses on page 4 of Form 1040NR, Schedule NEC, lines 10a and 10b. If they have net gambling winnings (after offsetting their total gambling losses against their total gambling winnings), this should be included in the net amount on Line 15, column (d).

  2. Nonresident aliens with income from gambling winnings are subject to tax at a flat 30 percent rate unless covered by a treaty. This income is also subject to withholding at source. Based on these treaties, gambling winnings are not subject to United States tax for the following countries:

    • Austria

    • Belgium

    • Bulgaria

    • Czech Republic

    • Denmark

    • Finland

    • France

    • Germany

    • Hungary

    • Iceland

    • Ireland

    • Italy

    • Japan

    • Latvia

    • Lithuania

    • Luxembourg

    • Netherlands

    • Russia

    • Slovak Republic

    • Slovenia

    • South Africa

    • Spain

    • Sweden

    • Tunisia

    • Turkey

    • Ukraine

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

    Note:

    Gambling income of residents of Malta is taxed at 10 percent.

  3. Federal tax withheld on gambling winnings must be substantiated with Form 1042-S (Income Code 28), Form W-2G, or Form 1099-G.

  4. Form 1040NR -Gambling tax from Schedule NEC, page 4, Line 11, should be reported on Line 54, Page 2.

    • To adjust the tax - use REQ54, TC 29X, reason code 037.

  5. Form 1040NR - U.S. tax withheld at source from page 2.

    • To adjust - use REQ54, reason code 051, Credit Reference Number (CRN) 330 (+/-); this will generate a TC 766.

3.38.147.7.6  (01-01-2015)
Scholarships/Fellowships

  1. Qualified scholarships are tax free . The taxpayer must be a degree candidate to qualify for a tax-free scholarship/fellowship.

  2. A degree candidate is a full or part-time student who is pursuing a degree at a college or university (bachelor's or higher degree) or another accredited educational institution providing training in a recognized occupation.

  3. A qualified scholarship or fellowship is any amount used under the terms of the grant for any of the following:

    • Tuition and fees required to enroll in, or to attend, an educational institution

    • Fees, books, supplies and equipment that are required of all students in the course of instruction

  4. Amount(s) received for incidental expenses do not qualify as a tax free scholarship. Incidental expenses include expenses for room, board, travel, research, and clerical help. Also included are expenses for equipment and other items that are not required for either enrollment or attendance, or in a course of instruction at the educational organization. Any portion of the grant that represents payment for teaching, research, or other services is taxable.

    Payment for Degree Candidate
    Tuition Tax free
    Fees Tax free
    Books Tax free if required of all students in the course of instruction
    Supplies Tax free if required of all students in the course of instruction
    Equipment Tax free if required of all students in the course of instruction
    Room Taxable
    Board Taxable
    Travel Taxable
    Teaching Taxable
    Research Taxable
    Other Services Taxable
  5. Scholarships/Fellowships are reported on Line 12, Form 1040NR (Line 5, Form 1040NR-EZ).

  6. An entry on Line 12, Form 1040NR (Line 5, Form 1040NR-EZ) can be from any or all of the following documents or forms used to report Scholarship/Fellowship/Grants received:

    1. Form W-2 (issued by a college or an educational institution)

    2. Form 1042-S, Income Code 15 (issued by a college or educational institution)

    3. A statement from the educational institution (on their letterhead) which identifies the income paid to the nonresident alien taxpayer as a Scholarship/Fellowship Grant.

      Note:

      Support is not required for an entry on Line 12, Form 1040NR (Line 5, Form 1040NR-EZ).

  7. All or part of Scholarship/Fellowship/Grant income may be exempt under a valid tax treaty. Item L on Schedule OI, page 5, of Form 1040NR (Item J on page 2 of Form 1040NR-EZ) must be completed by the taxpayer. Verify the tax treaty using Publication 901, Table 2.

    Note:

    The exempt amount per tax treaty is not included in Line 12, Form 1040NR (Line 5, Form 1040NR-EZ). Include the treaty-exempt amount on line 22, Form 1040-NR (line 6, Form 1040NR-EZ).

    Note:

    Income Code 15, exemption Code 4, counts as a valid treaty exemption when issued by a college or university and there is no withholding.

  8. If the Scholarship /Fellowship/Grant amount cannot be exempted by a valid tax treaty, the taxpayer may exclude items as allowed by IRC Section 117 (tuition, fees, books, supplies and equipment).

