3.38.147 International Notices

Manual Transmittal

October 17, 2018

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 3.38.147.3.1(22) -Removed last sentence and moved to it to new (25)

(3) IRM 3.38.147.3.3(2) - Added new verbiage for Tax Cuts and Jobs Act

(4) IRM 3.38.147.3.3(3) -Updated sentence for 2017 and prior years

(5) IRM 3.38.147.3.4(1)- Updated new sentence for 2018 and removed sentences (2 thru 6)

(6) IRM 3.38.147.3.5- New Subsection for exemptions for TY 2017 and prior years.

(7) IRM 3.38.147.3.6(1)- Added filing 1040 and (2) Added filing Form 1040NR

(8) IRM 3.38.147.3.7.1- Updated Selection Keys, added 322,323,412,414,417,421,422,425,439,497 and deleted 381,382,470.

(9) IRM 3.38.147.3.10- Updated year from 2013 to 2014.

(10) IRM 3.38.147.3.12(1) -Changed exemptions to exempt amounts.

(11) IRM 3.38.147.3.12(6)-Updated the Note to add on the Form 1040 after Head of Household and the second Note added new 2018 section and updated 2017 and Prior Years section.

(12) IRM 3.38.147.3.16- Updated sentence for PTC

(13) IRM 3.38.147.4.1(2)- Inserted new (2) for IDRS Command Code information and renumbered the remaining parenthesis.

(14) IRM 3.38.147.4.1(6) = First Note added with or without a TPNC, deleted second Note.

(15) IRM 3.38.147.4.5(2)- Added earned to foreign income.

(16) IRM 3.38.147.4.5(5)(a)- Updated table under the “Then” title updated the sentence to read Adjust the income to remove the exempt amount on Schedule 1, line 21 of Form 1040 (line 21 for 2017 and prior years)

(17) IRM 3.38.147.4.5(6)-Bullet 1 updated to Ensure the taxpayer included the earned income on the applicable lines: Line 1 and Schedule L, lines 12,18 or 21 (lines 7, 12,18, or 21 for 2017 and prior years). Bullet 2 updated to Adjust Schedule 1, line 21 (line 21 for 2017 and prior years) of Form 1040 to remove the foreign earned income exclusion amount.

(18) IRM 3.38.147.4.5(8)- Second bullet was updated to Adjust the total income on Schedule 1, line 22 (line 22 for 2017 and prior years) of Form 1040 to remove the foreign earned income exclusion amount

(19) IRM 3.38.147.4.5(9)- Changed the year from 2017 to 2018 and on last sentence updated the years to 2015, 2016, and 2017. In the Example changed the years from 2017 to 2018 and on full tax year to (2017 or 2018). Updated the Note on bona fide and physical presence.

(20) IRM 3.38.147.4.5(10)- Updated sentence.

(21) IRM 3.38.147.4.5(11)- Removed and exemption in the first sentence. Reminder was updated to The total amount of income (including the foreign earned exclusion amount from Form 2555) reported on Schedule 1, line 21(line 21 for 2017 and prior years) of Form 1040 may include other gains and losses usually found on a statement attached to the Form 1040. Verify the total income exclusion amounts on line 45 and on line 50.

(22) IRM 3.38.147.4.5(14)- Added 2018 taxable year and exclusion amount.

(23) IRM 3.38.147.5.1(1)-Updated Foreign income and bullet one to change the Part from VIII to VI

(24) IRM 3.38.147.5.1(3)- Updated the lines for Form 1040 and the lines for prior years.

(25) IRM 3.38.147.5.1(4)-Updated Note including new information on Schedule 1 and included the lines for prior years.

(26) IRM 3.38.147.5.1(5)-Updated new information on Schedule 1 and included the lines for prior years.

(27) IRM 3.38.147.5.1(6)- Updated new information on Schedule 1 for all bullets for 2018

(28) IRM 3.38.147.5.2(2)-Updated sentence for earned income from foreign country on Form 2555/EZ.

(29) IPU 18U0347 issued 02-22-2018 IRM 3.38.147.6(3) - Delete TPNC and replaced with TPNC 513.

(30) IRM 3.38.147.6(5)-Updated the sentence to include for 2018, Foreign real property taxes do not qualify for a deduction.

(31) IRM 3.38.147.6(8)-Deleted information in parenthesis on 2 and 5 year foreign taxes paid. Note deleted in the parenthesis of five and or two.

(32) IPU 18U0839 issued 05-21-2018 IRM 3.38.147.6(9) Note- Changed the dollar amount to $50,000. Updated the IRM reference number and hyper link.

(33) IRM 3.38.147.6(11)- Added new information on foreign tax credit for foreign tax on income on Form 2555/EZ.

(34) IRM 3.38.147.6(12)- First bullet added December 21, 2015 and deleted 3rd and 4th bullet.

(35) IRM 3.38.147.6.1(2)-Updated line information for current and prior years.

(36) IRM 3.38.147.6.1(3)- Added tax to the sentence to read same tax year.

(37) IRM 3.38.147.7(4)-Updated last sentence after United States, then foreign income may be attributable to that office.

(38) IRM 3.38.147.7(6)- Updated last sentence on first bullet may be exempt under an applicable tax treaty or excluded under IRC Section 117.

(39) IRM 3.38.147.7.1(2)-Updated exception added new (4) disposition for gain by nonresident alien and created new bullets list for Wages and Wages paid

(40) IRM 3.38.147.7.1(3)- Updated line items for Form 1040NR, lines 8 through 21. Deleted second sentence.

(41) IPU 18U0347 issued 02-22-2018 IRM 3.38.147.7.1(5) - Added a new instruction for (5).

(42) IRM 3.38.147.7.3(5)(6)(7)- Removed 5, 6, and 7 from the section

(43) IPU 18U0347 issued 02-22-2018 IRM 3.38.147.7.3(8) - Added a new instruction for (8).

(44) IRM 3.38.147.7.3.1(1)-Updated filing status information for 2018 and later and created new table.

(45) IRM 3.38.147.7.3.1(2)-Updated to include 2017 information.

(46) IPU 18U0347 issued 02-22-2018 IRM 3.38.147.7.3.2(1) - Added If and then titles for table.

(47) IRM 3.38.147.7.3.2(1)-Added new information for TY 2018.

(48) IRM 3.38.147.7.3.2(2)-Updated to include 2017 information.

(49) IRM 3.38.147.7.3.3(2)-Added new information for TY 2018 for Schedule A deductions.

(50) IRM 3.38.147.7.3.3(3)(4)- Updated TY 2017 and prior information.

(51) IRM 3.38.147.7.3.4(1)(2)(3)- New information on Dependents claimed for CTC ,ACTC, and ODC.

(52) IRM 3.38.147.7.4.2(1)-Updated TY 2018 information for exemptions.

(53) IRM 3.38.147.7.4.2(2)-Updated to include 2017 information.

(54) IRM 3.38.147.7.4.3(2)-Added new information for 2018 and later on state and local income tax withheld.

(55) IRM 3.38.147.7.5(1)- Added after Gambling winnings (Form 1042-S, Income Codes 28 and 54) and they are non-effectively connected (Form 1040NR, Schedule NEC).

(56) IRM 3.38.147.7.5(4)-Added information on adjusting gambling tax.

(57) IRM 3.38.147.7.6(8)-Note added Form 1098-T or a statement from a qualified educational institute

(58) IRM 3.38.147.9.1(1)-First bullet added new information on valid SSN for 2018 and ITIN for 2017 and prior years and added a new note for dependents claimed for CTC and/or ACTC.

(59) IRM 3.38.147.9.2(1)-Added new subsection on Child Tax Credit and Credit for other Dependent.

(60) IRM 3.38.147.9.3(5)-Added new $1400 is new qualifying credit for ACTC

(61) IRM 3.38.147.9.3(6)-Added new information on ACTC on qualifying credits.

(62) IRM 3.38.147.9.4(2)(4)(5)-Added new information on Education Credits and who qualifies and deleted sentences (6)(7)(8)(9).

(63) IRM 3.38.147.9.5(3)-Updated new allowable credits for 2018 to $13,840.

(64) IRM 3.38.147.9.5(5)-Added new sentence on phaseout based on income limits.

(65) IRM 3.38.147.9.7(1)- Added See (6) and (7) on last sentence.

(66) IRM 3.38.147.10(6)- Updated information on Dual Status taxpayers.

(67) IRM 3.38.147.10(7)-Added new information for TY 2018 on Dual Status on exemptions and deleted the original (8) which re-numbered the remaining section.

(68) IRM 3.38.147.10.1(7)-Added Schedule 4 on last sentence.

(69) IRM 3.38.147.10.1(11)-Updated filing status codes.

(70) IRM 3.38.147.10.2(11)- Added For TY 2017 and prior years.

(71) IRM 3.38.147.10.2(12)- Updated filing status codes.

(72) IRM 3.38.147.10.4(2)-Deleted provide by Chief Counsel in second sentence.

(73) IRM 3.38.147.10.4(3)-Deleted legally enforceable to legal obligation.

(74) IRM 3.38.147.13.2(5)-Updated payment on Line 75 instead of 74, added Schedule 5, and total tax line to 15,

(75) IRM 3.38.147.13.2(6)-Updated REQ54 input information and deleted the Caution.

(76) IRM 3.38.147.13.2(7)-Updated Line number 74 to 75 and added Schedule 5.

(77) IPU 18U1109 issued 07-30-2018 IRM 3.38.147.13.4(2) Added a new 5th bullet to the list

(78) IRM 3.38.147.15.3(2)-Second bullet updated dollar amount per qualifying child.

(79) IRM 3.38.147.15.3(3)-Note was updated for a PR bona fide resident.

(80) IPU 18U0347 issued 02-22-2018 IRM 3.38.147.15.3(5) - Added a new instruction for (5).

(81) IPU 18U0347 issued 02-22-2018 IRM 3.38.147.15.3.1(1)(2)(3)(4)(5) - Added new subsection with instruction.

(82) IRM 3.38.147.15.4(1)-Updated new 2018 maximum limitation from $127,200 to $128,400.

(83) IPU 18U0347 issued 02-22-2018 IRM 3.38.147.15.5(3) - Deleted last sentence in the Note.

(84) IRM 3.38.147.15.5(3)- Added Schedule 1, to line 12 on last sentence.

(85) IRM 3.38.147.17- Updated Title to Form 8288 and Form 8288-A

(86) IRM 3.38.147.17(1)- Added Foreign corporation to the sentence and added two new bullets on the FIRPTA transactions.

(87) IRM 3.38.147.17(2)- Added new withholding agent must use and added two new bullets for Form 8288 and Form 8288A

(88) IRM 3.38.147.19(2)- Added new hyper link for IRM reference.

(89) IRM 3.38.147.19(3)- Added new information on foreign agricultural worker on a H-2 visa.

(90) IPU 18U0347 issued 02-22-2018 IRM 3.38.147.20(1) - In the table removed the word none.

(91) IRM 3.38.147.21- Added Form 8805 to title.

(92) IPU 18U0347 issued 02-22-2018 IRM 3.38.147.21.1(2) - Added over $500.

(93) IRM 3.38.147.21.1(2) Added new paragraph (2) for withholding from Form 1040-S and two new bullets.

(94) IRM 3.38.147.22.1(5) Added new information on reporting taxable social security and new Note for indicator on RTVUE.

(95) IRM 3.38.147.22.1(7) Deleted sentences and original (10) is replaced as new (7)

(96) IRM 3.38.147.22.1(8)-Deleted sentences and original (11) is replaced as new (8)

(97) IPU 18U0347 issued 02-22-2018 IRM 3.38.147.23(2) - Added new Note for Competent Authority letter.

(98) IRM 3.38.147.23(9)-Paragraph (9) moved to 3.38.147.21.1 and renumbered section.

(99) IRM 3.38.147.23(10)-Second bullet added Form 1042-S is attached or the amount is found on IRPTRL

(100) IPU 18U0347 issued 02-22-2018 IRM 3.38.147.23.1(2) - On second bullet updated box numbers.

(101) IRM 3.38.147.23.1(2)-Updated Exemption codes, second bullet deleted Box numbers, and updated table 1st and 2nd row added amount

Effect on Other Documents


IRM 3.38.147 dated October 27, 2017 (effective January 1, 2018) is superseded. The following IRM Procedural Updates (IPUs), issued from February 22, 2018 through July 30, 2018, have been incorporated into this IRM: IPU 18U0347, IPU 18U0839 and IPU 18U1109.

Audience

Individual Master File (IMF) Submission Processing and Notice Review tax-examiners

Effective Date

(01-01-2019)

Signed by
Linda J. Brown
Director, Submission Processing
Wage and Investment Division

Program Scope

  1. This section provides instructions to the Notice provides instructions to the Notice Review function for reviewing Individual Master file (IMF) International Returns, Integrated Data Retrieval System (IDRS), and Computer Paragraph (CP) notices.

    Note:

    Notices may also be mandated for review by Treasury Inspector General for Tax Administration (TIGTA), management, policy statements, and etc.

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

      Note:

      The CP Notice Inventory is found in the OLNR system.

  2. Purpose: This section provides IMF Notice Review personnel with instructions for reviewing CP notices that have been selected by NRPS. Reviews are conducted with the goal of improving both the accuracy and quality of information the IRS send to taxpayers. The Notice Review process helps to ensure the information received by taxpayers is complete and correct and taxpayers do not receive an erroneous refund or erroneous balance due notice.

    Note:

    Notices are subject to change for various reasons, including notice clarity studies and legislative changes.

