21.8.1. IMF International Adjustments

(1) Employees in the Accounts Management (AM) organization respond to telephone calls and taxpayer correspondence, process claims, certain applications, and other internal adjustment requests.

(2) This IRM provides guidance to Accounts Management employees assigned to work IMF international cases.

(1) See IRM 1.2.61.2, Current TS Division Delegations of Authority for information about authorities delegated to Accounts Management.

(1) IRM 1.1.13.7.3, Accounts Management provides information about roles and responsibilities in AM.

(2) IRM 21.1.1, Accounts Management and Compliance Services Overview provides responsibility guidance to AM employees.

(1) IRM 1.4.16, Accounts Management Guide for Managers provides guidance for program management and review of programs assigned to AM.

(1) The current year Accounts Management Program Letter, Measures and Operating Guidelines.

(2) IRM 21.10.1, Embedded Quality (EQ) Program for Accounts Management, Campus Compliance, Field Assistance, Tax Exempt/Government Entities, Return Integrity and Compliance Services (RICS) and Electronic Products and Services Support.

(1) The table below contains some of the common acronyms used in this IRM

(1) This IRM cites many Internal Revenue Code sections. The primary code sections are:

• IRC 901

• IRC 911

• IRC 931

• IRC 933

• IRC 1441

• IRC 1445

• IRC 1446.

(2) The following publications are used for international issues. Use them as technical reference material or provide to taxpayers when necessary. These publications are available for reference on SERP and on the internet at http://www.irs.gov

• Publication 3 - Armed Forces' Tax Guide

• Publication 54 - Tax Guide for U.S. Citizens and Resident Aliens Abroad

• Publication 514 - Foreign Tax Credit for Individuals

• Publication 515 - Withholding of Tax on nonresident Aliens and Foreign Entities

• Publication 516 - U.S. Government Civilian Employees Stationed Abroad

• Publication 570 - Tax Guide for Individuals With Income From U.S. Possessions

• Publication 597 - Information on the United States-Canada Income Tax Treaty

• Publication 901 - U.S. Tax Treaties

• Publication 970 - Tax Benefits for Education.

(3) In addition to these publications, some general information publications are also printed in Spanish for the convenience of taxpayers. The following publications are available for reference on SERP and on the internet at http://www.irs.gov

• Publication 1 (SP), Your Rights as a Taxpayer (Spanish Version)

• Publication 1544(SP), Reporting Cash Payments of Over $10,000 (Received in a Trade or Business) (Spanish Version)

• Publication 4261(SP), Do You Have a Foreign Bank Account? (Spanish).

(4) General processing procedures outlined in this IRM are used in conjunction with the following IRMs:

• IRM 21.5 - Account Resolution

• IRM 21.6 - Individual Tax Returns

• IRM 21.7.12 - Non-Master File Accounts (NMF) Adjustments

• IRM 21.8.2 - BMF International Adjustments

• IRM 13 - Taxpayer Advocate Service

• IRM 21 - Customer Account Services

• IRM 25.6 - Statute of Limitations

• IRM 25.12 - Delinquent Return Refund Hold Program

• IRM 20 - Penalty and Interest.

(1) Due to the ramp-down of the Philadelphia Submission Processing Campus (PSPC), International Individual Master File (IMF) return processing moved in its entirety to the Austin Submission Processing Campus (ASPC) in June of 2007. However, the Philadelphia Accounts Management Campus (PAMC) continues to process IMF international Accounts Management work.

(2) Correspondence, amended returns, no-merge cases, and/or Form 1040X involving the following issues are considered "IMF International Issues" and are worked at PAMC.

• Form 1040-NR, Form 2555, Form 1116, Form 1040-SS, Form 8233, Form 8833, Form 8840, Form 8689, and related notices with Filing Location Codes 98, 66, 20 or 21. Refer to Document 6209 Section 4- Document Locator Number http://serp.enterprise.irs.gov/content/6209/6209.html.

• Dual Status

• Form 1042-S for individual taxpayers, received loose, or with taxpayer correspondence

• Correspondence or amended returns for changes due to "tax treaties"

• Spanish language correspondence relating to Form 1040-PR or Form 1040-SS and/or other international issues

• Form 1040 Schedule H for U.S. Territories

• Form 843 Excess Social Security Tax claims for addresses in U.S. Territories

• Form 1040X Foreign Tax Credit carryback claims

• Form 4442 addressing international issues such as tax treaties, U.S. citizens living overseas, self-employment tax for individuals living in a territory, etc.

  Note: The U.S. Territories consist of the U.S. Virgin Islands, Puerto Rico, American Samoa, Guam, and the Commonwealth of the Northern Mariana Islands. Accounts Management adjustment cases involving these territories are handled by the international function in Philadelphia. This does not include EIP 1 inquiries about any of the territories.

(3) Update IMF international Identity Theft (IDT) cases under the IMF INTL work type, category codes IDT1, IDT3, IDS1, program codes 40011, IDS3, IDT3 program code 40013 and for IDT8/IDS8, program code 40017, and then reassigned in CII to IDTVA AM international Identity Theft. For further information about IMF IDT routing refer to IRM 25.23.4, IDTVA Paper Process.

(1) IMF international Individual Income Tax Returns:

• Form 1040 with Form 1116, Form 2555, Form 4563, Form 5074, or Form 8689 attached

• Form 1040-C

• Form 1040-NR

• Form 1040-PR

• Form 1040-SS

(2) NMF international Income Tax Returns:

• Form 926

• Form 8404

• Form 1040-NR Fiduciary

(3) Foreign Withholding Tax Returns and Associated Forms:

• Form 8288, Form 8288-A , Form 8288-Band Form 8288-C

• Form 8804

• Form 8805

• Form 8813

• Form 1042

• Form 1042-S

(4) Foreign Information Returns:

• Form 926

• Form 5713

• Form 8233

• Form 8833

• Form 8840

• Form 8843

• Alien Exemption Certificate Form W-8BEN, Form W-8 BEN-E, Form W-8ECI, Form W-8EXP, Form W-8IMY, and Form W-8CE

(1) The following Websites are helpful when researching international issues:

• Submission Processing Website at Submission Processing (sharepoint.com)

• IRC codes listed here by section number at http://www.fourmilab.ch/ustax/ustax.html

• Tax treaties at https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z

• Various international topics at http://www.irs.gov/Businesses/International-Businesses

• IRS Bulletins, Notices, Announcements, etc. at http://www.irs.gov/irb/

• U.S. Citizenship and Immigration Services (USCIS) Website at http://www.uscis.gov

• The Social Security Administration Website http://www.ssa.gov/

• United States Department of State at http///www.state.gov/

• International dialing codes at http://www.countrycallingcodes.com/

(2) International customers may call the International Accounts Management line (International Taxpayer Customer Service) at 267-941-1000 (NOT toll-Free).

(3) International assistors may transfer International calls to other International Applications if necessary, including international EIN International, IMF Acct., International BMF Acct., International Tax Law, International US Cert, and International ACS Support. If the taxpayer’s inquiry cannot be addressed by transferring to one of the International Applications or by providing one of the helpful telephone numbers in paragraph 5 below, follow the Form 4442 referral process.

