Foreign Nationals and the Tax Effects of COVID-19

Many foreign nationals visit the U.S. each year.  Most foreign national visitors do not spend a sufficient amount of time in the U.S. to be classified for tax purposes as residents.

An individual can be classified as a tax resident of the U.S. under the following circumstances:

• The individual is a U.S. citizen, regardless of country of residence.
• The individual holds a permanent resident card, commonly referred to as a green card.
• The individual is physically present in the U.S. for 183 days or more in the calendar year.
• The individual is physically present in the U.S. for 183 days or more under a 3-year test, is not a tax resident of another country or doesn’t have a closer connection to another country.  This is known as the substantial presence test.

In 2020, many foreign national visitors may have spent more days in the U.S. than they planned due to travel and related disruptions resulting from the global outbreak of the COVID-19 virus.  This may have affected the travel plans of foreign travelers who intended to leave the U.S.  Regardless of whether they were infected with the COVID-19 virus, individuals may have become severely restricted in their movements, including by order of government authorities.  Individuals who did not have the COVID-19 virus and attempted to leave the U.S. may have also faced canceled flights and disruptions in other forms of transportation, shelter-in-place orders, quarantines and border closures.  Even those who could have traveled may have felt unsafe doing so during the COVID-19 emergency due to recommendations to implement social distancing and limit exposure to public places.  As a result, many foreign national visitors who may have exceeded the threshold of the number of days of presence in the U.S. could find that they were now classified as tax residents of the U.S.

In determining substantial presence, there are certain circumstances where the days of presence can be excluded.  One of those circumstances is known as the Medical Condition Exception.  The Medical Condition Exception provides that a foreign national individual is not treated as present in the U.S. on days when the individual intended to leave the U.S., but was unable to do so because of a medical condition that arose while the individual was present in the U.S.

Revenue Procedure 2020-20 was issued in response to the COVID-19 Emergency and its effect on the ability of certain individuals to be able to physically leave the U.S. by establishing the COVID-19 Emergency Period.  The COVID-19 Emergency Period is a single period of up to 60 consecutive calendar days selected by an individual starting on or after February 1, 2020 and ending on or before April 1, 2020 during which the individual is physically present in the U.S. on each day.  For purposes of this revenue procedure, the foreign national will be presumed to have intended to leave the U.S. and presumed to have been unable to leave the U.S. on any day during the individual’s COVID-19 Emergency Period for purposes of the substantial presence test.

Foreign nationals who have a requirement to file a Form 1040-NR, Nonresident Alien U.S. Income Tax Return for 2020 must claim the COVID-19 Medical Condition Travel Exception by attaching Form 8843, Statement for Exempt Individuals and Individuals with a Medical Condition, to their Form 1040-NR by the form’s due date, including extensions.  Foreign nationals who are not required to file a 2020 Form 1040-NR are not required to file Form 8843 to claim the COVID-19 Medical Condition Travel Exception under the revenue procedure, but those individuals should retain all relevant records to support reliance on this revenue procedure and be prepared to produce these records and complete a Form 8843 if requested by the IRS.

Without the availability of excluding the days of presence in the U.S. between the dates of February 1, 2020 and April 1, 2020 for purposes of the substantial presence test, many foreign nationals could have found themselves in the position of being classified as U.S. tax residents.  This would require reporting their worldwide income on a U.S. income tax return and possibly owing U.S. income tax on this income.  They would also be required to disclose to the IRS details regarding assets owned outside of the U.S.

It is important that the foreign national who is in this situation consult with a U.S. tax professional familiar with the applicable tax laws concerning the substantial presence test and the COVID-19 Medical Condition Travel Exception so that the individual can comply with the laws that apply in their specific circumstances.