  3. Audience: These procedures apply to Wage and Investment (W&I) Submission Processing Individual Master File (IMF) Notice Review personnel, located in Austin:

    • Supervisory Tax Examining Technician

    • Lead Tax Examining Technician

    • Tax Examining Technician

    • Supervisory Clerk

    • Lead Clerk

    • Clerk

  4. Policy Owner: Director, Submission Processing

  5. Primary Stakeholders: Other areas that may be affected by these procedures include (but are not limited to):

    • Accounts Management

    • Chief Counsel

    • Compliance

    • Information Technology (IT) Programmers

    • Large Business and International (LB&I)

    • Submission Processing (SP)

    • Tax Exempt and Government Entities (TEGE)

Background

  1. The purpose of Notice Review is to review IMF Computer Paragraph (CP) notices to verify the accuracy of notices selected for review before mailing. This will ensure the information received by taxpayers are completed and accurate. Notice Review employees use the Notice Review Processing System (NRPS) package, Control D, and or Integrated Data Retrieval System (IDRS), Integrated Automation Technologies (IAT) Tool, and Account Management Services (AMS) to ensure the information for each notice is processed correctly. Any changes to the notices are made using the On-Line Notice Review (OLNR) system.

  2. Under the Taxpayer Bill of Rights (TBOR) taxpayers have rights that apply throughout their dealings with the IRS. The right to be informed means taxpayers are entitled to clear explanation of laws and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. Thus, notices should be reviewed to ensure they are written in plain language, provide clear explanations of any IRS decisions about a taxpayer’s account, and provide clear instructions for what a taxpayer needs to do. Taxpayers also have the right to a fair and just tax system, which means they can receive assistance from the Taxpayer Advocate Service (TAS) if they are experiencing financial difficulty or the IRS has not resolved their issues properly or timely through normal channels. Including information about TAS on correspondence will help protect this right.

Authority

  1. Title 26 of the United States Code (USC) or more commonly known as the Internal Revenue Code (IRC) has been amended by acts, public laws, rules and regulations, such as the following:

    • Omnibus Budget Reconciliation Act (OBRA) of 1993

    • Revenue Reconciliation Act of 1998 (RRA98)

    • American Taxpayer Relief Act (ACTA) of 2012

    • Surface Transportation and Veterans Heal Care Choice Improvement Act of 2015

    • Consolidated Appropriations Act of 2016

    • Hiring incentives to Restore Employment (HIRE) Act

    • Foreign Account Tax Compliance Act (FATCA)

    • The Protecting Americans from Tax Hikes Act of 2015 (PATH)

      Note:

      The above list may not be all inclusive of the various updates to the IRC.

  2. Publications relating to International issues can be used as technical reference material. The following is a list of the most common Publications used:

    • Pub 3, Armed Forces Tax Guide

    • Pub 54, Tax guide for U.S. Citizens and Resident Aliens Abroad

    • Pub 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

    • Pub 514, Foreign Tax Credit for Individuals

    • Pub 515, Withholding of Tax on Nonresident Aliens and Foreign Entities

    • Pub 570, Tax Guide for individuals with Income from U.S. Possessions

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

    • Pub 850, (EN/SP) English-Spanish Glossary of Tax Words and Phrases used in Publications issued by the Internal Revenue Service

    • Pub 901, U.S. Tax Treaties

    • Pub 915, Social Security Benefits and Equivalent Railroad Benefits

    • Pub 970, Tax Benefits for Education,

    • Pub 1321, Special Instructions for Bona Fide Residents of Puerto Rico Who must file a U.S. Individual Tax Return (Form 1040 or 1040A)

  3. 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

Responsibilities

  1. International IMF related documents are processed exclusively in the 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, Managers Security handbook, to subordinate employees and establish methods to enforce them.

  3. The Campus Director is responsible for monitoring operational performance for the Submission Processing campus.

  4. The Operation Manager is responsible for monitoring operational performance for their operation.

  5. The Team/Manager/Lead is responsible for performance monitoring and ensuring employees have the tools to perform their duties.

  6. The team employees are responsible to follow the instructions contained in this IRM and maintain updated IRM procedures.

Program and Objectives and Review

  1. Program Goals: Review computer Paragraph (CP) notices to generate to notify the taxpayer of any change to a specific module from the taxpayer’s original return and to verify the accuracy of the information and ensure the notice received by the taxpayer is complete and correct.

  2. Program Reports: After NRPS completes the selection process, it combines all of the selection information into NRPS batches. NRPS produces various reports from the output files.

    1. NRPS Document Charge-out (NRPS 6120)- provides information needed by the Files Function to pull documents for use in reviewing notices.

    2. NRPS Selection Report (NRPS 6130)- contains notice/transcript input and selected for review counts, sorted by selection key and by Taxpayer Notice Code (TPNC), with year-to-date totals for notices selected in the current cycle.

    3. Notice Retype Error Report (NRPS 8240)- shows the previous four weeks selection percentages and the current cycle’s selection percentage, based on the automated selection process.

  3. Program Effectiveness: The program goals are measured by using the following tools:

    • Embedded Quality Submission Processing (EQSP)

    • Balance Measures

    • Managerial Reviews

  4. Annual Review: The processes outlined in this IRM should be reviewed annually to ensure accuracy and promote consistent tax administration.

Acronyms/Abbreviations/Definitions

  1. This table list Acronyms, Abbreviations, and Definitions

    Acronyms and Abbreviations Definition
    ACTC Additional Child Tax Credit
    AMS Account Management Services
    APO Army Post Office
    ATIN Adoption Taxpayer Identification Number
    ATRA American Taxpayer Relief Act
    DFAS Defense Finance & Account Services
    DLN Document Locator Number
    DPO Diplomatic Post Office
    ECI Effectively Connected Income
    EQSP Embedded Quality Submission
    FATCA Foreign Account of Tax Compliance Act
    FDAP Fixed Determinable, Annual, or Periodical Income
    FTHBC First Time Homebuyers Credit
    FPO Fleet Post office
    FSM Federated States of Micronesia
    IAT Integrated Automation Technologies
    IDRS Integrated Data Retrieval System
    IRSN Internal Revenue Service Number
    ITIN Individual Taxpayer Identification Number
    MAGI Modified Adjusted Gross Income
    NRPS Notice Review Processing System
    OBRA Omnibus Budget Reconciliation Act
    OFAC Office of Foreign Assets Control
    OLNR On Line Notice Review
    PATH Protecting Americans from Tax Hikes
    RMI Republic of the Marshall Islands
    SSN Social Security Number
    TEGE Tax Exempt and Government Entities
    TIN Taxpayer Identification Number
    TPNC Taxpayer Notice Code
    TTIN Temporary Taxpayer Identification Number

Related Resources

  1. The following resources may assist in performing the work as outlined in this IRM:

    • Servicewide Electronic Research Program (SERP)

    • Notice Review Processing System (NRPS)

    • On-Line Notice Review (OLNR)

    • Integrated Data Retrieval System (IDRS)

    • Account Management System (AMS)

    • Integrated Automation Technologies (IAT)

IRM Deviations

  1. Service Center Directors, Headquarter Branch Chiefs, and Headquarter Analysts do not have the authority to approve deviations from IRM procedures. Any request for an exception or deviation to an IRM procedure must be elevated through appropriate channels for executive approval. This will ensure other functional areas are not adversely affected by the change, and it does not result in disparate treatment of taxpayers.

  2. See specific guidelines in IRM 1.11.2, Internal Management Documents System, Internal Revenue Manual (IRM) Process. Request for an IRM deviation must be submitted in writing and signed by the Field Director, following instructions from IRM 1.11.2.2.4(3). Any disclosure issues will be coordinated by the Program Owner. No deviations can begin until reviewed by the Program Owner and approved at the Executive Level. All requests must be submitted to the Submission Processing Headquarters IRM Coordinator.

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 Army Post Office (APO) and Fleet Post Office (FPO) addresses.)

    • Form 390 (American Samoa) - American Samoa Individual Income Tax Return

    • Form 482.0 (Puerto Rico) - Planilla de Contribucion Sobre Ingresos de Individuos

    • 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 (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico)

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

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

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

    • Dual - Status - Form 1040 and Form 1040NR or Form 1040NR-EZ filed together for the same tax year; "Dual- Status" or "D/S" indicated on the return. Always leave Form 1040 and Form 1040NR or 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 or ITIN: however, the secondary taxpayer has an Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) and is reporting income

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

    • Treaty Trader

    • Fulbright Grantee

    • IRC Section 871, Section 893, section 911, IRC Section 931, Section 932, IRC Section 933 or Section 934 notated anywhere on the return

    Note:

    American Indian Treaty - Returns are not considered International returns. These must be renumbered as a domestic 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 and Form 1040A with foreign addresses

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

    • Form 1040NR and 1040NR-EZ.

  5. Returns assigned DLN beginning with 21 are:

    • Form 1040 and Form 1040A with U.S. territory address

    • Form 1040-PR (in Spanish)

    • Form 1040-SS

    • Form 1040 with Form 5074 or 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 or campus where received.

  8. All transshipped returns reflect an original received date.

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 Integrated Data Retrieval System (IDRS) and/or 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 and address on the notice or entity portion of the (MeF filed) refund transcript.

  4. Verify the signature on Form 1040NR and 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.

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 resident aliens and nonresident aliens of the U.S. within the same tax year.

  5. Effectively Connected Income - All income, gain, or loss that is derived in connection with the conduct of a trade or business within the United States. This generally includes compensation received for personal services in the U.S. by a nonresident alien.

  6. Excludable Income - Any income that can be omitted from taxable income such as, Form 4563 exclusions, exclusions due to applicable tax treaty provisions and other exclusions provided by the Internal Revenue Code.

  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, research duties, and/or exercising talents abroad by U.S. students and foreign students.

  9. Green Card Test - A taxpayer is a lawful permanent resident of the U.S. (Green Card Holder) at any time during the calendar year, if that individual has been granted the privilege of residing permanently in the United States as an immigrant in accordance with the immigration laws. Resident status is deemed to continue unless it is rescinded or administratively or judicially determined to have been abandoned. .

  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 - Income which is not effectively 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 or 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 lawful permanent residency test (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 - Section of the Internal Revenue Code that 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 or 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. Substantial Presence Test- A rule applied in determining if an alien is a U.S. resident alien 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, individuals under certain visas are treated as “exempt individuals” and they do not count days of temporary presence in the United States. However, there are limitations on the length of time that an individual will be an “exempt individual ”for purposes of the substantial presence test.

  22. 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.

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

  24. 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.

  25. U.S. Territory Citizen- 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. citizens for that purpose.

  26. Visa - An endorsement written or stamped on a passport indicating that the holder is allowed to enter, leave, or stay for a specific period of time in 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.

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, or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents, 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 that has an income tax treaty with the United States, may be treated as a nonresident alien under the residency rules of the applicable income tax treaty if such individual timely files an Form 1040NR or Form 1040NR-EZ with a Form 8833, Treaty Based Return Position Disclosure Under Section 6114 or 7701(b), attached claiming to be a resident of the other country.

    Note:

    However, a nonresident alien may be treated as a resident alien for all or part of the year under certain circumstances including a "first-year election" .

  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 IRC Section or applicable 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 the person's income as effectively connected with the U.S. trade or business. ECI is taxed at the same graduated tax rates that apply to U.S. taxpayers. However, some types of ECI may be exempt (in the whole or in part) from tax under an applicable income tax treaty.

Filing Status

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

  2. Starting 2018, the Tax Cuts and Jobs Act (TCJA) (p.l. 115-97) eliminated the personal exemption amount, changing the number of filing statuses from six to three that a nonresident alien can claim on Form 1040NR.

    For TY 2018 and later, nonresident aliens may use the following Filing Statuses:

    Form 1040NR Filing Status checked by Taxpayer Filing Status Codes allow by Code and Edit
    2 1
    5 3
    6 1 or 5
  3. For TY 2017 and prior years, nonresident aliens may use the following Filing Statuses 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
  4. Married Filing Jointly for Nonresident Aliens- A nonresident alien married to a U.S. citizen or resident alien is taxed on worldwide income at the graduated tax rates same as a U.S. citizen or resident alien, if that person makes an election to be treated as a U.S. person, files married filing jointly 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 alien, and the other spouse ends the year in nonresident status. Both taxpayers must have a valid SSN or ITIN [See IRC Section 6013(g) or IRC Section 6013(h)].

  5. 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 listed in the specific categories of the instructions 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.

  6. 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.

Exemptions
TY 2018 and later

  1. Taxpayers filing as a U.S. citizen, resident alien, non resident alien or U.S. National cannot claim an exemption (the amount is $0) for self, spouse, children or dependents on Form 1040 or Form 1040NR.

Exemptions
TY 2017 and Prior years

  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 12,150 =9,113

  3. Nonresident aliens from Canada, nonresident aliens from 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 aliens 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 30 percent 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

Deductions

  1. Resident aliens filing 1040 may claim the:

    • same itemized deductions as U.S. citizens using Schedule A of Form 1040 or

    • standard deduction for their particular filing status if they do not itemize.

  2. Nonresident aliens filing Form 1040NR 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, Exclusion of Income for Bona Fide Residents of American Samoa) may prorate their itemized deductions or standard deduction.

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 SSN on 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 3.11.3.9.2.1(3), Taxpayer Identification Number (TIN) 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 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.

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.