(4) Assistors staffing the International Taxpayer Customer Service line DO NOT use the Telephone Transfer Guide (TTG) to transfer calls.

(5) Assistors staffing any toll-free application will not transfer to the International Taxpayer Customer Service line (267-941-1000). Provide the following helpful telephone numbers to international callers for working international issues when necessary. Ensure the callers are informed these are not toll- free numbers. For hours of operation, refer to The Source for Telephone numbers http://serp.enterprise.irs.gov/content/who-where/ttg/telephone-numbers.html. If the caller does not want to call back, follow the referral process. See IRM 21.3.5.4, Referral Procedures, for more information.

(1) Linguistic Policy, Tools and Services (LPTS) will translate documents written in several foreign languages to English.

(2) To have a document translated, follow the procedures in IRM 25.23.4.19, Requesting Translations of Certain Languages.

(1) On June 10, 2014, the IRS Commissioner and National Taxpayer Advocate (NTA) announced the IRS’s adoption of a Taxpayer Bill of Rights (TBOR). These Rights are now part of Pub 1, Your Rights as a Taxpayer. The TBOR lists rights that already existed in the tax code, putting them in simple language and grouping them into 10 fundamental rights. You are responsible for being familiar with and acting in accordance with taxpayer rights. See IRC 7803(a)(3), Execution of Duties in Accord with Taxpayer Rights. For more information about the TBOR see https://irssource.web.irs.gov/SitePages/TaxpayerBillOfRights.aspx.

(2) Per the TBOR, taxpayers have the right to expect a fair and just tax system which provides taxpayers with the opportunity to have their facts and circumstances considered when it might affect their underlying liabilities, ability to pay, or ability to provide information timely.

(3) Taxpayers have the right to receive help from the Taxpayer Advocate Service (TAS) if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through normal channels. For more information on the Taxpayer Bill of Rights, visit https://irssource.web.irs.gov/SitePages/TaxpayerBillOfRights.aspx

(4) Refer taxpayers to TAS when the contact meets TAS criteria, see IRM 13.1.7, Taxpayer Advocate Service (TAS) Case Criteria), or when Form 911, Request for Taxpayer Advocate Service Assistance (and Application for Taxpayer Assistance Order)is attached, and steps cannot be taken to resolve the taxpayer's issue the same day.

(5) "Same day" includes cases that can be resolved in 24 hours, as well as cases where steps can be taken within 24 hours to begin resolving the issue. See IRM 13.1.7.5, Same Day Resolution by Operations

(6) When making a TAS referral, use Form 911, and forward to TAS in accordance with your local procedures.  

(7) The National Taxpayer Advocate has reached agreements with the Commissioners of the Taxpayer Services(TS) Division, Small Business and Self-Employed Division (SB/SE), Tax Exempt and Government Entities (TEGE) Division, Criminal Investigation (CI), Appeals, and Large Business and International (LBI) Division, that outline procedures and responsibilities for the processing of TAS casework when either the statutory or delegated authority to complete case transactions rests outside of TAS. These agreements are known as Service Level Agreements (SLAs). The SLAs are located on the Intranet at https://irssource.web.irs.gov/TAS/SitePages/SLA.aspx.

(8) When referring cases to TAS, keep in mind that TAS employees do not have the delegated authority to make international adjustments. TAS employees, can, however, help taxpayers with certain international issues. For more information about TAS's delegated authorities, see IRM 13.1.4, TAS Authorities.

(9) For taxpayers who prefer to contact TAS directly, provide the toll-free number 877-777-4778. International callers who cannot dial toll-free will refer to Publication 1546-EZ, The Taxpayer Advocate Service Is Your Voice at the IRS, for contact information.

(10) Sometimes a taxpayer is unable to effectively complete the steps necessary to resolve the tax issues. In these cases, the taxpayer may need to obtain a CPA, Attorney or Enrolled Agent to help the taxpayer in working effectively with TAS to resolve the issue.

(11) Taxpayers may be eligible for free or nominal fee help and representation from a Low- Income Taxpayer Clinic (LITC). LITCs

• help low- income individuals in resolving federal tax problems such as audits, appeals, litigations, and tax collection disputes.

• provide services to taxpayers who speak English as a second language, including education about taxpayer rights and responsibilities, and consultations on individual tax issues.

• services must be free or cost a nominal fee. LITCs receive funding from the IRS and the program receives oversight from the National Taxpayer Advocate, but the clinics are wholly independent of the IRS.

• are located in each state, Puerto Rico, and the District of Columbia, but not every clinic offers a complete range of services. For a complete list of LITCs, services offered, and contact information, see Pub 4134, Low Income Taxpayer Clinic List.

(12) If you want to report a systemic problem to TAS, you can do so by using the Systemic Advocacy Management System (SAMS) a web- based method of identifying, prioritizing, and working issues that affect multiple taxpayers. The SAMS application is available on the Systemic Advocacy pages at https://www.irs.gov/advocate/systemic-advocacy-management-system-sams, or you may call 877–777–4778 or TTY/TDD 800–829–4059. When submitting issues through SAMS, do not include taxpayer information.

(13) Taxpayers can use the internet version of SAMS on the Systemic Advocacy pages at http://www.irs.gov/advocate/. Those without internet access can request a Form 14411, Systemic Advocacy Issue Submission, by calling 800–TAX-FORM (800-829-3676). If you suggest the taxpayers report a systemic problem by using SAMS, remind taxpayers to not include taxpayer information in their submissions and to be sure to include a phone number where a TAS employee can reach the taxpayer if TAS has any questions about the submission.

(14) For Taxpayer Advocate contact information for U.S. territories and international refer to the local taxpayer advocate contact page at SERP - TAS - LTA Addresses - Who/Where (irs.gov)

(1) IRC 6103 establishes the taxpayer's (T/Ps) right to confidentiality of returns and return information. You must ensure that you provide correct information to the correct T/P or authorized representative. Check the Integrated Data Retrieval System (IDRS) Command Code (CC) CFINK for the Power of Attorney (POA).

(2) IRC 7213, IRC 7213A, and IRC 7431 provide criminal penalties and civil remedies to ensure that T/Ps returns and return information remain confidential.

(3) For more information on General Disclosure Guidelines, refer to IRM 21.1.3.2, General Disclosure Guidelines. For a full discussion on disclosure, refer to IRM 11.3.1 through IRM 11.3.40.

(1) Refer all unresolved technical issues using an IRM or publication to campus management. If management is unable to make a determination, follow local procedures that involve coordinating resolution through the Planning and Analysis Section.

(2) When necessary, the analyst from the Planning and Analysis Section will review and forward any international problems requiring the attention of the Headquarters International Analyst.

(3) IRM 21.1.2.2.2, IRM 21 Change Requests/SERP Feedback, lists the various forms used to request changes or submit comments and/or suggestions.

(4) When an issue is questionable, but does not meet CAT-A criteria, and help is needed from Examination, follow procedures in IRM 21.5.3.4.7.2.1, Examination Technical Assistance Request.

(1) Rev. Proc. 2015-40 allows a U.S. taxpayer to request help from the U.S. Competent Authority on issues arising under a tax treaty between the U.S. and a foreign country.

(2) The IRS LB&I Commissioner acts as the U.S. competent authority, charged with administering the provisions of tax treaties, interpreting, and applying the treaties, and reaching mutual agreement in specific cases.