    Note:

    Taxpayer must provide a statement supporting the excluded amount.

  9. The excluded amount is reported as an adjustment to income.

  10. To allow or disallow the tax treaty-exempt amount or excluded amount:

    • Input REQ54, TC 29X, using reason code 083 for the treaty-exempt amount or reason code 084 for the excluded amount..

  11. See Tax Treatment of Scholarship and Fellowship Payments in the Job Aid for line by line references.

3.38.147.7.7  (01-01-2015)
Estates and Trusts (Nonresident Alien)

  1. Nonresident alien estate and trust tax returns are filed on Form 1040NR and processed as non-Masterfile documents.

  2. If the return was incorrectly processed to Masterfile, take the following steps:

    • Void the notice.

    • Input a STAUP for 8 cycles if necessary.

    • Prevent the refund from generating if necessary. Refer to 3.14.1 IMF Notice Review guidelines regarding the timelines for the TC570/NOREFP input.

    • Forward document to Accounts Management, Stop 6567, AUSPC via Form 3465 Adjustment Request.

3.38.147.8  (01-01-2015)
USAID Returns

  1. Treas. Reg. 1.6012-1(b)(3) provides special provisions for Form 1040NR filers with wages from the United States Agency for International Development (USAID).

  2. If a notice shows taxpayer not liable, and tax has been decreased to zero (0) with an overpayment of tax withheld, take the following steps:

    • Prevent the refund from generating.

    • Void the notice and following guidelines regarding the timelines for the TC570/NOREFP input.

    • Adjust the return using the figures originally reported by USAID.

3.38.147.9  (01-01-2015)
Credits Claimed on International Returns

  1. The following instructions will provide additional information for processing returns claiming various tax credits.

3.38.147.9.1  (01-01-2015)
Child Tax Credit (Non-Refundable)

  1. A qualifying child for purposes of the child tax credit/additional child tax credit is a child who is:

    • Claimed as a dependent on Line 6c on Form 1040 or Line 7c on Form 1040NR.

    • Under age 17 at the end of the tax year.

    • A son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, or a descendant of any of them (for example, your grandchild).

      Note:

      A godchild is not a qualifying descendent.

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

    • Lived with taxpayer for more than half of the tax year.

      Note:

      A child is considered to have lived with you for all of tax year if the child was born or died in the tax year and your home was this child's home for the entire time he or she was alive. Temporary absences for special cIRC Sectionumstances, such as for school, vacation, medical care, military service, or business, count as time lived at home.

    • Must meet the substantial presence test if assigned an ITIN.

    • Was a U.S. citizen, a U.S. national, or a resident of the United States. If the child was adopted, see Adopted child note below.

      Note:

      An adopted child is always treated as your own child. An adopted child includes a child lawfully placed with you for legal adoption. If you are a U.S. citizen or U.S. national and your adopted child lived with you as a member of your household all year, that child meets the condition above to be a qualifying child for the child tax credit.

    • A resident alien.

      Note:

      To determine residency, use test for resident alien status. Both the relationship and citizenship tests for this refundable credit are more restrictive than for the dependency tests. If the child is not the taxpayer's direct descendant or stepchild, the child must qualify under the foster child rules. Residents of Mexico and Canada do not qualify unless they are U.S. citizens.

  2. The credit decreases based on modified adjusted gross income and threshold amounts. If the taxpayer is filing Form 2555 and Form 2555-EZ, excluding income under IRC Section 933 (Puerto Rico), or IRC Section 931 (Form 4563), the taxpayer must use the Child Tax Credit worksheet in Publication 972. Refer to IRM 3.38.147.15.2,Puerto Ricoo Child Tax Credit for specifics on Puerto Rico.

3.38.147.9.2  (01-01-2015)
Additional Child Tax Credit (ACTC) (Refundable)

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

    Note:

    See Publication 17, Your Federal Income Tax (For Individuals), and Publication 972 ,Child Tax Credit, for more information on the Additional Child Tax Credit.

  2. If a Bona Fide resident of Puerto Rico chooses to file Form 1040/A, Schedule 8812 must be attached to claim ACTC.

  3. U.S. territories other than Puerto Rico may not claim ACTC. See IRM 3.38.147.15.3,Puerto Rico Additional Child Tax Credit for specific information on Puerto Rico.

    Exception:

    U.S. Military stationed in a U.S. territory. See IRM 3.38.147.9.6, Earned Income Tax Credit (EITC) for more information.


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