Notice Review Processing System (NRP) 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
    302 Disallowed foreign earned income exclusion on Form 2555/EZ - did not use FI WS or Math Error
    303 Changed return for incorrectly compute foreign income
    304 Changed foreign earned income exclusion (Form 2555/EZ) - Exclusion limitation is incorrect
    305 Error figuring foreign earned income/housing exclusion/ded Form 2555
    306 We didn’t allow the amount you claimed for Additional Child Tax Credit on your Form 1040 You’re not eligible to claim the credit because you excluded foreign earned income with Form 2555 or Form 2555-EZ.
    307 Credit for the Elderly or Disabled not allowed for nonresident aliens
    308 Changed foreign income exclusion
    309 Disallowed foreign earned income exclusion (Form 2555/EZ) - did not meet tests
    310 Disallowed foreign earned income exclusion - resident of U.S. Possession
    311 Processed Form 1040NR as your tax form
    312 Changed foreign tax Credit - Credit computed on income excluded on Form 2555/EZ
    313 Foreign Tax Credit income - not allowed
    314 Disallowed Foreign Earned Income Exclusion - Income earned in Cuba IRAQ or Libya
    315 We didn’t allow your personal exemption on your tax return because your (ITIN) is inactive. Each exemption on your tax return must have an active ITIN or other valid (TIN).
    316 We didn’t allow your personal exemption on your tax return because your (ITIN) is inactive. Each exemption on your tax return must have an active ITIN or other valid (TIN).
    317 Each exemption on your tax return must have an active (ITIN) or other valid (TIN). One or more of your dependents has an active (ITIN). As a result, we didn’t allow those exemptions on your tax return. this change may affect your taxable income, tax, or any of the following credits: Credit for child and dependent care, Child tax credit, and Additional child tax credit.
    318 Expired Taxpayer ITIN-Dependents Credits disallowed
    319 Expired Taxpayer/Spouse ITIN-Additional Child Tax Credit Disallowed-Spanish TPNC
    320 Expired Taxpayer/Spouse ITIN-Additional Child Tax Credit Disallowed-
    321 Changed dual status return - joint tax return not allowed
    322 ITIN Expired for one more of your dependents -Disallowed certain credits
    323 ITIN has Expired-Disallowed certain credits
    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 Form 1040NR - no response to request for dates in U.S.
    329 Recompute total tax on Form 1040-SS - addition error
    330 Self-employment tax changed
    331 Changed amount of excess social security tax withheld
    332 Disallowed additional child credit on Form 1040-SS - missing form
    333 Error on Form 8910 - changed alternate motor vehicle credit on Form 1040
    334 Error on Form 8910 - changed alternate motor vehicle credit on Form 3380
    335 Error on Form 8936 – Changed Electric Drive Motor Vehicle Credit on Form 1040
    336 Error on Form 8936 - Changed Electric Drive Motor Vehicle Credit on Form 3380
    337 Error on Form 8834 – Changed Electric Drive Motor Vehicle Credit on Form 1040
    338 Error on Form 8834 – Changed Electric Drive Motor Vehicle Credit on Form 3380
    337 Recompute household employment taxes on Form 1040-SS - insufficient income on schedule H
    338 Recompute household employment taxes on Form 1040-SS - error on schedule H tax computation or transfer
    339 Disallowed additional child credit on Form 1040-SS - child exceed age limit
    341 Changed return for Form 8689 error
    343 Earned Income credit not allowed
    345 Excess social security tax not allowed - missing forms
    346 Recompute total payments on Form 1040-SS - addition error
    348 Installment payment for First-Time Homebuyer credit added to return
    349 Installment payment for First-Time Homebuyer credit changed
    352 Amount changed for additional medicare tax/error computing Form 8959
    353 Amount changed for additional medicare tax/error computing Form 8959. Error computing Part II, line 13
    354 Amount changed for additional medicare tax/error computing Form 8959. Error computing Part II, line 17
    355 Amount changed for additional medicare tax/error computing Form 8959. Error computing Part V, line 24
    356 Error in transfer of the amount from line 18 of your Form 8959.
    357 Additional Medicare Tax amount changed due to error
    359 Recompute total tax on Form 1040-PR addition error
    361 Recompute excess social security tax or tier 1 RRTA withheld on Form 1040-PR computation error
    362 Disallowed additional child credit on Form 1040PR missing form
    363 Premium Tax Credit changed due to error on Form 8962
    364 Advance Premium Tax Credit Repayment changed due to error on Form 8962
    365 Changed amount of household employment taxes on line 4 of your Form 1040-PR.
    367 Recompute household employment taxes on Form 1040-PR - insufficient income on schedule H
    368 Recompute household employment taxes on Form 1040-PR - error on schedule H tax computation or transfer
    369 Disallowed additional child credit on Form 1040-PR - Child exceeds age limit
    370 Net Investment tax changed due to error on Form 8960
    371 Net Investment tax changed due to error on Form 8960
    372 Net Investment tax changed due to error on Form 8960
    373 Net Investment tax changed due to error on Form 8960
    374 Refund or amount owed changed based on correspondence response
    375 Recompute excess social security tax or tier 1 Railroad Retirement Tax Act (RRTA) withheld on Form 1040PR Form W2 missing
    376 Recompute total payment on Form 1040-PR - addition error
    377 Ineligible to claim health coverage tax credit
    378 Net investment tax changed due to error on Form 8960
    383 Recompute return - additional child tax credit figured incorrectly
    384 Earn income inclusion Form 2555 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 Form 8962
    389 Premium Tax Credit changed due to error on Form 8962
    390 Premium Tax Credit changed due to error on Form 8962
    391 Premium Tax Credit changed due to error on Form 8962
    392 Premium Tax Credit changed due to error on Form 8962
    393 Form 1040NR and Form 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 Form 1040NR
    401 Disallowed exemption(s) for other Dep (s) - Non-resident alien
    402 Disallowed exemption(s) for other Dep (s) - residents of S Korea or Japan
    403 Removed U.S. Bank INT Income from taxable income (Form 1040)
    404 Included cap gains from Form 8288-A on Form 1040
    406 Disallowed Exempt for Treaty - No response to request for Info
    408 Disallowed Tax Treaty Exemption - Question 'L' or 'J' not answered
    409 Disallowed Tax Treaty Exemption - invalid tax treaty claimed
    410 Treaty exemption disallowed
    412 Your country disallows Dependent exemptions-Disallow certain credits
    413 Incorrectly transferred amount of tax from Form 1040NR
    414 Changed Itemized Deductions-State and local taxes exceeds Filing Status
    415 Disallowed scholarship or fellowship exclusion - supporting statement missing
    416 Changed scholarship or fellowship exclusion - exclusion cannot exceed amt received
    417 Disallow some credits -Age limit on Dependent or SSN missing
    418 Disallowed Standard Deduction (Form 1040NR and Form 1040NR-EZ)
    419 Disallowed Itemized Deductions not effectively connected to U.S. trade/business
    420 Itemized Deductions not allowed on Form 1040NR-EZ
    421 SSN missing or ITIN was missing or last name was not provided-Disallow certain credits
    422 Each Dependent listed must have a valid SSN or ITIN-Disallow certain credits
    423 Child Tax Credit not allowed due to country of residence
    424 Disallowed education credit - no resident alien
    425 Each Dependent claimed must have a valid SSN issued-Disallow part of the Child Tax Credit
    426 Changed tax on income not effectively connected (Form 1040 NR) - computation error
    427 Changed tax on income not effectively connected (Form 1040NR Page 2) - XFER from Page 4 error
    428 Recomputed tax using correct tax treaty rate
    429 Recomputed tax using 30 percent (or lower treaty) rate
    430 Disallowed tax withheld - supporting docs (Form W-2, Form 1042-S, Form 1099) missing
    432 Disallowed income tax withheld at source Form 1042-S missing
    433 Disallowed partnership under S1446 with holding - Form 8805 and/or Form 1042-S missing
    434 Disallowed Form 8288-A credit IRS has no record of payment
    435 Disallowed U.S. tax withheld on dispositions of U.S. real prop INT Form 8288-A and/or Form 1042-S missing
    436 Changed Form 8288-A credit on return amount does not match Form 8288-A
    438 Disallowed foreign withholding claimed on return
    439 Changed the total tax on Form 1040NR-EZ because there was an additional error.
    440 Disallowed Health Insurance credit - no response to info request
    441 Disallowed Form 8805 or Form 1042-S credit SSN on Form 1040NR and credit Doc mismatch
    442 Changed return copy of green card and signed declaration not received
    443 Disallowed refund of tax withheld on Social Security benefits 30 percent or tax treaty rate
    445 Changed state and local taxes computation error
    447 Changed tax on gambling winnings 30 percent rate applies
    448 Changed tax on gambling winnings gambling winnings exempt under tax treaty
    449 Adjusted taxable income on Form 1040NR exemption amount figured incorrectly
    450 Adjusted taxable income on Form 1040NR-EZ exemption amount figured incorrectly.
    451 Adjusted tax by allowing personal exemption on 1040NR-EZ.
    452 Disallowed dependents -credits-Primary/Spouse SSN/ITIN missing/Invalid.
    453 Disallowed Additional Child Tax Credit-Primary/Spouse SSN/ITIN missing/Invalid-Spanish
    454 Disallowed Additional Child Tax Credit-Primary/Spouse SSN/ITIN missing/Invalid.
    456 Disallowed tax treaty exemption max time allowed exceeded for treaty article.
    457 Adjusted return total exemption amount computed incorrectly on Form 1040NR-EZ.
    458 Adjusted return personal exemption allowed on Form 1040NR-EZ.
    464 We didn’t allow some or all of the amount you claimed as additional child tax credit on line 9 of your Form 1099-SS because the (ITIN) for one or more the qualifying persons is inactive.
    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.
    467 We didn’t allow some or all of the amount you claimed as credit for child and dependent care expenses on line 47 of your Form 1040NR. One or more of the qualifying persons is inactive.
    472 Removed Self Employment Tax SE Income Limt $434.
    473 Changed SE Tax (Form 1040-SS) computation error.
    474 Changed SE Tax (Form 1040-SS) refund/amt you owe computation error.
    475 Changed additional child tax credit dep TIN(s) missing.
    476 Changed additionall child tax credit dep name(s) or TIN(S) invalid.
    477 Disallowed add'l child tax credit TP has limit 3 qualified children.
    478 Adjusted Form 1040NR-EZ missing requested explanation for itemized deductions.
    479 Adjusted Form 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 Form 1040-PR
    487 Removed Self Employment Tax - Self Employed Income limit $434
    488 Social Security Self Employment Tax Changed - Error on Form 1040PR
    489 Self Employment tax changed - Error on Form 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 additional child tax credit Taxpayer has limit 3 qualified children
    493 Changed additional child tax credit one or more children born after tax period
    494 Adjusted Form 1040PR part of tax treaty exemption exceeds maximum
    495 Amount you claimed as child tax credit or additional child tax credit on your tax return because you, your spouse , or one or more of your dependents claimed for the credit di not have a TIN assigned by the due date of the tax return.
    496 We didn't allow the amount you claimed as child tax credit or additional child tax credit on your tax return because you, your spouse, or one or more of your dependents claimed for the credit did not have a taxpayer identification number assigned by the due date of the tax return. (Form 1040-PR)
    497 One or more Dependents didn’t have an assigned TIN by due date of the return-Disallowed certain credits.
  2. For information on Selection Keys not shown in the above chart, refer to IRM 3.14.1.3.1, Notice Selection Process .

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.

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, 2014and 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.

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 alien or a nonresident alien.

  3. If a visa holder is determined to be a nonresident alien, the taxpayer is generally 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 U.S. citizens.

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

    1. CW Visa Only Transitional Worker (CW) classification visa applies only to the U.S. territory of the Commonwealth of the Northern Mariana Islands. It is issued to temporary workers in the CNMI who are ineligible for other employment-based non-immigrant U.S. visas. For additional information, see IRM 4.23.5.10, FICA Tax on Wages Paid To Residents of the Philippines for Services Performed in the Commonwealth of the Mariana Islands (CNMI).

    2. 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.

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

    4. 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.

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

    6. 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.

    7. Q Visa The "Q" Visa is issued to alien students whose employment or training affords the opportunity for cultural sharing with the American public. 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.

    8. 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 wages. 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.

    9. 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.

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 exempt amounts vary among countries and specific items of income. The term "resident" is generally defined under the relevant treaty to mean a resident for income tax purposes of the applicable foreign country, which may require a physical presence within the foreign country such that citizenship or nationality alone may not establish "residency" for purposes of the treaty.

  2. Tax treaties reduce the U.S. taxes of residents for foreign countries. With certain exceptions, such as a dual resident individual who is treated as a resident of a foreign country under the tie-breaker rules of an applicable treaty, they do not reduce the U.S. taxes of U.S. citizens or resident aliens. U.S. citizens and resident aliens are subject to U.S. income tax on their worldwide income and under a "saving clause" provision in most treaties the U.S. retains the right to tax its citizens and residents as though the treaty is not in effect (with some exceptions). 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 used to exempt effectively connected income reported on Form 1042-S (Income Code 16 through 20 (15 through 19 for 2014 and prior years), should be provided on Item L, Schedule OI on page 5 of Form 1040NR (Item J, Schedule OI, page 2 of Form 1040NR-EZ). Taxpayers should not include amounts exempt by treaty on line 8 of Form 1040NR (line 3 of Form 1040NR-EZ). The treaty amounts should be included on line 22 of Form 1040NR or line 6 of 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 the IRS web page.

    Note:

    Beginning in 2016, Treaty Tables 1 and 2 previously contained in Pub 515 and Pub 901 have been updated and moved tohttps://www.irs.gov/individuals/international-taxpayers/tax-treaty-tables

  5. If a taxpayer claims a treaty benefit, the taxpayer must provide, among other things, the name of the country of which they are a resident, the relevant treaty article (sub paragraph is not required), 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 16 (15 for 2014 and prior years) and there is no withholding.

