Update on Tax Residence & Filing of Tax Returns

In line with our previous articles dedicated to providing useful information on dealing with the current pandemic, this week´s publication alerts our clients on the following recent tax developments.

1. Will there be an extension of the Medical Condition Travel Exception?

As stated in our prior publications, the IRS 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, 2020-20 IRB, dated April 21, 2020).

In short terms, under Rev. Proc. 2020-20, the IRS established the possibility for taxpayers to choose a 60 day-period starting on or after February 1, 2020 and on or before April 1, 2020, that will be completely disregarded for purposes of calculating the substantial presence test of tax residence. In addition, on June 3, 2020 the IRS issued a set of FAQs that created a 30-Day Medical Condition Exception.[1] This additional relief may be requested in addition to the 60-day term granted under Rev. Proc. 2020-20 and likewise does not depend on a statement or certification by a treating physician with respect to the taxpayer’s health. This confirms that anyone can claim this additional benefit regardless of whether his or her health has been impacted by the Covid- 19 pandemic.

Any eligible individual who claims these exceptions may also claim the medical condition exception for any other health problems which arose in the U.S., including contracting COVID-19, with respect to any other period during 2020 for which the individual satisfies the applicable requirements. In order to claim these exceptions, 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. Since you are allowed to claim multiple Medical Condition Exceptions under this Form, the taxpayer should be careful to clearly indicate and distinguish the various exceptions that are being claimed for year 2020. Up to the date of this article, the IRS has indicated that there is no intention to further extend the terms of these extensions under Rev. Proc. 2020-20 or its FAQs but we will be closely monitoring any developments in this regard.

2. Will there be a further extension to file the individual tax returns for 2019?

The Secretary of Treasury, Stephen Mnuchin, had indicated on June 25, 2020 that he was considering whether to extend the July 15, 2020 deadline to file the tax returns.[2] However, in an Information Release by the IRS it was announced that the July 15 tax filing and payment deadline will not be postponed. If there are any individuals who are unable to meet the July 15 filing deadline they must request 3 an extension. The IRS has issued FAQs indicating that a request of extension to file will result in the return being due on October 15. Further, tax payments are due on July 15 so filing for an extension will trigger late payment interest.

We note this IRS position restricts the benefit of the extension since ordinarily taxpayers have an option to request an automatic six-month extension. However, the position of the IRS is that the extension cannot go beyond the ordinary date to which extensions are granted. Here also, we will be closely monitoring any developments to inform our clients if any further extensions are granted, particularly in States which are undergoing a second wave of COVID-19 contagion.