(3) The U.S. competent authority conducts the competent authority process through two offices, Advance Pricing and Mutual Agreement Program (APMA) and the Treaty Assistance and Interpretation Team (TAIT). APMA has primary responsibility for cases arising under the business profits and associated enterprises articles of U.S. tax treaties. TAIT has primary responsibility for cases arising under all other articles of U.S. tax treaties. TAIT also has primary responsibility for cases arising under U.S. tax treaties with respect to estate and gift taxes. APMA and TAIT each can consider cases arising under the permanent establishment articles of U.S. tax treaties, and both offices will coordinate and collaborate on such cases and on any other cases as necessary.

(4) Send written requests for APMA to:

Internal Revenue Service
Deputy Commissioner International, Large Business and International Division
1111 Constitution Ave. N. W.
SE:LB:TTPO:APMA:K 534-01
Washington, DC 20224

(5) Send written requests for TAIT to:
Commissioner International, Large Business and International Division
Internal Revenue Service
1111 Constitution Avenue. N.W.
SE:LB:TTPO:AMPA:TAIT:K 570-03
Washington, DC 20224

(6) Direct any questions about competent authority requests to the attention of APMA or TAIT, as necessary, at the above address.

(7) Nonresident aliens or foreign corporations generally must contact the Competent Authority of the country of their residence with their inquiries.

(8) For more information, see Tax Treaties on IRS.gov at http://www.irs.gov/Individuals/International-Taxpayers/Tax-Treaties.

(1) The IRS is involved in a significant number of taxpayer contacts to perfect returns during the filing process, to resolve issues identified in post-filing, and to secure delinquent returns.

(2) Based on requests from practitioners and other stakeholders, the Service developed guidance on the acceptance of faxes and signature stamps approved for Servicewide adoption.

(3) Refer to IRM 21.3.4.3.7, Use of FAX for Taxpayer Submissions, for current procedures for the acceptance of fax and signature stamps.

(1) For domestic issues, refer to information contained in Exhibit 21.5.3-2, Examination Criteria (CAT-A), and IRM 3.11.6.8, Form 1040X Routing Guide, for applicable Examination criteria.

(2) Suspend the following types of international claims and issues as 2CATA for classification:

Caution: Before forwarding any case to Examination involving a tax increase or credit decrease review Exhibit 21.5.3-1, Claim Processing with Examination Involvement.

• IMF Dual Status Claims Form 1040-NR converted to Form 1040, Form 1040 converted to Form 1040-NR, for ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡.

• Nonresident alien claiming non-taxable income due to receiving pension from a U.S. based company for ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡.

• Foreign Tax Credit Carryback more than ≡ ≡ ≡ ≡ ≡ ≡ ≡. For more information see IRM 21.5.9.5.12.7, Carryback of Foreign Tax Credit (FTC).

• Changes to Foreign Tax Credit more than ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

• Decreases on Form 1040-NR Fiduciaries more than ≡ ≡ ≡ ≡ ≡ ≡ ≡. For more information see IRM 21.7.12.7.1, Fiduciary Filed Form 1040-NR, U.S. Nonresident Alien Income Tax Return.

• Form 1040-NR claiming temporary living or business expenses more than ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

• Revocation of IRC 6013 (g) joint return with a nonresident alien spouse more than ≡ ≡ ≡ ≡ ≡ ≡ ≡. For more information see IRM 21.8.1.14.

• ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

Note: Refer all international Identity Theft (IDT) cases to Exam using the CAT-A referral reasons listed in the drop-down menu for identity theft cases.

Note: When referring any of these claims to Examination through CII, select HQ XX from the drop-down listing of reasons referred.

(3) If the taxpayer cites an IRC, Regulation, Tax Treaty, etc., research the reference and try to secure an explanation unless the claim meets other Examination Criteria. This information may be available on-line through Westlaw at Westlaw Sign In | Thomson Reuters.

(1) The following instructions refer to paper cases not on the Correspondence Imaging Inventory (CII). For CII cases refer to IRM 21.5.1.5, Correspondence Imaging Inventory CII Procedures.

(2) Every international case sent to Exam Classification MUST include:

• A current transcript (TXMOD, MFTRA or IMFOLT)

• A printout of RTVUE for the Taxpayer Identification Number (TIN) and year on the claim, plus any other year(s) referenced

  Reminder: Do not provide the original return if all needed schedules are being included.

• A printout of the entity module (ENMOD or INOLE) of the individual involved or referenced.

(3) When the claim year or related return modules show an "-L" freeze (generated by TC 420 input), the case MUST have an AMDISA print (do not request the original return). Every "-L" freeze has an AIMS record. The last 2 digits of the AIMS control number show which area office has control of the AIMS data base.

(4) When an amended return claim is being referred to Examination Classification, ensure that pages 1 and 2 of Form 1040X are complete, including verification of all needed schedules and forms required for making an issue determination. Form 1116 is required to verify a Foreign Tax Credit. IRM 21.5.3.4.7.2, Examination "Disallows," "Accepts," or "Selects" the Claim, lists the requirements for Examination area claim referrals.

(5) When the case is returned from Examination, follow the steps in the table below.

(6) If a copy of the disallowance letter is returned for association, attach the copy with the original return.

(1) Protective Claims are formal or informal claims, amended returns for credit or refund normally based on expected changes in a:

• Current Regulation,

• Pending legislation, or

• Current litigation

(2) Taxpayers file a protective claim when their right to a refund is contingent on future events. These claims are filed to protect the taxpayer’s right to recover internal revenue tax before the expiration of the statute of limitations. For this reason, they are all considered to meet "CATA" criteria. See IRM 21.5.3.4.7.3, Protective Claims, for more information.

(3) Send All Protective Claims to Examination Classification.

(4) Send Only complete Protective Claims to Examination Classification. Prior to sending to Classification, screen all protective claims for:

• Statute timeliness

• Completeness, and

• Signature(s)

(5) If the claim is not processable, call or correspond with taxpayer for missing information. If no reply is received, follow normal adjustment procedures for rejecting the claim. Any requested missing information must be provided by the taxpayer before the refund statute expiration date for a claim to be considered complete.

(1) Unpostables are transactions which cannot post to the Master File. A transaction that fails to post to an account is returned to the originating campus for corrective action. See IRM 21.5.5, Unpostables, for complete information.

(1) IMF international return processing is done by the Austin Submission Processing Campus (AUSPC). International returns are assigned unique File Location Codes (FLC).

• File Location Codes 66, and 21 contain all IMF returns with a U.S. territory address (with a 5- digit zip code), Form 1040-PR and, Form 1040-SS.

• IMF File Location Codes 98, and 20 contain all 1040 series returns with an address from a foreign country and all returns filed with any of the Forms listed in paragraph 3 below.

(2) International returns include:

• Form 1040-NR

• Form 1040-PR

• Form 1040-SS

  Note: Send Form 1040-GUAM to Guam.

(3) International processes any Form 1040 series with the following attachments:

• Form 1116- Foreign Tax Credit. Subject to the tolerance levels identified in IRM 21.6.3.4.1.6, Form 1116, Foreign Tax Credit.