  6. Article XXV often refers to the Non-Discrimination provision in the United States and Canada income tax treaty, which allows citizens/residents of Canada to figure their Form 1040NR tax based upon a hypothetical Form 1040 tax computed using married filing joint tax rates.

    • 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 or the taxpayer files Single or Head of Household on the Form 1040,, the Form 1040NR is to be processed using Filing Status Code 1 (FSC 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:

      Article XXV, paragraph 1, does not provide a basis for a Canadian national who is a U.S. non-resident alien to claim a standard deduction or extra personal exemptions on the hypothetical Form 1040.
      Tax Year 2018- If the standard deduction amount on Form 1040 or statement is greater than the Form 1040NR deduction (line 37 or itemized deductions), recalculate the Form 1040 taxable income using the Form 1040NR deduction and exemption amount.
      Tax Year 2017 and Prior Years- If the standard deduction amount and exemptions on the Form 1040 or statement is greater than the Form 1040NR deduction (line 38 or itemized deductions) and exemptions, recalculate the Form 1040 taxable income using the Form 1040 NR deduction and exemption amounts.

      Note:

      Alternative Minimum Tax may still apply.

    • The tentative tax reported on Form 1040 or statement is the total U.S. tax payable by the taxpayer and his or her spouse as if both were U.S. citizens and all of their income arose in the United States. An income deficit (or loss) of the spouse shall not be taken into account.

    Reminder:

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

  7. The taxpayer may not claim that income is exempt under treaty by claiming “Tiebreaker” under Article IV. Article IV generally provides whether a taxpayer is a "resident" of a foreign country for purpose of the treaty, and it does not provide an exemption of income. If Article IV is the only treaty article provided in response to Item L on page 5 of Form 1040NR or Item J on page 2 of Form 1040NR-EZ, then the treaty claim is not valid. However, a dual resident (one who is resident of the U.S. under U.S. domestic law and of the foreign country under the foreign country’s domestic law) may claim to be treated solely as a resident of the foreign country pursuant to the treaty tiebreaker rules of an applicable treaty by filing a Form 1040NR with a Form 8833 attached.

  8. Under certain circumstances, an individual may claim a benefit under an applicable tax treaty between the United States and a foreign country on Form 1040. For example, an individual who meets the substantial presence test and is therefore a resident alien, may file a Form 1040 and claim that certain U.S. source income is exempt from U.S. tax under an applicable income tax treaty because the income is related to teaching, studying, or training. In that case, a Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), should be completed and attached to the Form 1040 with the relevant tax treaty article information. The taxpayer must identify the foreign country involved, the tax treaty article number(sub paragraph is not required), and the amount of exempt income. The amount must be reported as income on line 8 and the exempt amount as a negative amount on line 22.

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 they 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.

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.

Funny Box IVO (Integrity and Verification Operation) - Return Integrity and Compliance Services (RICS)

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

Premium Tax Credit (PTC) Form 8962

  1. Starting in 2014, individuals and families can claim a new premium tax credit to help them afford health insurance coverage purchased through an Affordable Insurance Marketplace. Taxpayers use Form 8962, Premium Tax Credit to compute and claim the premium tax credit on their tax return. If the taxpayers have received the benefit of advanced payments of the premium tax credit (APTC), the taxpayers must reconcile the credit with the amount of their APTC to either claim any additional credit allowed on their tax return or repay the excess benefit received from APTC paid to the insurer.

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. See the IMF Notice Review International Job Aid 2510-001, 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 preventing an overpayment from generating TC570, inputting an adjustment or credit transfer, input the appropriate International File Location Code (FLC 20 or 21) for all international returns.

Math Error Notices

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

  2. Use the IDRS Command Codes Job Aid for assistance (e.g. Command Codes (CC) TXMOD, AMDIS, ENMOD, IMFOL, INOLE, INTST, RTVUE, NAMES) which is available on Servicewide Electronic Research Program (SERP)

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

  4. 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 3.14.1.6.9.7, Slipped Blocks and Mixed Data Blocks, for processing instructions for slipped or mixed blocks.

  5. 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.

  6. 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 with or without a TPNC.

  7. TPNC 311 will be assigned by ERS whenever a return is converted, during processing, from a Form 1040NR-EZ to Form 1040-NR. TPNC 311 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.

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).

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.

Reviewing AMS Transcripts

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

Form 2555, Foreign Earned Income and Form 2555-EZ, Foreign Earned Income Exclusion

  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 under IRC section 911.

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

  3. Form 2555 and Form 2555-EZ must be completed and 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 or 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. If individuals whose activities in Iraq and Libya are or were permitted by a specific or general license from the Department of the Treasury's Office of Foreign Assets Control (OFAC) were not in violation of U.S. law. The restrictions do 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 Schedule 1, line 21 of Form 1040 (line 21 for 2017 and prior years) and send TPNC 314
  6. Form 1040 with a Form 2555 or 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:

    • Ensure the taxpayer included the earned income on the applicable lines: Line 1 and Schedule L, lines 12,18 or 21 (lines 7, 12,18, or 21 for 2017 and prior years)

    • Adjust Schedule 1, line 21 (line 21 for 2017 and prior years) of Form 1040 to remove the foreign earned income exclusion amount

    • Assign TPNC 100. Refer to the IMF Notice Review International Job Aid 2510-001 for instructions.

  7. U.S. government employees may not exclude income received from the U.S. government or its agencies on Form 2555 or Form 2555-EZ.

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

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

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

    • Adjust the total income on Schedule 1, line 22 (line 22 for 2017 and prior years) of Form 1040 to remove 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) or Republic of the Marshall Islands (RMI) and Form 2555 or Form 2555-EZ is attached, allow the exclusion.

  9. U.S. citizens and U.S. 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 2018, the taxpayer enters bona fide dates of 11/01/11 to 10/15/2018. The taxpayer completed an uninterrupted period of residence for a full tax year (2018) and therefore meets the bona fide residence test. The taxpayer would also qualify for tax years 2015, 2016 and 2017.

      Example:

      For tax year 2018, the taxpayer enters bona fide residence dates of 10/01/2017 to 11/ 30/2018. The taxpayer did not complete an uninterrupted period of residence for a full tax year (2017 or 2018) and therefore does not meet the bona fide residence test in either year.

      To qualify for the physical presence test, the taxpayer must be physically present 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 bona fide residence and physical presence requirements may be waived if the taxpayer can demonstarte that he or she was forced to leave the foreign country because of war, civil unrest, civil insurrection, hostile fire, etc. Refer to Publication 54 for a list of qualifying countries each year.

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

  10. For married taxpayer filing jointly with deductible or excludable income for both spouses, a separate Form 2555 or Form 2555-EZ is required for each spouse. Generally, only one spouse can claim a housing exclusion or housing deduction. Treasury. Reg. 1.911-5(a)(3)(ii).

  11. For tax year 2006 and subsequent tax years when the taxpayer claims the Form 2555 exclusion amounts, the tax must be manually figured using the Foreign Earned Income Tax Worksheet found in the Form 1040 Instructions. If necessary, recompute the tax and retype the notice appropriately.

    Reminder:

    The total amount of income (including the foreign earned exclusion amount from Form 2555) reported on Schedule 1, line 21(line 21 for 2017 and prior years) of Form 1040 may include other gains and losses usually found on a statement attached to the Form 1040. Verify the total income exclusion amounts on line 45 and on line 50 from Form(s)2555 before manually computing the tax. Special instructions apply when capital gain excess is present.

  12. When recomputing credits, the exclusions and deductions are often included in the Modified AGI (MAGI).

  13. If returning back to taxpayer's figures on Form 2555 or Form 2555-EZ, retype, void or label the notice as appropriate.

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

    Taxable Years Maximum Exclusion
    2018 $103,900
    2017 $102,100
    2016 $101,300
    2015 $100, 800
    2014 $99,200
    2013 $97,600
    2012 $95,100

Form 2555, Foreign Earned Income

  1. A U.S. citizen, U.S. resident alien, or non-resident alien (filing Dual Status return) living and working in a foreign country, may be exempt foreign earned income under IRC section 911. The taxpayer is entitled to the following exclusions and/or deductions on Form 2555:

    • Housing Exclusion is housing is provided by employer (Part VI)

    • Foreign Earned Income Exclusion (Part VII)

    • ,

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

  2. Form 2555 must be completed and filed with a Form 1040.

  3. Foreign earned income shown on line 26 of Form 2555 must be shown as income on Form 1040 line 1 and Schedule 1, lines 12, 17 (line 29a, column (j) Schedule E), 18 or 21 (lines 7, 12, 17, 18 or 21 for 2017 and prior years).

  4. If foreign earned income other than wages is excluded then a manual computation is necessary to determine the correct exclusion amount. The taxpayer cannot claim any adjustment, deduction or expense on Form 1040 that is definitely related to the excluded income. The foreign earned income exclusion on Form 2555 must be reduced by the allocable amounts. See IMF Notice Review International Job Aid 2510-001 for instructions.

    Exception: If all the foreign earned income credit on Form 2555 is from page 2 of Schedule E then follow taxpayer intent.

    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 Schedule 1, line 21 (line 21 for 2017 and prior years) of the Form 1040.

  5. The foreign earned income exclusion amount on line 45 of Form 2555 must be included on Schedule 1, line 21(line 21 for 2017 and prior years) of Form 1040. The housing deduction on line 50 of Form 2555 is included on line 36 of Form 1040.

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

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

    • Annotation of "Form 2555" written next to line 21 and line 36 on Schedule 1

    • Taxpayer claiming "Overseas Housing Exclusion" (Schedule 1 line 21)

    • Taxpayer claiming "Overseas Earned Income Exclusion" (Schedule 1 line 21)

    • Taxpayer claiming "Overseas Housing Deduction" (Schedule 1 line 36)

  7. A taxpayer qualifies for foreign earned income exclusion if the taxpayer:

    • has foreign earned income

    • has tax home test and

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

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

    • if a partial tax year that falls within the qualifying period, the foreign earned income exclusion must be prorated for the partial year.

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 or 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. Taxpayer who have earned income from a foreign country or countries can file Form 2555 or Form 2555-EZ to exempt foreign earned income from gross income:

    • Is self-employment income reported;

    • Business or/moving expenses claimed;

    • A foreign housing exclusion or foreign housing deduction claimed.

    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.

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 (for example, city, state, or province) of the country or territory.

  2. Generally, taxpayers may claim credit on Form 1116 , Foreign Tax Credit, or deduct foreign income taxes paid on Schedule A, Itemized Deductions, but not both. However a taxpayer claiming the credit on Form 1116 for foreign income taxes may still claim a deduction for certain foreign income taxes for which a credit is not allowed.

  3. Form 1116 is filed to claim credit for income taxes paid to another government. Send TPNC 313 for Form 1040NR (TPNC 513 for Form 1040) if Form 1116 was either incomplete or not attached.

    Note:

    If Foreign Tax Credit is $300 or less ($600.00 or less for married filing joint), the only foreign source income is passive income (i.e. interest and dividend), and the foreign source income and taxes are reported on a qualified payee statement (includes Form 1099-DIV, Form 1099-INT and Schedule K-1 (Form 1041)), 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. For 2018, foreign real property taxes do not qualify for a deduction. For 2017 and prior years, 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. The Foreign Tax Credit is a non-refundable credit.

  8. Excess foreign tax credits may be carried back 1 year and then carried over 10 years .

    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 ten year year carry over and one year year carryback periods. Refer cases involving foreign tax credit carry back to Examination Classification when over $50,0000. IRM 21.5.9.5.44Carryback, for additional carryback information.

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

  11. The taxpayer cannot claim a deduction or a foreign tax credit for foreign tax on income that is excluded from taxable income using Form 2555 or Form 2555-EZ excluded the income using Form 2555 or Form 2555-EZ, IRC Section 933 (Puerto Rico) or IRC Section 931 (Form 4563). If the amount online 1a of Form 1116, equals the amount on line 26 of Form 2555 (line 18 of Form 2555-EZ), and line 12 of 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.

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

    • Cuba (ended December 21, 2015)

    • Iran

    • North Korea

    • Sudan

    • Syria

  13. The foreign tax credit is not allowed for :

    • taxes with respect to an international boycott;

    • withholding taxes with respect to payments on stock or other property for which the required holding period has not been met;

    • withholding taxes on income or gain with respect to which a taxpayer had to make related payments on positions in substantially similar or related property;

    • taxes paid with respect to the purchase of oil or gas; or

    • taxes paid or accrued with respect to a covered asset acquisition described in IRC Section 901(m).

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 of Schedule A, Itemized Deductions

    Note:

    Taxpayers are not required to attach any documentation if they are claiming foreign income taxes paid on Schedule A.

  3. Generally, 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. However, a taxpayer claiming credit on Form 1116 for foreign income taxes may still claim a tax deduction for certain foreign income over the tax credit for periods when taxable foreign income is earned in countries whose relationship with the U.S. is restricted. Foreign earned income from these countries does not qualify for the Form 1116.

    Note:

    If the taxpayer claims the foreign income taxes on Schedule A, and claims a foreign tax credit on Form 1116, disallow the Schedule A foreign tax deduction if it cannot be determined that the foreign income is from a restricted country.

Form 1040NR or 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 alien or nonresident alien for tax purposes. See Chapter 1 of Publication 519, U.S. Tax Guide for Aliens for more information

  2. Form 1040NR and Form 1040NR-EZ is filed by a nonresident alien taxpayer who is engaged in a trade or business within the United States even if the taxpayer:

    • Does not have income from a trade or business within the United States.

