Medical Condition Travel Exception to Tax Residence

The IRS has recently issued a Revenue Procedure in order to mitigate the tax residence implications that would arise for nonresident alien individuals from their inability to leave the country as a result of the COVID-19 pandemic (see Rev. Proc. 2020-20 dated April 21, 2020). Under U.S. domestic tax legislation, the tax residence of an individual has two components. On the one hand, it is determined under nationality or immigration considerations. If the individual is a U.S. Citizen or a green card holder, he automatically qualifies as a U.S. tax resident. On the other hand, tax residence is based on the number of days the individual has spent in the United States. Broadly speaking, an individual is considered a tax resident if he has spent more than one hundred eighty-three (183) days within the United States.

Days of presence in the U.S. are calculated by looking at the three most recent tax years, under a formula 2 set forth in Section 7701(b)(3) of the Internal Revenue Code, the so-called “substantial presence test”. For purposes of the substantial presence test, the one hundred eighty-three (183) day threshold, is determined as follows: if (1) such individual was present in the U.S. on at least thirty-one (31) days during the current calendar year; and (2) the sum of the number of days on which the individual was present in the U.S. during the current year and the preceding two (2) calendar years equals or exceeds one hundred eighty-three (183) days, then such individual is considered a resident alien for that calendar year. Special rules apply, however, when calculating the number of days present in the U.S. during the preceding two (2) calendar years.

For the first preceding calendar year, each actual day of presence in the U.S. is counted as 1/3 of a day for purposes of computing the one hundred eighty-three (183) day total. For the second preceding calendar year, each actual day of presence is counted as 1/6 of a day. The substantial presence test is the reason why individuals have to keep detailed track of the days spent in the United States and is frequently one of the first questions an attorney asks their clients when meeting to assess their tax residence.

The IRS received a lot of comments and requests since initially no specific relief has been granted in the CARES Act for individuals unable to leave the United States who are at risk of becoming U.S. tax residents under the substantial presence test. The IRS took these comments into account and, as a result, issued Rev. Proc. 2020-20 in order to establish the possibility to claim a “medical condition travel exception” to the substantial presence test. Under current legislation, there is a “medical condition exception” to the substantial presence test for those individuals present in the United States to receive medical treatment, but only to the extent the symptoms arose while the individual was present in the United States (Treas. Reg. § 301.7701(b)-3(c)(1)).

Under this exception to the substantial presence test, days spent in the country to get the treatment are completely disregarded for purposes of the substantial presence test calculation. It is important to note that days spent in the United States for purposes of seeking treatment for pre-existing conditions will be fully counted for tax residence purposes. Rev. Proc. 2020-20 has expanded the scope of applicability of the medical condition exception to include individuals that were unable to leave the United States as a result of the COVID-19 pandemic.

The Revenue Procedure establishes procedures for eligible individuals to select a 60-day period and apply the medical condition exception to such period, resulting in those days being excluded for purposes of the substantial presence test and presents the following key features: 3 To apply the exception eligible individuals may select any 60 day-period starting on or after February 1, 2020 and on or before April 1, 2020. Generally, to be eligible, an individual must not be a U.S. citizen, permanent resident and he must not have been a U.S. income tax resident as of December 31, 2019. Further, an individual who has applied or taken steps to become a permanent resident in 2020. In order to claim this exception, you must file Form 8843 (Statement for Exempt Individuals and Individuals with a Medical Condition), before the due date for filing the non-resident tax return (Form 1040-NR) or before the expiration of the respective extension.

The possibility to claim the exception exists regardless of whether or not you are required to file a Form 1040-NR. There is no need for a physician's statement when claiming this exception. This confirms that anyone can claim this benefit regardless of whether they have contracted COVID-19. In other words, Rev. Proc. 2020-20 presumes that every applicant’s travel plans were affected by the COVID- 19 pandemic regardless of any formal medical diagnosis. This a significant departure from the traditional requirements to claim a medical condition exception.

Any eligible individual who claims this exception may also claim the medical condition exception for any other health problems arising in the U.S., including for medical conditions or medical problems related to the COVID-19 pandemic, with respect to any other period during 2020 for which the individual satisfies the applicable requirements. If you feel that your tax residence status has been affected by your inability to depart the United States, you should consider coordinating with your tax advisor for the filing for this benefit within the applicable deadline.