• Form 2555- Foreign Earned Income Exclusion

• Form 4563 - Exclusion of Income for Bona Fide Residents of American Samoa

• Form 5074 - Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands

• Form 8288-A - Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests

• Form 8288-C - Statement of Withholding Under Section 1446(f)(4) on Dispositions by Foreign Persons of Partnership Interests

• Form 8689 - Allocation of Individual Income Tax to the U.S. Virgin Islands

• Form 8805 - Foreign Partner's Information Statement of Section 1446 Withholding Tax

• Form 8833 - Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)

• Form 8840 - Closer Connection Exception Statement for Aliens

• Form 8843 - Statement for Exempt Individuals and Individuals with a Medical Condition

(4) An international return is also any Form 1040 series with the following indications:

1. Any address outside the 50 United States or the District of Columbia

2. Taxpayer claiming Dual Status (Form 1040 and Form 1040-NR filed together as taxpayer claims part year residence and part year non-residence)

3. Primary or both taxpayers are nonresident aliens (NRA)

4. Tax Treaty benefit or exemption is claimed

5. IRC 911, 931, or 933 is invoked

6. Taxpayer is a treaty trader or Fulbright grantee

(1) When adjusting IMF international accounts using CC REQ54, REQ77 or transferring credits using CC ADD/ADC24, ADD/ADC34 or ADD/ADC48, input a Filing Location Code (FLC) 66 or 98 according to the primary location code shown on TXMOD or ENMOD. When the primary location code is 21 or 66 input FLC 66. When the primary location code is 20 or 98 input FLC 98.

(2) Input FLC 66 or 98 when adjusting accounts incorporating forms that are listed in international Forms Processing IRM 21.8.1.2.14 above, and IMF/NMF Forms listed in IRM 21.8.1.2.2.

(1) Based on Rev. Rul. 2002-23, a document mailed from a foreign country with a timely official postmark of the foreign country is treated as being timely filed.

(2) This rule applies to all documents required or permitted to be filed with the Service, including returns, claims, requests for an extension to file, and payments made with returns.

(3) If the last day for filing falls on a Saturday, Sunday, or a legal holiday, then a document with a foreign country official postmark date on or before the next succeeding day that is not a Saturday, Sunday, or legal holiday is treated as timely filed under IRC 7503 and Rev. Rul. 2002-23. The term legal holiday is defined under Rev. Rul. 2002-23 and IRC 7503 as a legal holiday in the District of Columbia, in the United States, or a statewide legal holiday in the state where the federal tax return, claim for refund or other documents are required to be filed or sent. The term does not include legal holidays in foreign countries, unless such holidays are also legal holidays in the District of Columbia or applicable state, as described above. See Rev. Rul. 2002-23 for more requirements when foreign mail is received later than such mail is ordinarily received.

(4) The postmark determination for documents sent from a foreign country also applies to designated international private delivery services. The list of designated delivery services (both international and domestic) is only updated when new delivery services are added in lieu of or in addition to the designated Private Delivery Services (PDSs).

(5) The current types of delivery services through designated PDS's, per are:

• DHL Express, DHL Express 9:00, DHL Express 10:30, DHL Express 12:00, DHL Express Worldwide, DHL Express Envelope, DHL Import Express 10:30, DHL Import Express 12:00, DHL Import Express Worldwide.

• Federal Express (FedEx): FedEx First Overnight, FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2 Day, FedEx International First Flight out, FedEx International Priority, and FedEx International First; FedEX International Economy and

• United Parcel Service (UPS): UPS Next Day Air Early AM, UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

(1) When an error is made on an international return, a specific range of notice code numbers are assigned. They are listed in research material according to the type of return filed, and do not follow strict numerical sequence. Review the list to locate the specific notice number.

(2) Reference sources that provide literal definitions for these codes, which are also referred to as Input Codes and Notice Codes, can be found in Chapter 9 of Document 6209.

(1) Account research is performed through the Integrated Data Retrieval System (IDRS). Command Codes are used to access different types of taxpayer information. See the Command Codes Job Aid on SERP under the "IRM Supplements" tab.

(2) The most common command codes and their purposes are:

• ADJ54 - Used to adjust taxpayer's account.

• ENMOD - Used to request the entity module for a specific TIN.

• IMFOL - Displays entity and tax information that is posted for on-line query. It accesses the IMF and allows several screen displays based on the definer codes used.

• INOLE - Used to access the most current entity data from the National Account Profile, (NAP) files.

• IRPTR - Accesses the Information Returns Masterfile (IRMF), which contains income and withholding data reported to the IRS from payers/employers, i.e., W-2, 1099, 1098 and Form 1042-S.

• NAMEE - Name and address data is entered to research a missing EIN.

• NAMEI - Name and address data is entered to research a missing SSN.

• NAMES - Name and address data is entered to research a missing SSN.

• REQ54 - Overlays TXMOD on the TXMOD screen to request ADJ54 screen.

• RTVUE - Contains line by line original tax return information that is posted to the Master File. RTVUE also shows math error corrections. It accesses the Return Transaction File (RTF) and contains all edited, transcribed, and corrected data from the return. This command code requires a definer to access an index type screen. For further explanation of the displays and definer codes, refer to the Command Code Job Aid on SERP. This command code can be used as an alternative to command code ESTAB requests.

• TPIIP - Research a taxpayer using only the last 4 digits of SSN and last name.

• TRDBV - Used by IDRS users to gain detailed read-only access to the tax return data base.

• TXMOD - Used to research a specific tax period. It is only available for active modules and shows pending information. Command code IMFOL may be used if TXMOD is not available.

(1) During return processing, a two-digit unallowable code identifies disallowed items. These can include a taxpayers deduction, exemption, item exceeding statutory limitations, items of a questionable nature, or items not supported by the proper information or schedule.

(2) Document 6209 contains unallowable codes and their explanations. This information can also be found on SERP at http://serp.enterprise.irs.gov/content/6209/section-3-12.html.

(3) These codes appear on TXMOD, and a sample is on Servicewide Electronic Research Program (SERP) in the Command Code Job Aid.

(1) The United States has income tax treaties (conventions) with a number of foreign countries. Under these treaties, residents of foreign countries are taxed at a reduced rate, or are exempt from U.S. income tax on certain types of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and with specific items of income.

(2) In some cases, tax treaties permit foreign individuals who are residents of the treaty country to visit the United States, practice their profession, and earn income (sometimes in limited amounts) for a limited period without having to pay U.S. income tax with respect to such income.

(3) Treaty provisions relating to such income is found in Publication 901, U.S. Tax Treaties.

(4) Taxpayers and contact representatives can access the individual country treaties through the internet. Access http://www.irs.gov and search for Tax Treaties.

(5) The U.S.S.R. income tax treaty remains in effect for the following members of the Commonwealth of Independent States: Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan. In 1992, the U.S. entered into a separate income tax treaty with Russia. In 2001, Ukraine entered into a separate agreement, and in 2003, Kazakhstan also entered into a separate agreement.

(1) Many types of income can be classified into three categories for purposes of the IRC 911foreign earned income exclusion.