    • Does not have U.S. sources incomes; or

    • Has income that is exempt from U.S. tax under a tax treaty or any section of the Internal Revenue Code

    Note:

    A Form 1040NR-EZ is filed by a nonresident alien only if the taxpayer’s U.S. source income was from wages, salaries, tips, refunds of state and local income taxes, scholarship or fellowship grants, and nontaxable (by tax treaty or by any section of the Internal Revenue Code) interest or dividends . If the taxpayer has taxable interest or dividend income, he or she must use Form 1040NR instead of Form 1040NR-EZ.

  3. Form 1040NR or Form 1040NR-EZ is filed by a nonresident alien who is engaged in a trade or business within the United States if the taxpayer:

    • Has U.S. source income; and

    • Not all of the U.S. tax owed was withheld from that income.

    Note:

    If the return indicates the taxpayer was present in the U.S. for the entire year, review the complete return and attachments for additional information to determine whether the taxpayer was a resident rather than a nonresident for U.S. tax purposes.

  4. A nonresident alien is taxed at graduated rates on taxable income effectively connected with a U.S. trade or business. Although most effectively connected income is derived from U.S. source income effectively connected income may include foreign source income. If the taxpayer has an office or other fixed place of business in the United States hen , foreign source income may be attributable to that office.

  5. A nonresident alien who is married to a U.S. citizen or resident alien spouse may elect under IRC Section 6013(g) or IRC Section 6013(h) to be treated as a resident of the U.S. and may file a Form 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 all or a portion of such types of income may be exempt from U.S. income tax including the following situations:

    • Qualifying scholarship or fellowship income (but not including any portion of such scholarship or fellowship income that is treated as compensation for services) may be exempt under an applicable tax treaty or excluded under IRC Section 117, provided that certain requirements are met. See Chapter 3 of Publication 519.

    • Certain community property laws must be disregarded and income cannot be split, if:

    • Both the taxpayer and his or her spouse are nonresident aliens, or

    • One of the taxpayers is a nonresident alien and his or her spouse is a U.S. citizen or resident alien and they do not both elect to be treated as U.S. residents and file a joint return

      Note:

      In these cases, community income must be reported as described in IRC Section 879 and Publication 519.

    • Nonresident aliens who work for certain international organizations or foreign governments may exempt wages earned as compensation for official services to such organizations or governments under IRC Section 893 - Compensation of Employees of Foreign Governments or International Organizations.

    • Wages a nonresident alien earns from a foreign employer, not engaged in business in the U.S., for services the nonresident alien performed in the U.S. for a period not exceeding 90 days is exempt if the nonresident alien’s compensation does not exceed $3,000 aggregate. A larger exempt amount may be available under an applicable treaty.

      If the taxpayer indicates wages or salary compensation is being exempted, see IRM 3.22.3.163.2.1, ,Employees of Foreign Governments or International Organizations, for instructions.

    • Interest paid to nonresident aliens from U.S. bank accounts is not taxable as income 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). If a supporting statement indicates bank interest, delete the line 9a bank interest entry on Form 1040 and assign TPNC 403.

  7. Nonresident aliens may be subject to additional taxes and liabilities including:

    • Alternative Minimum Tax on the net gain from the disposition of U.S. real property interests

    • Tax at a 30% (or lower treaty) rate on certain items of gross income of gains from U.S. sources that are not effectively connected with a trade or business within the U.S.

    • Social Security and Medicare taxes on taxable wages

    • Tax on distributions from an IRA or other retirement plan, and tax on contributions to, earnings from, and distributions from foreign retirement plans (unless otherwise exempt by an applicable tax treaty)

    • Tax on transportation income

    • Employment tax and income tax withholding for household employees

  8. Nonresident aliens who file Form 1040NR or Form 1040NR-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)

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

      Note:

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

Effectively Connected Income (ECI)

  1. Effectively connected income includes:

    • U.S. Source Fixed, Determinable, Annual, Periodical (FDAP) Type Income - The following classes of FDAP income may also be effectively connected income only if an actual connection exists with a U.S. trade or business:

    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 (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 aliens partner’s distributive share of the partnership’s effectively connected income (3) the amount realized by a nonresident alien on sale of U.S. real property (including stock in a U.S. real property holding company) and (4) disposition for gain by a nonresident alien of an interest in a partnership in the conduct of a trade of business with the U.S.

    • Wages,
      A nonresident alien partner’s distributive share
      of the partnerships effectively connected income, and
      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 resident aliens 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 21 or page 1 of Form 1040 NR-EZ, lines 3 through 5.

    • 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 in box 3a or Exemption Code 14 in Box 4a) or Form 1099.

  4. Income included on Form 1042-S with Income Codes 16 through 20 (15 through 20 for 2014 and prior years) is personal service income reported as effectively connected income on page 1 of Form 1040NR or Form 1040NR-EZ.

  5. When a Form W-2 and Form 1042-S are attached to a Form 1040NR or Form 1040NR-EZ , are from the same employer, and the wages are exempt by tax treaty, an employer may report the taxable portion on Form W-2 and the tax exempt portion on Form 1042-S. If a Form W-2 and a Form 1042-S from the same employer are attached to the return, add the income from both forms together and then subtract the treaty exemption amount to determine if the taxpayer claimed more than the maximum amount allowed by treaty. The remainder is taxable and must be reported on line 8, Form 1040NR (line 3, Form 1040EZ). The exempt amount is reported on line 22, Form 1040NR(line 5, Form 1040NR-EZ).

  6. 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, line 13 of {Form 1040, line 14 of Form 1040NR}, . Also, net gains may be subject to the Form 6251, Alternative Minimum Tax . See Publication 519 for more information.

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

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

    • pensions and annuities

    • Gambling 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 exempt 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 alien and

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

  2. With certain exceptions, 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. Form 1042-S with exemption code 00 or a blank entry in box 3a or 4a identifies the income as non effectively connected.

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 a 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. For the 2017 Form 1040NR, if Prior Year Earned Income (PYEI) is written next to the Additional Child Tax Credit (ACTC) line, accept taxpayer PYEI without documentation and use the amount to manually calculate the ACTC.

Filing Status
  1. For TY 2018 and later, the following table provides the allowable filing statuses (FSC) for Form 1040NR:

    Form 1040NR Filing Status checked by Taxpayer Description Allowable Filing Status Code
    2   1
    5   3
    6 The date of death is more than 2 years prior to the tax year 1
    6 No date of death or date of death if less than 2 years prior to the tax year 5
    No boxes checked Filing Status depends on tax. Look for fiduciary notation 1
    Multiple boxes are checked Not applicable Use the filing status 1,3, or 6 which corresponds to the taxpayers’s taxable income (tax rate chart) as long as the criteria for that status is met.
  2. For TY 2017 and prior years, the following table provides the allowable filing statues (FSC):

    Form 1040NR Filing Status Box 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 Not Applicable 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.
Exemptions
  1. For TY 2018 and later, taxpayers filing a Form 1040NR cannot claim an exemption (the amount is $0) for self, spouse, children, or dependents.

  2. For TY 2017 and prior years, the following table provides the allowable exemptions for foreign taxpayers:

    If the taxpayer checks Then the taxpayer can claim an exemption(s) for:
    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
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. For TY 2018 and later deductions on Schedule A are limited to the following:

    • Taxes Paid- Beginning in 2018, state and local income tax withheld is limited to the smaller of the amount on Schedule A, line 1b, Form 1040NR or $10,000 for Filing Status 1 ($5,000 for Filing Status 5)

    • Gifts to U.S. Charities-Deductible contributions limited to U.S. religious, charitable, scientific, literary, educational and humanitarian purposes

    • Casualty or theft losses from a federally declared disaster

    • Other Miscellaneous deductions
      Un-reimbursed job expenses and other certain Miscellaneous Deductions subject to the 2% limitation of the Adjusted Gross Income (AGI) can no longer be deducted.

  3. For TY 2017 and prior years, deductions on Schedule A are limited to the following:

  4. For TY 2017 and prior years, total itemized deductions on Schedule A is subject to a limitation based on adjusted gross income on line 36 of Form 1040NR. For 2018 and later, the limitation no longer applies. Schedule A was not subject to the limitation in tax years 2010 to 2012.

  5. 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).

  6. 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 includes a version of Schedule L.

Dependents
  1. Dependents claimed for Child Tax credit (CTC), Additional Child Tax Credit and Credit for Other Dependent (ODC) are restricted based on the taxpayer’s country of residence on Form 1040NR.

  2. To determine the country of permanent residence for a nonresident alien. use the taxpayers’s information on the Form 1040NR in the following order:

    1. Schedule OI, Line B page 5 Form 1040NR, (page 2 Form 1040NR-EZ)

    2. Schedule OI, Line A page 5 Form 1040NR, (page 2 Form 1040NR-EZ)

    3. Address from the Entity section of Form 1040NR or Form 1040NR-EZ

    4. Review of any attachments

  3. Use the following table to determine the allowable dependents based on country of residence.

    If Then
    The taxpayer is a U.S. national or a resident of :
    • Canada

    • Mexico

    • India


    And claiming a dependent
    The taxpayer can claim dependents for CTC, ACTC, and ODC
    The taxpayer is a resident of South Korea The taxpayer can claim child(ren) who lived in the United States, but not other dependents for CTC, ACTC, and ODC
    All others or the country of residence cannot be determined No dependents can be claimed for CTC, ACTC, or ODC.

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-EZ 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-EZ is the fifteenth (15th) day of the sixth (6th) month (06-15-XX) following the close of the tax year.

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 Not Applicable 1
Exemptions
  1. For TY 2018 and later, taxpayer filing a Form 1040NR-EZ cannot claim an exemption (the amount is $0) for self.

  2. For TY 2017 and prior years, only one exemption (for self) is allowed on Form 1040NR-EZ.

    Note:

    A taxpayer filing Form 1040NR-EZ cannot be claimed as a dependent by another taxpayer.

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 line 12 of Form 1040NR-EZ., For TY 2018 and later, state and local income tax withheld is subject to the imitation same as Form 1040NR.

  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

Gambling Income

  1. Gambling winnings (Form 1042-S, Income Codes 28 and 54) are subject to a 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 (Form 1040NR, Schedule NEC) 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 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 lLine 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 the 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. To adjust the tax:

    • Gambling tax (schedule NEC line 15) - use REQ54, input TC 29X, reason code 037.

    • U.S. tax withheld at source (withholding, Form 1042-S, box 7) use CC REQ54, input TC 290.00, Reason Code (RC) 051, with Credit Reference Number (CRN) 330 (+/-). The adjustment will post as TC 766/767.

    -

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 of Form 1040NR (line 5 of Form 1040NR-EZ).

  6. An entry on line 12 of Form 1040NR (line 5 of 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 16 (15 for 2014 and prior years [issued by a college or educational institution])

      Note:

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

  7. All or part of Scholarship/Fellowship/Grant income may be exempt under a valid and applicable tax treaty. Any portion of the grant that represents payment for teaching, research, or other services is generally taxable. 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 Table 2 at https://www.irs.gov/individuals/international-taxpayers/tax-treaty-tables

    Note:

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

    Note:

    Income Code 16 (15 for 2014 and prior years), 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 Form 1098-T or a statement from a qualified educational institute supporting the excluded amount.

  9. The excluded amount is reported as an adjustment to income on line 31 of Form 1040NR (line 8 of Form 1040NR-EZ).

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

    • To adjust - use REQ54, input TC 29X, Reason Code (RC) 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 IMF Notice Review International Job Aid 2510-001 for line by line references.

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 IRM 3.14.1 IMF Notice Review guidelines regarding the timelines for the TC570/NOREFP input.

    • Route document to Accounts Management, Stop 6567 AUSPC, on Form 3465, Adjustment Request.

U. S. Agency International Development Returns (USAID)

  1. Treasury. 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 the taxpayer is not liable, and the tax has been decreased to zero (.00) with an overpayment of tax withheld, take the following steps:

    • Prevent the refund from generating.

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

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

Credits Claimed on International Returns

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

Child Tax Credit (Non-Refundable)

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

    • Has a valid SSN for 2018 or has a valid SSN or ITIN for 2017 and prior years.

    • Claimed as a dependent on the front of the Form 1040 or in box 7 on Form 1040NR.

      Note:

      Dependents claimed for the Child Tax Credit (CTC) and /or Additional Child Tax Credit on Form 1040NR is restricted based on the taxpayer’s country of residence. For more information on Child Tax Credit and Additional Child Tax Credit refer to IRM 3.38.147.7.4.4 Dependents.

    • Under the age of 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 (ahijada or ahijado) 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 circumstances, such as for school, vacation, medical care, military service, or business, count as time lived at home.

    • For TY 2017 and prior years, must meet the substantial presence test if assigned an ITIN.

    • Was a U.S. citizen, a U.S. national, or a resident alien 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 (MAGI) and threshold amounts. If the taxpayer is filing Form 2555 or 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 Rico Child Tax Credit for specifics on Puerto Rico.

Child Tax Credit and Credit for Other Dependent

  1. Beginning in TY 2018, taxpayers can claim the Credit for Other Dependent (ODC). Child Tax Credit (CTC) is allowed only for qualified dependents that have a valid social security number (SSN) and are under the age of 17 years.

  2. If the qualifying dependent claimed for CTC does not have a valid ITIN, or is over the age of 16 years, the CTC is disallowed and the ODC is allowed.

  3. For TY 2018 and later, use the additional information in the following tables to determine if the taxpayer qualifies for the Child Tax Credit (CTC) or the Credit for Other Dependents (ODC). Follow the instructions in IRM 3.38.147.3.4 to determine the qualified dependents for CTC or ODC on Form 1040NR.

