Foreign citizens stuck in the U.S. due to international travel restrictions will have to explain their overstay to the IRS or face potential U.S. taxes.
Under U.S. tax law, foreign individuals residing in the U.S. have to report and potentially pay taxes on their worldwide incomes to the IRS if they meet a residence threshold of 183 days.
Under tax code Section 7701, foreign individuals who come to the U.S. for sports, business, medical visits, or tourism and who are unable to return to their home countries will have to file forms with the Internal Revenue Service next year to explain their reasons for remaining.
“People that come here often leave themselves a smaller margin of days, and we’re in uncharted territory not knowing when the travel restrictions will be lifted,” said Diane Nobile, a tax attorney at Saul Ewing Arnstein and Lehr in Miami.
The concerns are growing as governments impose limits on international travel to slow the spread of Covid-19, the disease caused by the new coronavirus.
“Taxpayers literally have no other option but to stay put,” said Cecil Nazareth, a Washington-based chartered accountant with his own firm.
The IRS said it had no immediate comment.
The 183 days are counted either in a single year or by calculating time spent in the U.S. over the past three years—the latter being a rule that many foreign nationals watch closely to avoid U.S. tax residence.
“For people who plan closely to the three-year formula, that threshold could have very well already been met,” Nobile said.
The three-year average test is calculated by adding all the days spent in the U.S. in the current year, plus one-third of the days of the prior year, plus one-sixth of the days in the year before that. Typically that results in foreign individuals spending 120 days in the U.S. each year.
“There are people who are very leery of becoming U.S. residents, so they watch their days very closely,” said Richard LeVine, a wealth adviser at Withersworldwide, a tax and wealth advisory firm. “And now with flights canceled it could be a real issue.”
Barring additional guidance from the IRS addressing specific Covid-19 situations, practitioners say taxpayers should file certain forms with the IRS.
“The important thing for people to realize is that if they extended past the 183 days, they have to take some forward action,” Nobile said. “They can’t just ignore the requirement.”
Taxpayers with certain visas—athlete, student, or medical, for example—can exempt certain days automatically from the overall tally and file Form 8843, Nobile said. That form can also be used by individuals who overstay the 183-day threshold for medical reasons, excluding pre-existing conditions.
If an individual can’t use that form, it may be because they are from a country that is a treaty partner with the U.S. In that case, they can file Form 8833 which goes to the treaty’s “tie-breaker” rule.
“Make sure to put the reason, that due to travel bans caused by Covid-19 you were not able to return to your home country and thus exceeded the limit,” Nazareth said with regards to Form 8833.
And for individuals who are unable to claim treaty benefits, there is Form 8840,which lets the person explain why their tax home is actually in another country with which they have a closer connection, where they own a home, spend more time and own more assets.
Lastly, a foreign individual who isn’t covered by a treaty or a special visa can file Form 1040-NR, the income tax return for non-residents, and claim all day-count exemptions possible.
“I would recommend documenting every effort you’ve made to leave,” Nobile said. “Screen shots from airline cancellations, doctors notes, who you called, all of that helps to refute the presumption that they are a tax resident.”