(2) Earned income is compensation for personal services performed. The source of earned income is the place where the services are performed. The following types of income have been classified as earned income:

• Salaries

• Wages

• Commissions

• Bonuses

• Professional fees

• Tips

(3) The following types of income have been classified as unearned income:

• Dividends

• Interest

• Capital gains

• Gambling winnings

• Alimony

• Social Security benefits

• Pension and annuities

(4) Some types of income are considered variable, they may fall into the category of earned, unearned or partly both. They are:

• Business Profits

• Royalties

• Rents

(5) For more information on the various types or classifications of income, see Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.

(1) A taxpayer must meet the following requirements in order to qualify for the foreign earned income exclusion:

• Tax Home Test

• Bona Fide Residence Test

• Physical Presence Test

(2) Qualified individuals may elect to exclude their foreign earned income from their gross income. To qualify, the taxpayer must:

1. Have a tax home in a foreign country, and

2. Be a U.S. citizen or resident alien who is a national of a country with which the United States has an income tax treaty with a nondiscrimination clause, and

3. Be a bona fide resident of a foreign country or countries for a full taxable year, or

4. Be a U.S. citizen or U.S. resident alien and be physically present in a foreign country or countries for 330 days.

(3) An individual who resides or is present in a U.S. territory does not qualify for the foreign earned income exclusion.

1. Some taxpayers may qualify for the territory exclusion. See IRM 21.8.1.10.2, IRC 931 Territory Exclusion (Form 4563).

2. Disallow claims for the foreign earned income exclusion and inform the taxpayer about the territory exclusion, if the taxpayer appears to qualify.

(4) For purposes of the foreign earned income exclusion, foreign earned income does not include any amount paid by the United States or any of its agencies to its employees, whether from appropriated or non-appropriated funds. Payments to employees of non-appropriated fund activities include the following:

• Armed forces post exchanges

• Officers and enlisted personnel clubs

• Post and station theaters

• Embassy commissaries

(5) If a U.S. Government employee is paid by a U.S. agency that assigned that person to a foreign government to perform specific services for which the agency is reimbursed by the foreign government, the compensation is from the U.S. Government. It does not qualify for the exclusion or deduction if the individual continues as an employee of the U.S. Government.

(6) Consider the following factors when determining the taxpayer's tax home:

(7) Consider the following factors when determining if a taxpayer qualifies for the foreign earned income exclusion as a bona fide resident (IRC 911(d)) of a foreign country.

(8) The following definitions are clarification of terms used in the above chart which identifies bona fide residence factors.

1. Foreign Country - A territory under sovereignty of a government other than the United States.

   Note: International waters are not treated as foreign countries. Individuals working on oil rigs in international waters, on a 28 day on 28 days off basis, are not considered bona fide residents of a foreign country.

2. Entire Taxable Year - A 12- month period, calendar or fiscal. A calendar year is the period beginning January 1 and ending December 31. A fiscal year begins with a month of the taxpayer's choosing and ends on the last day of the month, following a 12- month period.

3. Uninterrupted Period - The taxpayer may leave the country for brief temporary trips abroad for vacation or business, but must have clear intentions of returning to their foreign residence or to a new bona fide residence in another country without unreasonable delay.

(9) Consider the following factors when determining if a taxpayer qualifies for the foreign earned income exclusion due to their physical presence in a foreign country.

(10) Consider the following explanations when determining if the taxpayer qualifies for the IRC 911 foreign earned income exclusion due to their physical presence:

1. A "full day" is a continuous period of 24 hours starting at midnight and ending with the following midnight.

2. The day of arrival or departure is not counted in determining the 330 days.

3. The "qualifying days" may include vacation time spent on foreign soil.

4. The 330 full days presence on foreign soil need not be consecutive, and may be interrupted by periods during which travel is over international waters, or in which the taxpayer is otherwise not present in a foreign country (i.e., a brief visit to the United States).

(11) The physical presence test does not depend on the type of residence the taxpayer establishes, the nature or purpose of the stay abroad, nor their intentions about returning to the United States. It is based only on how long the taxpayer stays in a foreign country or countries.

(1) IRC 911(d)(4) allows certain taxpayers who had to leave a foreign country because of war, civil unrest, or similar adverse conditions to waive the minimum time limitation requirements specified under either the bona fide residence or physical presence test.

(2) Taxpayers who qualify for the waiver must be able to show that they reasonably could have expected to meet the minimum time requirements if they had not been required to leave the country.

(3) Waiver of the minimal time limitation requirement is accomplished by:

1. Submitting a statement with the return explaining that they expected to meet the applicable time requirements, but the conditions in the foreign country prevented them from the normal conduct of business and

2. Entering "Claiming Waiver" in the top margin on page 1 of the Form 2555.

(4) Burden of Proof: when the documentation which would prove the taxpayer's intent to meet the physical presence time requirement is unavailable, the taxpayer must provide a statement with a complete explanation. If the taxpayer meets the waiver based on their statement, allow the election. To qualify for relief under IRC 911(d)(4), an individual must have established residency or have been physically present in the foreign country prior to the date listed in the annual waiver revenue procedure that the individual was required to leave.

(5) Individuals who establish residency, or are first physically present in the foreign country after the date that the Secretary prescribes, are not treated as qualified individuals under IRC 911.

(6) A Revenue Procedure is generally issued each year to list the countries and dates those countries are eligible for the IRC 911(d)(4) waiver. The latest additions are listed in the following table:

(7) Taxpayers may claim the exception on their original return, or if an original return has been previously filed, taxpayers must file a Form 1040X with the correct Form 2555 for the year the exception is being claimed, within the normal 3- year statute of limitation period.

(1) Once the taxpayer has established that their tax home is in a foreign country and the taxpayer meets either the bona fide residence test or the physical presence test, they may elect to exclude from their income all or some of the amount of their foreign earned income.

(2) The foreign earned income of an individual which can be excluded for any taxable year cannot exceed the amount of foreign earned income computed on a daily basis. The maximum excludable annual rates are listed in the following table:

(3) When both spouses have foreign earned income and each meet either the bona fide residence test or the physical presence test, each must file a separate Form 2555. In this case, for tax year 2024, up to $253,000.00 can be excluded if spouses file jointly.

(4) IRC 911(d)(6) denies the double benefit that could occur if taxpayers claimed the foreign earned income exclusion and did not reduce it by adjustments to income, or did not reduce certain itemized deductions and credits related to the excluded income. An adjustment to income can cause an adjustment to the foreign earned income exclusion on Form 2555, line 25. This line is always checked when there is an adjustment to income which is related to the excluded earned income.

(5) Itemized deductions related to excluded income must be reduced on Schedule A. Such reductions must always be checked when there are itemized deductions, (i.e., moving expenses, employee business expenses, etc.), related to excluded earned income. See Publication 54 for more details.

(6) Generally, the reduction of nonrefundable credits is limited to that portion which is specifically related to the excluded income.

(7) In applying the IRC § 911 foreign earned income exclusion limitations under community property laws, the total community income excluded cannot exceed the amount excludable if the income is not community property income.

(8) Wages received by employees of the United States Government, or any of its agencies, working overseas do not qualify for exclusion of foreign earned income under IRC 911. These employees include:

• Military personnel

  Caution: This includes any military personnel assigned to the North Atlantic Treaty Organization (NATO) or any other international organization.

