On April 21, 2020 the Treasury Department and the IRS issued Rev. Proc. 2020-27. This guidance provides a waiver of the time thresholds individual taxpayers must satisfy to claim the Foreign Earned Income Exclusion (FEIE) and the foreign housing cost amount under section 911, if the individual failed to meet the threshold because he or she fled the foreign country on or after a specified date because of the COVID-19 virus.
U.S. citizens or resident aliens qualifying for the FEIE can exclude an annually inflation adjusted amount of foreign earned income from U.S. taxation annually. In order to qualify, the individual must have a tax home in a foreign country and meet one of two qualifying tests. Under the bona fide residence test, a U.S. citizen must establish to the satisfaction of the Secretary of the Treasury that he/she has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire tax year. Alternatively, a citizen or resident of the U.S. can qualify if he or she has a tax home in a foreign country and during a rolling period of 12 consecutive months, he/she was present in a foreign country or countries during at least 330 full days.
However, if the Secretary determines that individuals were required to leave a foreign country because of war, civil unrest or similar adverse conditions in such foreign country, and such conditions precluded the normal conduct of business by such individuals, the individuals may be treated as qualified individuals (i.e., eligible to claim the FEIE and/or the foreign housing cost amount) for the period during which the individual is resident in the foreign country. To take advantage of this relief, an individual must establish that if those conditions had not arisen, the individual could reasonably have been expected to meet the eligibility requirements.
The Revenue Procedure announces that the Secretary has determined that the COVID-19 emergency precluded the normal conduct of business globally and has provided a waiver of time requirements globally as of Feb. 1, 2020 and in the People’s Republic of China, excluding the Special Administrative Regions of Hong Kong and Macau (China), as of Dec. 1, 2019. The period covered by the waiver of time requirements ends on July 15, 2020. As such, an individual who left a foreign country on or after Feb. 1, 2020, (or China on or after Dec. 1, 2019) but on or before July 15, 2020 may be treated as a qualified individual during the period the individual was present in a foreign country.
In order to qualify for the waiver of the time thresholds, an individual must have either established residency or been physically present in that foreign country prior to the dates listed above. A qualifying individual would need to establish to the satisfaction of the Secretary that he/she could reasonably have been expected to have met the time-based requirements for the physical presence test or the bona fide residence test had it not been for the COVID-19 virus. Thus, a showing that the individual returned to the U.S. in order to flee the virus is not enough to qualify for relief. Individuals who qualify for this relief generally may exclude a portion of their earned income and amounts paid for foreign housing subject to certain statutory limits.
Prior to this release, the IRS provided relief in Rev. Proc. 2020-14 (see IRB 2020-16) regarding certain countries with waiver of time thresholds for the 2019 tax year. The waiver of time requirements contained in Rev. Proc. 2020-14 are unaffected by this new release and remain in full force and effect.
The facts and circumstances of each individual’s situation need to be evaluated in order to properly determine eligibility under this relief. International assignees should maintain documentation showing the originally intended length of the assignment to document their eligibility for meeting the time-based requirements necessary to qualify under this relief. Individuals should consult with their tax advisors to assess whether taking the exclusion is optimal after taking into account potential foreign tax credit claims. This revenue procedure will be effective upon publication of the May 11, 2020 Internal Revenue Bulletin.