COVID Income Tax Disruptions: What to Expect

May 22, 2020

The flurry of congressional legislation as well as other guidance provided by the IRS since the global COVID-19 emergency began has affected many aspects of taxation of individuals and entities with international tax exposure. The impacts affect U.S. residency qualifications, filing processes and other standard tax requirements, and will have ramifications on 2019 and 2020 tax filings.

Disruptions to expect when considering your reporting requirements:

Economic Impact Payments eligibility for certain foreign nationals

  • Individuals are not be eligible for the economic impact payments on a joint tax return if either the taxpayer or spouse has an ITIN, unless either taxpayer is an active member of the U.S. Armed forces at any time during the year.
  • A nonresident alien is not eligible for the economic impact payment in 2020. Pursuant to guidance provided by the IRS in FAQs released May 6, any nonresident alien that received an economic impact payment in 2020 based upon tax residence in the U.S. in 2018 or 2019 should return those payments to the IRS.
  • A taxpayer is not eligible for an economic impact payment for a dependent with an ITIN.

Processing Paper Filed Documents including Tax Returns and ITIN Applications

The IRS has limited its operations to mission-critical functions.  As paper filed tax returns are not eligible for e-filing, including some returns for nonresidents or resident returns that contain ITIN applications, processing by the IRS will be significantly delayed. Even as IRS operation resume, it is expected that there will be significant processing delays in getting through the backlog.

Foreign Earned Income Exclusion – Travel Time Requirement Waivers

The IRS has provided time waivers for qualifying for the foreign earned exclusion for U.S. citizens and residents living abroad for China from December 1, 2019 and globally from February 1, 2019 through July 15, 2020.  An individual who originally expected to meet the requirements for the foreign earned income exclusion may still qualify to exclude foreign earned income, even if travel restrictions or early departures prevented meeting the tests as a Bona Fide Resident or Physical Presence Tests on the 2019 or 2020 US income tax returns. For further guidance on the COVID FEIE Exclusion, see our article.

Relaxing Substantial Presence Test for Foreign Nationals for COVID-19 Medical Emergency

Foreign nationals who might otherwise be considered residents of the U.S. under the substantial presence test may exclude up to 60 days of presence for dates February 1, 2020 through April 1, 2020 spent in the U.S. in order to be taxed as Nonresident Aliens. This may relieve individuals with prolonged, unexpected stays in the U.S., from taxation of worldwide income and international entity and asset reporting. Certain days of U.S. presence may also be excluded when determining qualification for certain tax treaty relief. For further guidance on the Substantial Presence Test requirements, see our article.

Relief for U.S. individuals and entities with foreign country activities due to COVID-19

The IRS has recognized that an individual or individuals may have been temporarily present in a foreign country and performed activities on behalf of a U.S. domestic corporation that would not have been conducted in the foreign country if not for COVID-19 Emergency Travel Disruptions. The IRS has provided guidance stating that these temporary activities will not be taken into account in determining reporting for a foreign branch separate Unit or Form 8858 filing obligation to report activities of a foreign branch.

To discuss the impact these disruptions could have on you or your employees’ income tax reporting requirements with an Aprio Tax expert, click here.

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Cheryl Leydon

(770) 353-5331