• State Department employees

• IRS employees

• Drug Enforcement Agency (DEA) employees

  Note: Amounts paid by the U.S. government or its agencies to persons not their employees, may qualify for foreign earned income exclusion or deduction. If unsure, correspond with the taxpayer for a clarification. Publication 15-A, Employer's Supplemental Tax Guide, can answer questions to help determine if the taxpayer is an employee or an independent contractor.

(9) The foreign earned income exclusion has no impact on the requirement for the payment of self-employment tax. See IRM 21.8.1.17.

(10) The exclusion is not available if travel, and therefore employment, in a foreign country is restricted by regulations pursuant to the Trading With the Enemy Act (50 U.S.C. 1701 etc. seq.) or the International Emergency Economic Powers Act (50 U.S.C. App.) mentioned in IRC 911. There are some exceptions, primarily for journalists who travel with permission from the Treasury Department.

(11) If income is excluded under the foreign earned income exclusion, the income is not considered as compensation in determining the amount of IRA contribution.

(12) Taxpayers who claimed the foreign earned income exclusion, housing exclusion, or housing deduction on Form 2555, Foreign Earned Income, must figure their tax using the Foreign Earned Income Tax Worksheet.

(13) Use reason code 014 when the taxpayer is adding foreign earned income and excluding the same foreign earned income on Form 2555 at the same time (generally a TC 290.00). Use RC 031 for all other foreign earned income exclusion changes.

(1) Qualified individuals may separately elect to claim the housing exclusion or the housing deduction, in addition to the foreign earned income exclusion. The housing exclusion applies only to amounts considered paid for with employer-provided amounts. The housing deduction applies only to amounts paid for with self-employment earnings.

(2) The initial election is made by filing Form 2555 with:

• A timely filed return (including any extensions)

• A return amending a timely filed return, or

• A late filed return (determined without regard to any extensions) filed within one year from the original due date of the return.

(3) The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) made the following changes to IRC 911 effective for tax periods beginning on or after January 1, 2006.

• The calculation of the base housing amount (line 32 of Form 2555) is now related to the maximum foreign earned income exclusion. The amount is 16 percent of the exclusion amount (computed daily) multiplied by the number of days in the qualifying period that fall within the tax period.

• The amount of qualified housing expenses is limited to 30 percent of the maximum foreign earned income exclusion (computed daily ) for the calendar year in which the taxable year of the individual begins multiplied by the number of days within the applicable period. However, the law provides for adjustments to the percentage based on geographic differences in foreign housing costs relative to housing costs in the United States.

• For a comprehensive list of adjusted limitations on housing expenses see the Form 2555 instructions. http://core.publish.no.irs.gov/instrs/pdf/i2555--2020-00-00.pdf

  Reminder: Some of these adjusted limitations on housing expenses change on an annual basis.

(1) Once a taxpayer chooses to exclude foreign earned income or housing amount, that choice remains in effect for that year and all later years unless they revoke it.

(2) If an election choice is revoked, a new election may not be made before the sixth (6th) taxable year after the revocation without the consent of the IRS.

(3) If a taxpayer files an amended return revoking a Foreign Earned Income election follow all normal adjustment procedures. Make the requested adjustment. Research subsequent years to determine if the Foreign Earned Income election was taken. If research shows the election was taken in subsequent years, advise the taxpayer in writing they may have to file corrected returns for those years since the election was revoked and a new election may not be made before the sixth taxable year after the revocation without consent of the IRS.

(4) Taxpayers can request IRS consent for reelection before the sixth taxable year after the revocation by requesting a Private Letter Ruling (PLR)

(1) Treas. Reg. § 1.911-7(a)(2)(i)(D) allows citizens or residents of the United States to take the foreign earned income exclusion. The exclusion is allowed under certain conditions and with some limitations. Publication 54 contains further information.

(2) The IRC911 foreign earned income exclusion (Form 2555) is made with:

• A timely filed return (including any extension),

• A return amending a timely filed return, or

• A late-filed return, filed within 1 year from the original due date of the return (determined without regard to any extension).

(3) The IRC 911 foreign earned income exclusion is allowed on prior year returns not listed above when the taxpayer has a PLR under Treasury Regulation § 301.9100-3, allowing the exclusion.

(4) The taxpayer does not need a PLR to claim the IRC911 foreign earned income exclusion on prior year returns in the following situations:

• The taxpayer owes no federal income tax after considering the exclusion and files Form 1040 with Form 2555 or a comparable form attached either before or after the Internal Revenue Service discovers that the taxpayer failed to elect the exclusion, or

• The taxpayer owes federal income tax, after considering the foreign earned income exclusion, and there is no IRS discovery that the taxpayer failed to make a timely election. The taxpayer prints legibly at the top of the first page of the Form 1040: "Filed Pursuant to Treasury Regulation §1.911-7(a)(2)(i)(D)".

  Note: Indications of IRS discovery would be a Taxpayer Delinquency Investigation (TDI) or Substitute For Return (SFR) notice where the tax is proposed to be assessed or was assessed prior to the taxpayer filing a prior year return with an IRC 911 foreign earned income exclusion.

(5) If the taxpayer owes federal income tax and there is IRS discovery that the taxpayer failed to make a timely election:

1. Correspond with the taxpayer and advise that they must request from Associate Chief Counsel, International, a PLR by the Service under Treas. Reg. 301.9100-3 to qualify for the IRC 911 foreign earned income exclusion election.

   Note: Review prior year tax returns on AMS or RTVUE to determine if the taxpayer made a timely election to claim the exclusion. If the exclusion is allowed on a prior year tax return, then the taxpayer's election remains in effect for all subsequent tax returns until it is revoked.

2. Advise the taxpayer of the procedure to obtain the PLR. See IRM 21.8.1.3.6 for more information on securing the PLR.

3. When a PLR is secured, the taxpayer will provided a copy before the foreign earned income exclusion election is allowed.

(1) U.S. citizens and resident aliens abroad have the option to file Form 2555, or an acceptable facsimile that exhibits their entitlement to the benefits under IRC 911. The Form 2555 should accompany a Form 1040, but it is sometimes submitted without the return.

1. The taxpayer may believe that Form 2555 is the only form required to be filed.

2. Form W-2 must be attached to obtain a refund.

(2) Research to determine if a return is on file for the taxpayer. Use research command code TXMOD and/or the CFOL commands.

(1) IRC 3402(a) requires employers to withhold taxes from wages earned at "source". However, an employer may discontinue the withholding of income tax from the wages of an employee who is a U.S. citizen or resident alien employed abroad, if certain conditions are met.

(2) IRC 3401(a)(8)(A) allows employees to file a signed statement including a declaration under penalties of perjury, along with a current Form W-4, declaring that they meet or will meet the qualifications of IRC 911(d) (qualified individual) for the taxable year and that they are exempt from tax on the maximum foreign earned income exclusion amount of earned income for the year in question.

(3) The Form W-4 must specify either:

1. Exempt status, and the taxable year for which the Form W-4 is effective, or

2. The number of withholding allowances allowed, based on exemptions, deductions (including the IRC 911 deduction) and credits.

(4) The Internal Revenue Service provides Form 673, Statement for Claiming Exemption from Withholding on Foreign Earned Income Eligible for the Exclusions Provided by 911, for U. S. citizens. A statement can be accepted in lieu of Form 673 if the taxpayer shows to their employer that they will meet either the bona fide residence test or the physical presence test and shows the estimated housing cost exclusion.