    If the taxpayer marks the And Then
    CTC box on Form 1040 or Form 1040NR Has a qualifying dependent (valid SSN, meets the age requirement and Form 1040NR, valid country of residence Allow the CTC
    OCD box on Form 1040 or Form 1040NR Has a Qualifying dependent (valid SSN or ITIN, any age and for Form 1040NR, valid country of residence Allow the ODC
    CTC box and the OCD box on Form 1040 or Form 1040NR Has a qualifying dependent (valid SSN, meets the age requirement and for Form 1040NR, valid country of residence Allow the CTC

    Note:

    The taxpayer cannot claim the spouse as a dependent for ODC. Disallow the ODC amount if the taxpayer claims a credit for the spouse.

  4. The 2018 maximum credit amount for a qualifying child for CTC is $2,000. The maximum credit amount for an eligible dependent for ODC is $500.

Additional Child Tax Credit (ACTC) (Refundable)

  1. Beginning 2015, if the taxpayer files Form 2555 or Form 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, the additional child tax credit cannot be claimed.

  2. Bona fide residents of Puerto Rico should file Form 1040-PR or Form 1040-SS, , ACTC can be claimed directly on the tax return by completing Parts I and II; therefore, Schedule 8812, Additional 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.

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

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

    Exception:

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

  5. The TY 2018 maximimum credit amount for a qualifying child for ACTC is $1,400.

  6. The Additional Child Tax Credit cannot be claimed if only the Other Dependent Credit is claimed. The taxpayer must claim the Child Tax Credit to qualify for the ACTC.

Education Tax Credits

  1. Education tax credits are refundable and nonrefundable credits for qualified expenses paid to an eligible educational institution.

  2. The education credit:

    • Can be claimed for taxpayer, spouse, or eligible dependent.

    • Is limited to one credit per student.

    • Is subject to phaseout based on modified adjusted gross income (MAGI).

  3. Form 1040NR filers, dual-status filers, and married filing separate filers do not qualify for the education tax credit.

  4. Taxpayer may not be eligible for education credits if taxpayer (or spouse) is a non-resident alien for any part of the tax year and did not elect to be treated as a resident alien.

  5. If the taxpayer is filing Form 2555 or Form 2555-EZ, or excluding income from IRC Section 933 (Puerto Rico), or IRC Section 931 (Form 4563), the taxpayer must use worksheets 2-1 and/or 3-1 in Publication 970, Tax Benefits for Education

Adoption Credit

  1. The Adoption credit is a nonrefundable credit for qualified expenses paid to adopt an eligible child. (The credit was a refundable credit for TY 2010 and 2011.)

  2. Taxpayer must file Form 8839, Qualified Adoption Expenses to claim the adoption credit.

  3. The allowable credit for 2018 is $13,840 for qualifying expenses paid to adopt a child with special needs or an eligible child. For 2017 the allowable credit is $13,570.

  4. Married nonresident aliens:

    • Can claim the credit only if filing a joint return with a U.S. citizen or resident alien spouse.

    • May also qualify for the credit as "certain married persons who live apart."

  5. Credit is subject to phaseout based on income limits.

Foreign Child Care Provider

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

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

Earned Income Tax Credit (EITC)

  1. If the taxpayer resides outside the U.S., he or she is generally not entitled to EITC. See (6) and (7) below for exceptions.

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

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

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

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

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

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

    • U.S. Air Force

    • U.S. Army

    • U.S. Coast Guard

    • U.S. Marines and U.S. Navy

    • DCPS CIVPAY Directorate

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

    • United States Armed Forces (USAF) - Active Duty, Defense Finance & Accounting Services (DFAS) - PMJFC/DE

    • Commanding Office United States Coast Guard (USCG) Human Resources Service Information campus

Recovery Rebate Credit

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

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

    2. Taxpayers filing Form 1040NR or Form 1040NR-EZ

    3. Taxpayers filing Form 1040-PR or Form 1040-SS

Making Work Pay and Government Retiree Credits

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

    Note:

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

    Note:

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

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

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

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

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

  1. Nonresident aliens do not qualify for this credit, but may be required to repay the credit .

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

  3. Uniformed services, Foreign Service members, and Employees of the intelligence community have additional time to purchase a home. See Instructions for Form 5405, Repayment of First-Time Homebuyer Credit.

Dual-Status Taxpayer - General Information

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

  2. A dual-status taxpayer is required to submit two separate tax forms: a Form 1040 with a Form 1040NR or Form 1040NR-EZ.

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

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

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

  6. Dual-Status taxpayers cannot claim a standard deduction but may use itemized deductions.

    Exception:

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

  7. For TY 2018 and later, taxpayer cannot claim an exemption for self, spouse, or dependents. For TY 2017 and prior years, Dual-Status taxpayers may claim their own exemption and are allowed exemptions for spouse and dependents for the part of the year they were a resident alien. The amount they claim for these exemptions is limited to their taxable income before exemptions for the part of the year they were resident aliens.

  8. Dual-Status taxpayers are not eligible for Education Tax Credits (Form 8863) , Earned Income Credit (Schedule EIC), or the Credit for the Elderly or Disabled (Schedule R).

  9. Dual-Status taxpayers cannot file as married filing jointly (FS2) or head of household (FS4).

    Exception:

    Under IRC Section 6013(g) and (h), a nonresident alien married to a U.S. citizen or resident alien can elect to be taxed at the married filing joint tax rate if that person files as married filing joint and reports all worldwide income. Dual-Status restrictions do not apply; process the return as a Form 1040. To make this election the taxpayers must attach a statement to the joint return declaring that they qualify under either IRC Section 6013(g) or IRC Section 6013(h) to file a joint return as U. S. residents for the entire tax year.

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

  11. A Dual-status taxpayer is subject to Net Investment Income Tax only for part of the year during which taxpayer is a U.S. resident.

  12. Tax Rates – A taxpayer who is married and a nonresident alien of the United States for all or part of the tax year and does not choose to file jointly under IRC Section 6013(g) or (h), must compute tax as married filing separately on income effectively connected with a U.S. trade or business.

    Note:

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

Form 1040 Dual-Status (D/S) Return

  1. Form 1040 Dual-Status (D/S) is required when a taxpayer is a resident of the United States on the last day of the year.

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

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

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

  5. Generally, income earned as a nonresident is not taxable in the U.S. unless it is effectively connected with a U.S. trade or business or is U.S. source income. Annuities, dividends, interest, capital gains, rents, royalties. etc. that are not connected with a U.S. source trade or business are taxed at 30 percent or applicable treaty rate.

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

  7. If the taxpayer computes tax on non-effectively connected income on Schedule NEC, page 4 of Form 1040NR, the amount is carried over to non-effectively connected income on line 54 of Form 1040NR and Schedule 4, next to the dotted portion of line 64 of Form 1040.

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

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

    Note:

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

  10. If the amounts on the Form 1040 and 1040NR or Form 1040NR-EZ are not the same, combine the amounts from the 1040NR or Form 1040NR-EZ with Form 1040.

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

Form 1040NR or Form 1040NR-EZ Dual-Status (D/S) Return

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

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

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

  4. If the taxpayer computes tax on non-effectively connected income on Schedule NEC, page 4 of Form 1040NR the amount is carried over to the tax on income not connected with the U.S. trade or business on line 54 of Form 1040NR.

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

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

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

    Note:

    Nonresident aliens who give up U.S. residency are not allowed to file Form 1040NR-EZ for the tax year in which they give up their U.S. residency.

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

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

    Note:

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

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

  11. For TY 2017 and prior years, during the period of residency, all exemptions can be claimed just like Form 1040 filing but cannot exceed taxpayer's taxable income (computed without regard for personal exemptions).

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

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

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

  15. Commuters from Canada and Mexico file Form 1040NR and are not liable for self-employment tax.

Manual Refunds

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

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

    • There is a different address entered on Line 73e of Form 1040NR. .

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

    • Hardship cases.

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

Erroneous Refunds

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

  2. Definition of Erroneous Refund - Any receipt of money from the IRS to which the recipient is not entitled. This definition is intended to be very broad and includes all erroneous payments even if the:

    • erroneous refund involves returning the taxpayer's money and

    • non-entitlement could not have been known at the time of the refund.

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

  4. For all category "A" erroneous refunds follow procedures in IRM 3.14.1.6.7, Erroneous Refunds. The work leader will route the package to Exam in Philadelphia.

Foreign Address Review

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

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

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

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

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

    Note:

    Use caution when deleting what appears to be repetition in the address. Many countries have a capital city with the same name as the country. Sometimes the city is distinguished by adding the word “City”. See IMF Notice Review International Job Aid 2510-001 for a list of the cities with names similar or the same as the country.

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

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

Centralized Authorization File (CAF) Mismatch

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

    • CFINK 000-00-1234

    • 30 201612

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

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

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

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

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

United States Territories

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

    • Commonwealth of Puerto Rico (PR)

    • U.S. Virgin Islands (USVI)

    • Guam (GU)

    • American Samoa (AS)

    • Commonwealth of the Northern Mariana Islands (CNMI)

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

    1. A U.S. income tax return

    2. A tax return with that territory, or

    3. Both

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    • Form W-2AS

    • Form W-2CM*

    • Form W-2GU*

    • Form 499R-2/ W-2PR

    • Form W-2VI

    Note:

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

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

  9. Taxpayers who live in U.S. territories are not entitled to the EITC on a return filed with the IRS. See (10) and (11) for exceptions.

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

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

    • U.S. Air Force

    • U.S. Army

    • U.S. Coast Guard

    • U.S. Marines and U.S. Navy

    • DCPS CIVPAY Directorate

    • DFAS - ATTN: Defense and Accounting Service (See IMF Notice Review International Job Aid 2510-001 for the complete list)

    • USAF - Active Duty, DFAS - PMJFC/DE

    • Commanding Office USCG Human Resources Service Information campus

  12. Taxpayers living in U.S. Territories who have wages, RRTA compensation, and self-employment income that are subject to Medicare tax may also be subject to the 0.9 percent Additional Medicare Tax (Form 8959) if wages or compensation exceed the applicable threshold.

  13. The Net Investment Income Tax (NIIT) (Form 8960) imposes a 3.8 percent tax on the lesser of an individual’s net investment income or the excess of the individual’s modified adjusted gross income (MAGI). Bona fide residents of Puerto Rico and American Samoa who may have a Federal Filing obligation may be liable for the NIIT if the taxpayer’s modified adjusted gross income (MAGI) from non-territory sources exceeds a specified threshold amount. The NIIT does not apply to a taxpayer who is a nonresident alien. Bona fide residents of the Commonwealth of the Northern Mariana Islands, Guam., and the U.S. Virgin Islands will generally not be liable to the IRS for the NIIT over the threshold amount.

U.S. Virgin Islands Residents

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

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

    2. Report world-wide income on USVI return.

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

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

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

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

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

    3. Pay any income tax due the U.S. Virgin Islands when filing the duplicate return there.

  3. If the taxpayer files a joint tax return, the taxpayer files the return with the jurisdiction where the spouse who has the greater Adjusted Gross Income (AGI) would have to file if that person was to file separately. If the spouse with the greater AGI:

    • Is a bona fide resident for the entire tax year, the joint return is filed with the U.S. Virgin Islands.

    • Is a U.S. citizen or resident alien but not a bona fide resident of the U.S. Virgin Islands for the entire tax year, the joint return is filed with the U.S.

  4. Allow only withholding taxes paid to the U.S. Government on an attached Form W-2. Do not allow withholding paid on a W-2VI. The taxpayer may be able to claim a foreign tax credit for any income tax paid to the USVI on the same income reported on a U.S. income tax return.

Processing Form 1040/A/EZ with Income and Address from U.S. Virgin Islands

  1. If the only source of income was derived from USVI and the taxpayer has USVI address (does not have a United States income tax filing obligation), prevent the refund from generating, void the notice, and take the following action. Refer to IRM 3.14.1.7.1.1 , Refund Intercepts, guidelines regarding the timelines for TC570/NOREFP input:

    1. Zero out the module. Use Blocking Series 00 (line through the DLN), Source Code 4, Reason Code 099, Hold Code 4, FLC 21, Source Document Y. In Remarks, state "return transshipped to USVI." Attach the ADJ 54 print to a copy of the source document (remember to write "copy" on the document). Give the original document to the work leader.

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

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

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


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

  2. Work Leader will transship the return to Virgin Islands.

    Caution:

    If Form 8869, Allocation of Individual Income Tax to the U.S. Virgin Islands is attached or there is an indication on the dotted portion of line 71 that the taxpayer is reporting taxes paid to the USVI, or the taxpayer is filing in compliance with Notice 2007-19 (Indicated by zero return, taxpayer's name, address, TIN and signature), DO NOT SEND THESE RETURNS TO THE USVI.

U.S. Virgin Islands Income and Taxation

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

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

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

    2. If you can determine that the taxpayer is filing in compliance with Notice 2007-19, then process the return. Some indications could be:

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

    • Zero return

    • Affirmation statement indicating the filing of a USVI Form 1040

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

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

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

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

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

    Note:

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

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

  5. Form 8689 must be attached to take the credit for United States tax allocated to the USVI. The taxpayer should add lines 40 and 44 of Form 8689 and include that amount in the total payments on line 75, Schedule 5 of Form 1040. The credit claimed cannot exceed the amount of total tax on line 15 of Form 1040.

  6. The credit for taxes paid to the U.S. Virgin Islands is nonrefundable. Use REQ54, input TC 290 .00 with Reason Code 063 (U.S. Virgin Islands Credit on Form 8689) and 766 (+/-) when adjusting the credit.

