IRS Issues Cross-border Tax Guidance Related to Travel Disruptions Arising From COVID-19 Emergency

The worldwide outbreak of COVID-19 has caused disruptions over numerous aspects of our daily lives, one of which is the implementation of travel restrictions which have significantly limited the ability of many individuals to leave the United States. This situation may cause certain individuals with physical presence in the United States to inadvertently become U.S. residents during 2020.

On April 21, 2020, the U.S. Treasury Department, and the Internal Revenue Service (“IRS”) issued guidance that provides tax relief to certain individuals and businesses affected by travel disruptions arising from the COVID-19 emergency.  Said advice, we have confirmed, does not waive the minimum days of physical presence required to establish bona fide residence in Puerto Rico (“Presence Test”).

In a recently issued Revenue Procedure, the IRS provided relief to certain nonresident individuals who, but for the COVID-19 emergency travel disruptions, would not have been in the U.S. long enough during 2020 to be considered resident aliens under the substantial presence test. Said individuals may exclude up to 60 consecutive calendar days of U.S. presence that are presumed to be caused by travel disruptions due to the COVID-19 emergency.

Additionally, the IRS provided a waiver of the residency requirements for claiming the foreign earned income exclusion to any individual who reasonably expected to meet the eligibility requirements during 2019 or 2020, but failed to do so because the individual departed the foreign country due to the COVID-19 emergency during the period commencing on December 1, 2019, for those in China, or February 1, 2020 for those in another country, and ending on July 15, 2020.

Lastly, the IRS released a set of “frequently asked questions” providing that certain U.S. business activities conducted by a non-resident alien or foreign corporation will not be counted for up to 60 consecutive calendar days in determining whether the individual or entity is engaged in a U.S. trade or business or has a U.S. permanent establishment, but only if those business activities would have not been conducted in the U.S. except for travel disruptions caused from the COVID-19 emergency.

Unfortunately, these Revenue Procedures issued by the IRS do not provide relief to individuals who are unable to meet the Presence Test to establish Puerto Rico bona fide residence as a result of the COVID-19 emergency.  Moreover, these guidelines do not extend the 14-day absence period granted to individuals for purposes of the Presence Test in the case of a major disaster declaration as previously approved during Hurricanes Irma and Maria back in 2017.

At BDO, we strongly believe that relief is also appropriate for individuals who reasonably expected to meet the Presence Test under section 937 in absence of the COVID-19 emergency. To that effect, we have requested the IRS to issue similar guidelines waiving the time requirements of the Presence Test applicable to Puerto Rico bona residents until July 15, 2020. We will continue issuing updates as we obtain more information from the IRS.

Please contact us if you have questions regarding how to meet your Puerto Rico bona fide residence requirements.