(5) Employers withhold income tax from any wages the employee earns in the United States and any income exceeding the IRC 911 limitations.

(6) For questions involving the Form W-4 penalty program, contact the Campus Collection Branch.

(7) Form 673 can only be used by a U.S. Citizen.

(1) The following chart contains the countries to with U.S. travel restrictions.

(2) Taxpayers present in one of the foreign countries listed above during the time frames shown are in violation of U.S. law and are not treated as a bona fide resident of or physically present in those foreign countries.

1. The income they earn from sources within these countries for services performed does not qualify as foreign earned income.

2. Housing expenses they incur while in one of these countries cannot be included in computing their foreign housing amount.

Exception: Notice 2006-84 announced that the limitations of IRC 911(d)(8)(c) do not apply to qualified individuals who perform services at the U.S. Naval Base at Guantanamo Bay, Cuba. Therefore, such individuals are eligible for the exclusion under IRC 911, if they meet the other requirements of that section.

(1) If a taxpayer participates in or cooperates with an international boycott during the tax year, their foreign taxes resulting from boycott activities reduce the total taxes available for credit.

(2) Use Form 5713, International Boycott Report, to report operations in or related to boycotting countries, and the receipt of boycott requests and boycott agreements made.

(3) A list of the countries that may require participation in or cooperation with an international boycott is published by the Department of the Treasury each calendar quarter. The following countries are currently listed:

• Iraq

• Kuwait

• Lebanon

• Libya

• Qatar

• Saudi Arabia

• Syria

• Republic of Yemen

(4) Form 5713, International Boycott Report, is currently processed at the Ogden Campus.

(1) Individuals, either U.S. citizens or resident aliens, minimize double taxation by electing to claim the Foreign Tax Credit by using Form 1116. If a non-U.S. citizen is a bona fide resident of Puerto Rico for the entire tax year, the resident alien rules apply.

(2) A nonresident alien can claim a credit for income taxes paid or accrued to a foreign country or territory of the United States only on foreign source or territory source income that is effectively connected with a trade or business in the United States. For information on alien status and effectively connected income, see Publication 519, U.S. Tax Guide for Aliens.

(1) Eligible taxpayers may claim a Foreign Tax Credit for foreign income taxes paid or accrued (or taxes paid or accrued in lieu of those taxes) during the tax year to any:

• Foreign country

• U.S. territory, or

• Political subdivision (e.g., city, state, or province) of the foreign country or U.S. territory. For further information, See Publication 570

(2) Important: When a Foreign Tax Credit is claimed:

1. It is a nonrefundable credit, and

2. Foreign income taxes cannot generally be claimed as a deduction in the same year on Schedule A.

(3) If the taxpayer chooses not to claim a credit for foreign taxes, IRC 164(a)(3) allows a U.S. citizen or resident alien to claim a deduction on Schedule A for foreign income tax paid or accrued.

(4) Taxpayers excluding income from the territories cannot claim the Foreign Tax Credit for foreign income taxes paid on the excluded income. See IRC 931 and IRC 933.

(5) Citizens or residents cannot claim the Foreign Tax Credit for foreign income taxes paid or accrued on income that is exempt from tax under the foreign earned income exclusion, or the foreign housing exclusion (IRC 911). See Publication 514, Foreign Tax Credit for Individuals, for definitions of accrued and paid.

(6) A Form 1116 must be filed to claim the Foreign Tax Credit unless one of the following exceptions is met:

• The taxpayer meets the requirements for exemption from foreign tax limit discussed in Publication 514 and chooses exemption from the Foreign Tax Credit limit. They do not file Form 1116. Instead, they enter foreign taxes paid directly on Form 1040, line 31.

• A shareholder of a controlled foreign corporation who chooses to be taxed at corporate rates on the amount they must include in gross income from that corporation uses Form 1118 to claim the Foreign Tax Credit.

• The taxpayer paid income taxes to the U.S. Virgin Islands. The taxpayer must use Form 8689, Allocation of Individual Income Tax to the Virgin Islands.

(7) Adjust accordingly, using TC 29X with Reason Code 036 (Tax Credits).

(8) IRC 164(a)(3) allows a U.S. citizen or resident alien who itemizes deductions to claim foreign income tax paid or accrued as a deduction on Schedule A.

(1) A credit cannot be claimed for the following foreign taxes:

1. Taxes paid to a foreign country that the taxpayer does not legally owe, including amounts eligible for refund by the foreign country

2. Taxes imposed by and paid to certain foreign countries (see IRM 21.8.1.4.6, Computation - Foreign Tax Credit for a list of countries designated by the U.S. Secretary of State as having repeatedly provided support for acts of international terrorism, and countries with which the U.S. does not have diplomatic relations, and countries whose governments the United States does not recognize)

3. Payment of foreign tax that is returned to the taxpayer, a related person, or a party to the transaction generating the tax, in the form of a subsidy

4. Taxes attributable to excluded income from sources within the United States territories (See Publication 514 for more information.)

5. Tax withheld from dividends and other income from property, if certain minimum holding period requirements are not met

6. Other taxes designated in the Instructions to Form 1116.

(2) On January 1, 2008, Mexico adopted the "impuesto empresarial a tasa unica" (IETU). Mexico repealed the IETU, effective January 1, 2014. The IRS will not challenge that the IETU is an income tax that is eligible for the Foreign Tax Credit under Article 24(1) of the Income Tax Treaty between the United States and Mexico.

(1) Each tax year, an individual has a choice of electing:

1. To take the amount of any qualified foreign income taxes paid or accrued as a Foreign Tax Credit against U.S. income tax, or

2. To take the deduction on Schedule A, Form 1040

(2) Generally, the taxpayer must treat all foreign taxes paid or accrued in the same tax year in the same manner. See IRC 901(m)(6)IRC 901(k)(7), IRC 901(l)(4), IRC 901(j)(3) and IRC 908(b)which allow a deduction for taxes that cannot be claimed as a credit.

(3) An individual taxpayer may change their election from claiming a deduction to claiming a credit, for foreign income taxes paid or accrued, at any time during the period within 10 years from the due date for filing the return for the tax year for which the claim for credit is made. The period for changing their election from claiming a credit to claiming a deduction is 3 years from the time the original return was filed. See IRC 901(a) , IRC 6511(a) and (d) and Treas. Reg. §1.901-1(d).

(4) An individual changing no other election may file a claim or an amended return:

• For credit, or

• For refund of U.S. income taxes

(1) A taxpayer has a ten-year period of limitation to file a claim for refund of U.S. tax for a year when the taxpayer must pay or accrue a larger foreign tax than originally claimed as a credit for that year. For further information, see Statute IRM 25.6.1.10.2.8.4, Foreign Tax Credit.

(2) The same 10- year limitation period applies to:

1. A claim for refund based on the correction of math errors in figuring the Foreign Tax Credit

2. The discovery of qualified foreign taxes not originally reported on the return, and

3. Any other change to the size of the credit, including one caused by a correction to the Foreign Tax Credit limitation or a taxpayer decision to claim a credit for the taxes rather than a deduction.