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

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

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

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

    Note:

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

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

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

U.S. Virgin Islands Cover Over

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

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

    • DLN identified by 21211 or 21221

    • Category Code is ISPJ (International Special Project)

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

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

    • If a U.S. Virgin Islands Cover Over return has a TPNC 100 attached stating “VI Cover Over return-- Void notice,” then select “Void” on OLNR Notice Disposition.

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

American Samoa Residents

  1. A U.S. citizen, resident alien, or nonresident alien who is a bona fide resident of American Samoa (AS) for entire tax year must file:

    • AS tax return reporting gross income from worldwide sources.

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

      Note:

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

  2. A U.S. citizen or resident alien who is not a bona fide resident of American Samoa (AS) for entire year must file:

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

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


    A nonresident alien must file:

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

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

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

  4. U.S. Government employees living in American Samoa, whether bona fide residents or non bona fide residents, can claim a credit against tax on their U.S. tax return for income taxes paid or accrued to AS. To claim the credit, the taxpayer must figure the credit on Form 1116, Foreign Tax Credit, and attach it to the U.S. tax return.

  5. Bona fide residents of AS with earned income from AS may claim the IRC Section 931 exclusion using Form 4563.

  6. Allow only withholding taxes paid to the U.S. Government on an attached Form W-2. Do not allow withholding paid on a W-2AS. For AS withholding taxes paid on a W-2AS, the taxpayer may be able to claim a foreign tax credit for those taxes on the same income reported on a U.S. income tax return.

Processing Form 1040/A/EZ with Income and Address from American Samoa

  1. If the only source of income was derived from AS and the taxpayer has an American Samoa address (does not have a United States income tax filing obligation), prevent the refund from generating, void the notice, and take the following action. Refer to IRM 3.14.1.7.1.1, Refund Intercepts, guidelines regarding the timelines for TC570/NOREFP input:

    1. Zero out the module. Use Blocking Series 00 (line through the DLN), Source Code 4, Reason Code 099, Hold Code 4, FLC 21, Source Document Y. In Remarks, state "return transshipped to AS." Attach the ADJ 54 print to a copy of the source document (remember to write "copy" on the document). Give the original document to the work leader.

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

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

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

     

    Tax Office

    American Samoa

    Executive Office Building

    Pago Pago, AS 96799

  2. Work Leader will transship the return to American Samoa

Guam Residents

  1. A U.S. citizen, resident alien, or nonresident alien who is a bona fide resident of Guam (GU) for the entire tax year files with the Guam government (Under Section 935).

    • Taxpayers must report income from worldwide sources including all tax withheld by either Guam or the U.S., credit elect amount, and any payments of estimated tax paid to Guam or the U.S.

  2. If the taxpayer is not a bona fide resident of Guam for the entire tax year and is a U.S. citizen or resident alien, the taxpayer files a tax return (Form 1040) with the United States.

    • Taxpayer must report income from worldwide sources including income and withholding from Guam. Allow all W-2GU income and withholding. Tax and withholding due to the Guam government will be allocated by the IRS via Form 5074, Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands.

    Note:

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

  3. If the taxpayer files a joint tax return, the taxpayer files the return with the jurisdiction where the spouse who has the greater AGI would have to file if that person was to file separately. If the spouse with the greater AGI:

    • Is a bona fide resident of Guam for the entire tax year, the joint return is filed with Guam.

    • Is a U.S. citizen or resident alien but not a bona fide resident of Guam the entire tax year, the joint return is filed with the U.S.

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

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

    Accounts Management

    International Unit

    ATTN: North Building HUB International

    Philadelphia, PA 19255

Processing Form 1040/A/EZ with Income and Address From Guam

  1. If the only source of income was derived from Guam and the taxpayer has a Guam address (does not have a United States income tax filing obligation), prevent the refund from generating, void the notice, and take the following action. Refer to IRM 3.14.1.7.1.1, Refund Intercepts, guidelines regarding the timelines for TC570/NOREFP input:

    1. Zero out the module. Use Blocking Series 00 (line through the DLN), Source Code 4, Reason Code 099, Hold Code 4, FLC 21, Source Document Y. In Remarks, state "return transshipped to Guam." Attach the ADJ 54 print to a copy of the source document (remember to write "copy" on the document).

    2. Input Letter 86C to inform taxpayer that the return has been transshipped to Guam. Use paragraphs A, E, R, e, and u.

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

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

      Department of Revenue and Taxation

      Government of Guam

      PO Box 23607

      GMF, GU 96921

  2. Work Leader will transship return to Guam.

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

Commonwealth of Northern Mariana Islands Residents (CNMI)

  1. A U.S. citizen, resident alien, or nonresident alien who is a bona fide residents of Commonwealth of the Northern Mariana Islands (CNMI) for the entire tax year files with the CNMI government:

    • Taxpayers must report income from worldwide sources including all tax withheld by either the CNMI or the U.S., credit elect amount, and any payments of estimated tax paid to CNMI or the U.S.

  2. If the taxpayer is not a bona fide resident of CNMI for the entire tax year and is a U.S. citizen or resident alien, the taxpayer files a tax return (Form 1040) with the United States.

    • Taxpayer must report income from worldwide sources including income and withholding from CNMI. Allow all W-2CM income and withholding. Tax and withholding due to the CNMI government will be allocated by the IRS via Form 5074, Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands.

    Note:

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

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

  4. If the taxpayer files a joint tax return, the taxpayer files the return with the jurisdiction where the spouse who has the greater AGI would have to file if that person was to file separately.

    If the spouse with greater AGI:

    • Is a bona fide resident of Commonwealth of the Northern Mariana Islands the entire tax year, the joint return is filed with CNMI.

    • Is a U.S. citizen or resident alien but not a bona fide resident of Commonwealth of the Northern Mariana Islands for the entire tax year, the joint return is filed with the U.S.

Processing Form 1040/A/EZ with Income and Address from CNMI

  1. If the only source of income was derived from CNMI and the taxpayer has a CNMI address (does not have a United States income tax filing obligation), prevent the refund from generating, void the notice, and take the following action. Refer to IRM 3.14.1.7.1.1, Refund Intercepts, guidelines regarding the timelines for TC570/NOREFP input:

    1. Zero out the module. .Use Blocking Series 00 (line through the DLN), Source Code 4, Reason Code 099, Hold Code 4, FLC 21, Source Document Y in Remarks, state "return transshipped to CNMI" Attach the ADJ 54 print to a copy of the source document (remember to write "copy" on the document).

    2. Input Letter 86c to inform taxpayer that the return has been transshipped to CNMI. Use paragraphs A, E, R, e, and u.

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

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

    Division of Revenue and Taxation

    CNMI
    P.O. Box 5234, CHRB
    Saipan, MP 96950

  2. Work Leader will transship the return to Commonwealth of the Northern Mariana Islands

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

Puerto Rico Residents

  1. A U.S. citizen, resident alien, or nonresident alien who is a bona fide resident of Puerto Rico for the entire tax year files an income tax return with Puerto Rico. If all the taxpayer's income is from Puerto Rico sources, a U.S. tax return is NOT required. If the taxpayer has income from non-PR sources, a U.S. income tax return is required. Also, taxpayers who have effectively connected net business income of more than $400 from a trade or business in PR must file a Form 1040-PR or Form 1040-SS to pay self-employment tax (Under Section 933).

    Note:

    Income received for services performed as an employee of the U.S. government or any of its agencies cannot be excluded from the U.S. income tax return. If U.S. government wages are reported on both the IRS and Puerto Rican tax returns, Form 1116 can be attached to the IRS tax return to claim a credit for income taxes paid to Puerto Rico

Notices with a Puerto Rico Address

  1. If a taxpayer files a Form 1040 with a Puerto Rico address, allow only withholding taxes paid to the U.S. Government supported by an attached Form W-2. Do not allow withholding paid on a Form 499R-2/W-2PR. If all income is solely from Puerto Rico (Form 499R-2/W-2PR), it should be exempt. If either is on the return, disallow income and/or withholding. Assign TPNC's 141 and/or 438.

    Reminder:

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

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

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

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

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

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

Puerto Rico Child Tax Credit (CTC)

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

  2. Child Tax Credit may be limited by the modified adjust gross income (MAGI) and filing status for higher income taxpayers, but not by earned income.

Puerto Rico Additional Child Tax Credit (ACTC)

  1. Bona fide residents of Puerto Rico are not required to file 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.

  2. ACTC is limited to;

    • those taxpayers with 3 or more qualified children,

    • no more than $1400 per qualified child, and

    • the total of withheld Social Security Tax, Medicare Tax, and Self-Employment Tax Deduction.

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

    Note:

    If a PR bona fide resident of a U.S. territory excludes a II of their self employment income from gross income, the taxpayer cannot take the one-half self employment tax deduction on Schedule 1, on Form 1040, line 27.

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

  5. For the 2017 Form 1040 from Puerto Rico, taxpayers in Hurricane Maria or Irma may use Prior Year Earned Income (PYEI) to calculate Additional Child Tax Credit (ACTC), and Prior Year (PY) Social Security/Medicare tax on Schedule 8812. No support for these PY amounts is required. Taxpayer will write PYEI on line 67, and the PY Social Security/Medicare will be used on Schedule 8812 without any special notation. If $.00 PYEI, then TP is claiming 3 or more children for ACTC based on Social Security/Medicare.

Puerto Rico Additional Child Tax Credit (ACTC) with 2016 Social Security, Medicare, and Additional Medicare Tax
  1. For tax year 2017 Forms 1040-PR and Form 1040-SS, bona fide residents of Puerto Rico may elect to use their 2016 social security, Medicare, and additional Medicare taxes to calculate Additional Child Tax Credit (ACTC). The taxpayer decides whether using 2016 or 2017 amounts is more beneficial.

  2. If using tax year 2016, a taxpayer will write Prior Year Employment Tax (PYET) and the 2016 amounts withheld on the dotted line next to line 2, Part II. No documentation to support the 2016 write-in amount is required. (The taxpayer will also enter the amount from 2017 Form(s) W-2PR or Form(s) 499R-2 directly on line 2).

  3. If using tax year 2017 for the ACTC calculation, then the write-in on line 2 won’t be present.

  4. If using tax year 2016 Self Employment (SE) Tax to figure ACTC, the taxpayer will write Prior Year Self Employment Tax (PYSET) and an amount on the dotted line of line 3, Part II for 1/2 of their tax year 2016 SE Tax. No support is required. The taxpayer may use Prior Year (PY) amounts for both line 2 and 3 if applicable.

  5. The taxpayer may also use PY excess SST, PY tax from Form 4137, and PY excess Medicare tax from Form 8959 in their calculation of ACTC. These amounts won’t be displayed on Form 1040-PR, but on a worksheet that the taxpayer completes but doesn’t attach to the return.

Form 1040-SS and Form 1040-PR Excess FICA

  1. The 2018 social security tax rate is 12.4 percent with a maximum limitation of $128,400. In 2011 and 2012, the social security tax rate was 10.4 percent with maximum limitations. There is no ceiling on Medicare wages. In 2013, the social security tax rate was returned to 12.4 percent.

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

    Note:

    Be aware of a double credit situation when the taxpayer puts estimated tax payments on the excess FICA line of the Form 1040-PR, line 8 or Form 1040-SS, line 8.

    Note:

    Form 8959 requires the Additional Medicare Tax withholding be reported next to line 11 on Form 1040-PR and Form 1040-SS. Taxpayers are including the amount on the excess FICA line of the Form 1040-PR, line 8 or Form 1040-SS, line 8.

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

    Caution:

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

Notices Excluding Income from Puerto Rico

  1. A U.S. citizen or resident alien (but not a U.S. Government employee) who is a bona fide resident of Puerto Rico and has no income derived from sources outside of Puerto Rico may exclude all of their income under IRC Section 933. They do not have a federal income tax return filing obligation with the IRS. If the only source of income is from a Form 499R-2/W-2PR AND there is an indication that the taxpayer is a bona fide resident of Puerto Rico (the only address on the return or attachments is PR), prevent the refund from generating, void the notice, and take the following action. Refer to IRM 3.14.1.7.1.1, Refund Intercepts, guidelines regarding the timelines for TC570/NOREFP input:

    1. Zero out the module. .Use Blocking Series 00 (line through the DLN), Source Code 4, Reason Code 099, Hold Code 4, FLC 21, Source Document Y. In remarks, state "return sent to TP to file with PR." Attach the ADJ 54 print to a copy of the source document (remember to write "copy" on the document).

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

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

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

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

    .

  3. If the return includes Schedule C annotated "Income exclude per IRC Section 933” or “Income excluded per IRC Section 933 but included for FICA tax purpose only" ; this is for self-employment tax. It should not be reported on Schedule 1, line 12 of Form 1040, since the taxpayer will pay the appropriate tax to Puerto Rico.

    Note:

    If a bona fide resident of a U.S. territory excludes all of their self-employment income from gross income, the taxpayer cannot take the one-half self-employment deduction on Schedule 1, line 27, Form 1040.

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

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

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

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

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

  9. Schedule H-PR (ANEHO H-PR), Household Employment Tax (Puerto Rican Version),may be attached to a Form 1040-PR return, or is sometimes filed as a stand alone form. See IMF Notice Review International Job Aid 2510-001 for additional information.

Form 1040-SS or 1040-PR Self Employment Tax

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

    Note:

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

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

Form 1040-PR

  1. Taxpayers who are bona fide residents of Puerto Rico must file Form 1040-PR to pay self-employment tax and to claim additional child tax credit.

