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IRS Waiving Residency and Presence Tests for Certain U.S. Individuals in Response to COVID-19

By Jyme Mariani, Esq.

The U.S. Internal Revenue Service (IRS) updated several procedures relating to Internal Revenue Code (IRC) §911 for the foreign earned income exclusion requirements and residency and presence tests for 2019 and 2020.

Background

IRC §911 allows a “qualified individual” to exclude foreign earned income from gross income up to a certain amount ($105,900 in 2019; $107,600 in 2020). An employer need not withhold federal income tax from any wages paid to a qualifying employee it reasonably believes will be excluded under IRC §911. A qualifying individual is an individual who is a U.S. citizen and a bona fide resident of or present in a foreign country for a specified portion of the taxable year.

IRC §911(d)(4) provides an exception to the residency and presence eligibility requirements if an otherwise qualified individual leaves a listed foreign country because of war, civil unrest, or similar adverse conditions that preclude the normal conduct of business, on or after a certain date, pursuant to a determination by the U.S. Secretary of the Treasury (in consultation with the Secretary of State). In such a case, the income exclusion will apply even though the individual was not in the foreign country for the statutorily prescribed period, if the individual can show that but for the adverse conditions, he or she had a reasonable expectation of meeting the requirements of IRC §911.

Countries With a Waiver for 2019

The IRS released a supplemented list of countries for which some of the foreign earned income exclusion requirements of IRC §911 are waived for 2019 (with departure dates) [Rev. Proc. 2020-14; 2020-16 IRB 661]. The list contains the Democratic Republic of the Congo (with a departure date of January 13, 2019); Haiti (with a departure date of February 14, 2019); Iraq (with a departure date of May 14, 2019); Sudan (with a departure date of April 11, 2019); and Venezuela (with a departure date of January 24, 2019).

Residency, Presence Test Waivers

In response to COVID-19, the IRS is also waiving the residency and presence tests for certain U.S. individuals who were in China, excluding Hong Kong and Macau, as of December 1, 2019, or were otherwise outside of the United States as of February 1, 2020 [Rev. Proc. 2020-27, 4-21-20]. The covered period ends on July 15, 2020, unless the IRS announces an extension.

To qualify for relief under IRC §911(d)(4), an individual must have established residency, or have been physically present, in the foreign country on or before the dates specified above. Individuals who were first physically present or established residency in China after December 1, 2019, or another foreign country after February 1, 2020, would not be eligible for the waiver. Individuals seeking to qualify for the IRC §911 foreign earned income exclusion because “they could reasonably have been expected to have been present in a foreign country for 330 days but for the COVID-19 Emergency” and have met the other four requirements may use any 12-month period to meet the qualified individual requirement.

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Jyme MirianiJyme Mariani, Esq., is Managing Editor of Payroll Information Resources for the American Payroll Association (APA) and the Global Payroll Management Institute (GPMI).