  2. Returns are due by the fifteenth day of the fourth month following the end of the tax year.

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

Form 1040-SS

  1. Taxpayers residing in other territories file Form 1040-SS to pay self-employment tax.

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

  3. Taxpayers residing in a U.S. territory (except Puerto Rico) have an automatic extension of time to file their returns until June 15th.

Forms 8288 and Form 8288-A

  1. Nonresident aliens or foreign corporation are subject to a minimum tax on

    • Foreign Investment in Real Property Tax Act (FIRPTA) transactions.

    • the disposal at a gain in interest in a partnership and any portion of that gain under section 864(c)(8)

  2. The withholding agent must use:

    • Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, to report to the IRS the amount subject to withholding and the amount withheld.

    • Form 8288-A, Statement of Withholding on Dispositions by Foreign persons of U.S. Real Property Interests, to show the amount of withholding tax withheld for the taxpayer to file with their tax return.

  3. If any credit is claimed on line 62c of Form 1040NR, verify Form 8288-A, copy B, is attached and the Date of Transfer, Box 1, is within the tax period of the return. The amount in Box 2 is not to exceed the amount the taxpayer is claiming.

  4. When the credit is verified by Code and Edit, the information is transferred to Form 13698, International Credit(s) Verification Slip. Allow only the amount on the Total Credit line. If the Form 13698 is missing or the Total Credit line is blank take the case to the Work Leader for verification on the FIRPTA database.

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

  6. Review IDRS for possible erroneous duplicate credit on the account for the same payment. The credit posts as a TC766/767 with Credit Reference Number (CRN) 332. To adjust credit-use REQ54, input TC 290.00, Reason Code 069 and CRN 332 (+/-).

Community Property

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

Community Property Taxpayer - IRC Section 879

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

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

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

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

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

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

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

  8. Community Property States, Countries and territories:

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

Community Property of Nonresident Aliens - IRC Section 879

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

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

    Example:

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

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

Self-Employment Tax (Clergy)

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

  2. See ERS IRM 3.22.3.123.1

  3. A foreign agricultural worker temporarily admitted into the United States on a H-2A visa is exempt from Self-Employment tax, whether a resident alien filing a Form 1040 or a nonresident alien. Though these wages are typically reported by the employer on a Form W-2, the wages may be reported on a Form 1099-MISC.

Totalization Agreement (Self-Employment Tax)

  1. The totalization agreement between the United States government and the countries listed below generally provide that self- employed individuals are covered by social security system and liable for contributions to the social security system only in the country where they reside. If self-employment tax is not clearly indicated on a Form 1040 or Form 1040NR and a Schedule SE is not attached, NO SELF-EMPLOYMENT TAX IS DUE if taxpayer resides in:

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

    Note:

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

Withholding Tax on Foreign Partners (Form 8805)

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

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

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

  2. Form 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax, shows the amount of effectively connected taxable income and withholding tax allocable to each foreign partner.

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

    Note:

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

    Note:

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

    Exception:

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

  4. Review TC 766 credit allowance and if necessary, make the appropriate adjustment. To adjust the credit -Use REQ54, input TC 290.00, Reason Code (RC) 069 and Credit Reference Number (CRN) 331 (+/-).

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

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

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

  2. Withholding from Form 1042-S should be reported on line 62d of Form 1040NR, or line 16b of Form 1040NR-EZ. . If the withholding is present on Form 1042-S, but was not reported, adjust to add withholding.

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

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

  3. If supporting documents for withholding are not attached, verify the withholding≡ ≡ ≡ ≡ ≡ ≡ ≡ claimed by the taxpayer using CC IRPTR and allow only the withholding displayed on IRPTR, not to exceed the amount claimed by the taxpayer. Send appropriate TPNC.

  4. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

Social Security Benefits/Pensions and Annuities

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

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

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

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

  5. If the taxpayer has wage income and claims a deduction as a negative amount on line 21 for contributions made to a Canadian Retirement or Pension Plan (e.g., “RPP“, “RPPS”, Canada Article XVIII (8) through (13) on Form 8833), allow the deduction.

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

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

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

    Note:

    The 30 percent tax must be computed on 85 percent of the social security benefits (i.e., If the taxpayer has $3,000 of SSA/RRB income, they must pay tax on it Multiply $3,000 x 85 percent = $2,550. The tax on $2,550 x 30 percent = $765.

    Exception:

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

    Exception:

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

  3. U.S. citizens residing abroad and nonresident aliens who are residents of the following countries are exempt from U.S. tax on their benefits. Disallow if claimed by the taxpayer on line 20b of Form 1040. Assign TPNC 131.

    1. Canada

    2. Egypt

    3. Germany

    4. Ireland

    5. Israel

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

    7. Japan (only applies to nonresident aliens)

    8. Romania

    9. United Kingdom

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

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

    Note:

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

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

  7. If the taxpayer excludes income using Form 2555 under IRC Section 933 (Puerto Rico) or IRC Section 931 (Form 4563), then accept taxpayer’s amount of taxable social security.

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

SSA/RRB-Form 1042S (Green Card)

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

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

    2. A copy of the "green card"

    3. A signed declaration that includes the following statement:

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

      Note:

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

  2. Taxpayers are sending in series 1040 returns using their firm address, which usually is in the United States or a U.S. territory. Processing will correspond for the three (3) items listed above and when the taxpayer is unable to provide the required information, the claim is disallowed. Notice Review will generally see this condition generate a CP 13 with TPNC 442.

    1. To adjust the withholding amount- use REQ54 input TC 290.00, Reason Code (RC) 061, Credit Reference Number (CRN) 330 (+/-). This will generate a TC 766 or TC 767 on TXMOD.

Pensions and Annuities with Income Code 15

  1. Disability pensions shown on Form 1042-S with Income Code 15 (14 for 2014 and prior years) will be reported on line 8 of Form 1040NR if the taxpayer has not reached the minimum retirement age set by the employer. Disability pensions received after the minimum retirement age has been reached will be reported on lines 17a/b of Form 1040NR.

  2. Nonresident aliens with pension income supported by Form 1042-S with Income Code 15 (14 for 2014 and prior years) without an Exemption code or Exemption Code 00 must report such income as non-effectively connected income on Schedule NEC, page 4 of Form 1040NR.

    1. If the taxpayer has not reported Form 1042-S pension income, and it is taxable:

    2. If the taxpayer enters pension income from Form 1042-S on page 1 of Form 1040NR, and it is taxable:

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

    Note:

    Form 1042-S with Income Code 15 (14 for 2014 and prior years) from Office of Personnel Management, U.S. tax law holds that these benefits represent U.S. - sourced, taxable income unless U.S. tax law is overridden by a tax treaty between the U.S. and the country in which the NRA recipient is a resident.

  4. SBAs/SBPs paid to nonresident aliens of the following countries are not subject to U.S. tax under current treaties, provided they meet any requirements listed below or if the country is marked with an asterisk (*), they are a national of the country in which they reside:

    Non-Resident Alien countries not subject to US Tax  
    Australia Lithuania*
    Austria Luxembourg*
    Bangladesh* Malta*
    Barbados Mexico*
    Belgium* Morocco*
    Bulgaria* Netherlands*
    China* New Zealand (must also be a citizen of New Zealand)
    Cyprus* Norway
    Czech Republic (decedent must have been a resident of Czech Republic) Pakistan
    Egypt Portugal*
    Estonia* Romania
    Finland* Slovak Republic (decedent must have been a resident of Slovak Republic)
    Germany* Russia (must also be a citizen of Russia)
    Hungary* Slovenia*
    Iceland* South Africa*
    India* Spain*
    Ireland* Sri Lanka
    Israel Sweden (must also be a citizen of Sweden)
    Italy* Switzerland*
    Jamaica* (decedent must have been a national of Jamaica that the time the services were rendered) Thailand*
    Japan* Tunisia
    Kazakhstan (must also be a citizen of Kazakhstan) Turkey*
    Korea United Kingdom*
    Latvia* Venezuela*
  5. SBAs/SBPs paid to residents and citizens of the following countries are taxable in the U.S. at the following tax rates under current tax treaties (or in the absence of a treaty):

    Greece, Trinidad, Tobago, Ukraine 0 percent
    Indonesia, South Africa, Canada 15 percent
    All other countries (no tax treaty) 30 percent

Form 1042 and Form 1042-S

  1. Form 1042 and Form 1042-S are used by withholding agents to report tax withheld at source on certain income paid to nonresident alien individuals, foreign partnerships, or corporations not engaged in trade or business in the U.S. As of 2014, these Forms are also used to report payments under chapter 4 pursuant to the Foreign Account Tax Compliance Act (FATCA). An individual may be subject to a 30% withholding rate when the individual is an account holder of a foreign financial institution (FFI) and the FFI classifies the individual as a recalcitrant account holder.

  2. Forms 1042-S are information returns that identify, by type, income that is subject to U.S. withholding tax and which is paid to foreign persons (including nonresident aliens) by a U.S. withholding agent . Form 1042-S is also used to report tax withheld on withholdable payments under chapters 4.

    Note:

    If a copy of Form 1042-S is not attached, look for a copy of a Competent Authority letter signed by a United States Competent Authority. This letter can be used as supporting documentation to support the amount of withholding taxes claimed on the return in lieu or Form 1042-S.

    Note:

    Under the Foreign Account Tax Compliance Act (FATCA), certain Income Codes on Form 1042-S changed in 2015. Income codes referred to in IRM 3.38.147, International Notices, that changed are shown below.

    1. Pension and Annuities Income Code 14 (2014 and prior years) changed to 15.

    2. Personal Services Income Codes 15 through 19 (2014 and prior years) changed to 16 through 20.

    3. Other Income Code 51 (2014 and prior years) changed to 54.

  3. Box 1, Income Code: A 2-digit income code is used to determine the type of income reported in Box 1 (see Publication 515 for more information on individual codes). Effectively connected income (identified by Exemption code 01 in Box 3a or Exemption code 14 in Box 4a) is reported on page 1 of Form 1040NR or on Form 1040NR-EZ. Non-effectively connected income is reported on Schedule NEC, page 4 of Form 1040NR. (See IMF Notice Review International Job Aid 2510-001 for a list of specific Income Codes)

  4. Gambling winnings, Income Code 28, is always non-effectively connected income unless documentation is submitted to prove a nonresident alien is a professional gambler.

  5. Income Codes 16 through 20 (15 through 19 for prior years with 42 and 43 for TY 2011/2012) is effectively connected (personal service) income reported on page 1 of Form 1040-NR, or on Form 1040NR-EZ. This income is usually exempt from tax by a tax treaty. Verify the tax treaty using Table 2.

    Note:

    If Income Code 16 (15 for 2014 and prior years) and Exemption Code 04 are present and the Form 1042-S was issued by a college or university and the Form 1042-S has no withholding, accept the entry.

  6. Taxpayers who file a Schedule C for business expenses against income that has been reported on a Form 1042-S are permitted to do so when Box 1 on the Form 1042-S contains one of the following Income Codes: 16,18,42 or 51 (16,18,35 or 51 for 2014 and prior years). If one of these codes is not present, check for the presence of a Form 1099 and/or for an indication that the Schedule C is being claimed against other income. If none of the above conditions are present, disallow the Schedule C expenses and assign the appropriate TPNC.

  7. Box 5, Withholding Allowances: This box should only be completed if the Income Code is 16 through 19 and 42 (15 through 19 for prior years). The taxpayer will subtract the Box 5 amount from the Box 2 amount and enter it in Box 6. The amount on line 31 cannot exceed the amount on Form 1042-S, Box 5 ( and/or statements).

    • If the amount on line 31 is less than or equal to the amount on line 12, allow the amount in Box 5, or from the statement for school related expenses.

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

  8. The rate of withholding in Box 5 applies to the income in Box 2 or Box 6. The Income Code in Box 1 determines the correct rate of withholding regardless of the entry in Box 3b (tax rate). Most non-effectively connected income is taxed at the 30 percent rate unless a treaty applies.

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

    • If the taxpayer reports the income as not effectively connected income on line 54 of Form 1040NR, follow taxpayer intent.

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

  10. Foreign nationals with J-1 Visas are temporarily in the U.S. as part of the Exchange Visitor Program. Participants in the Camp Counselor and Summer Work Travel Program are foreign students who are in the U.S. to work temporary, seasonal type jobs during school vacation.

    J-1 Visa holders are not entitled to claim a treaty exemption if they:

    • Identify themselves as a service provider or cultural exchange participant, or

    • have wages for summer type seasonal work (e.g. retail, casinos, resorts, or (restaurants) or

    • are present in the U.S. for 4 months or less.

    Disallow the treaty exemption and verify that the income is reported on the appropriate line of the Form 1040NR or 1040NR-EZ.

Form 1042 and Form 1042-S Exemption Codes

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

  2. The most common Chapter 3 or 4 Exemption Codes are identified below:

    • Exempt Code 00 - Box 3b is blank; no exemption from withholding claimed.

    • Exempt Code 01 or 14 - Income effectively connected with a U.S. trade or business.

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

      If Then
      Taxpayer has not entered income or exempt amount on Form 1040NR and Form 1040NR-EZ Accept taxpayer's figures
      Taxpayer shows the amount as exemption income and exempt amount or as a tax treaty on page 1 Adjust to disallow income and amount
      Taxpayer reported gross income (box 2, Form 1042-S) and exempt withholding allowance (box 3, Form 1042-S) Adjust to disallow those amounts and accept the net income (box 4, Form 1042-S)
      Taxpayer reports all or part of net income (box 4, Form 1042-S) as taxable income Accept taxpayer's figures
      Form 1040NR prepared by USAID Accept the return as filed
    • Exempt Code 04 - exempt under a tax treaty. See table below.

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