(3) The 10 years are counted from the due date of the return (ignoring any extension for filing the return) for the year in which the foreign tax expense is paid or accrued. Do not confuse this limitation period for claiming a refund with the ten-year carryover and one-year carryback periods. For carryback and carryover information see IRM 21.8.1.4.7.

(4) For detailed information on Foreign Tax Credit Carryback claims, see IRM 21.5.9.5.12.7, Carryback of Foreign Tax Credit (FTC).

(5) The usual three-year period of limitation applies for refunds attributable to deductions of foreign income taxes reported on Schedule A.

(1) With respect to individual taxpayers, the foreign tax credit is calculated separately on separate Forms 1116 for the seven categories of income below:

• Section 951A category income

• Foreign branch income

• Passive category income

• General Limitation Category Income

• Section 901(j) Category Income

• Income Re-sourced by Treaty.

• Lump Sum Distributions

  Note: See Publication 514 for further information on the classification of this income.

(2) Taxpayers are instructed to use a separate Form 1116 for each category of income. Also, they are instructed to use a separate Form 6251 for the Foreign Tax Credit offset of alternative minimum tax. However, if separate forms are not submitted, or when the credit is for ≡ ≡ ≡ ≡ ≡ or less for married filing joint, or ≡ ≡ ≡ ≡ ≡ ≡ or less for other filing statuses, accept the return as filed. If adjusting the alternative minimum tax Foreign Tax Credit, use Reason Code 041 (Alternative Minimum Tax Foreign Tax Credit).

(3) If the taxpayer paid taxes to more than 3 countries or territories with the same type of income, then additional Forms 1116 must also be used.

(4) The credit on each category of income cannot exceed the proportionate amount of U.S. tax paid on that category of income. This is called the Foreign Tax Credit limitation. Therefore, the Foreign Tax Credit is limited to the lower of the Foreign Tax Credit limitation or the foreign tax paid or accrued attributable to that category of income.

(5) For each type of income, the taxpayer totals all the foreign income taxes paid on that category of foreign source taxable income and compares it to the total U.S. tax liability multiplied by the fraction equal to the amount of that category of foreign source taxable income over world-wide taxable income.

(6) The amount of foreign income tax paid or accrued that can be claimed as a credit against the federal income tax is subject to a ‘reduction’ or ‘scale down’ if attributable to excluded or exempt income. When income is excludable or exempt from tax (e.g., IRC 911(a), IRC 931(a) for income from sources within American Samoa, and IRC 933(a) for income from sources in Puerto Rico), the amount of foreign income taxes claimed as a credit (or deduction) must also be reduced or "scaled down" to account for the income on which no U.S. tax is paid. See Form 1116, Part III, line 12, "Reduction in foreign taxes".

(7) The amount allocable to excludable income is determined by multiplying the foreign tax paid or accrued by a fraction of the excluded foreign earned income (minus apportioned deductible expenses) divided by the total foreign earned income (minus allocable deductible expenses).

(8) If income other than foreign earned income (for example, earned income from U.S. sources or a type of income not subject to U.S. tax) is taxed by the foreign government, and the taxes on such other income can’t be separated, the denominator is the total amount of income subject to foreign tax less allocated deductible expenses.

(9) If a taxpayer has qualified dividends and/or capital gains and losses adjustments to the amounts reported on line 1a (gains), line 5 (losses) and/or line 18 (taxable income before subtracting exemptions) of Form 1116 may be required.

(10) A U.S. citizen who is a resident of a treaty country may be able to claim an additional credit for some of the taxes paid to the treaty country on U.S. source income. Many treaties do this by allowing a taxpayer to treat an amount of U.S. source income as foreign source income, thereby increasing the foreign tax credit limitation of the taxpayer. The amount of re-sourced income is figured in accordance with the applicable treaty provision. For tax years beginning on or before August 10, 2010, and tax years beginning after December 31, 2017, the additional amount of credit may be calculated by using the worksheet contained in Publication 514. This special credit is provided by the treaties of the following countries:

• Australia

• Austria

• Bangladesh

• Belgium

• Bulgaria

• Canada

• Czech Republic

• Denmark

• Finland

• France

• Germany

• Iceland

• Ireland

• Israel

• Italy

• Japan

• Luxembourg

• Malta

• Mexico

• The Netherlands

• New Zealand

• Portugal

• Slovak Republic

• Slovenia

• South Africa

• Spain

• Sweden

• Switzerland

• The United Kingdom

(11) Do not use the worksheet in Publication 514 to figure the additional credit for the following countries:

• Australia

• New Zealand

(12) IRC 901(j) denies the Foreign Tax Credit for taxes paid to certain countries due to nonrecognition of the foreign government (in most instances), the severance or lack of diplomatic relations, or the classification of the foreign country as one supporting terrorism.

(13) The Foreign Tax Credit is not currently available for taxes paid to the following countries a deduction for taxes paid to these countries is permitted:

• Iran

• Libya

• North Korea

• Sudan

• Syria

(14) The foreign tax credit is not available for foreign income taxes resulting from boycott activities of the taxpayer and paid to the following countries (and any other country which the taxpayer knows participates in the boycott):

• Iraq

• Kuwait

• Lebanon

• Libya

• Qatar

• Saudi Arabia

• Syria

• Yemen

(1) If, due to a limitation, a taxpayer could not claim the credit for the full amount of qualified foreign income taxes paid or accrued in a tax year in a separate category, IRC 904(c) allows a one-year Foreign Tax Credit carryback and then a ten-year carryover of the remaining excess foreign income taxes.

1. The excess foreign income taxes for that separate category is treated as paid or accrued in the applicable years to the extent of any excess foreign income tax limitation (the amount by which the limitation exceeds the amount of qualified taxes originally claimed) in those years.

2. The excess foreign income tax must be applied to the first eligible preceding year and then subsequent years. This is regardless of the relative benefits in various years.

3. Because of the Foreign Tax Credit limitation, a taxpayer may only use excess credits carried to years in which there was foreign income subject to U.S. tax.

(2) Special restrictions apply to carryback and carryover cases.

1. The carryback or carryover of unused foreign taxes can be claimed only as a credit, not as a foreign tax deduction.

2. In a carryback or carryover year in which foreign taxes were used as a deduction, no credits are allowed for the foreign taxes carried to that year, but the available carryover is reduced by the amount that would have been allowed if the taxpayer had elected the credit.

(3) The excess foreign taxes being carried back to the preceding tax year may be claimed by filing an Amended Return - Form 1040X with a Form 1116. IRM 21.5.9.5.12.7, Carryback of Excess Foreign Tax Credit, further explains processing carryback/carryover claims and when to refer FTC Carryback claims to Examination Classification.

(4) Neither Form 1045 nor Form 1139 may be used to carryback foreign tax credits. Taxpayers must file Form 1040X or amended returns to carryback these credits. See IRM 21.5.9.5.12.7, Carryback of Foreign Tax Credit (FTC), for specific instructions and restrictions.

(1) Procedures to settle cases of double taxation are provided in bilateral agreements between the U.S. and the following territories:

• Puerto Rico

• U.S. Virgin Islands

• Guam

• American Samoa

• Commonwealth of the Northern Mariana Islands

(2) Refer written requests for the help provided under the mutual agreement procedures to the:

Deputy Commissioner (International), Large Business and International Division
Internal Revenue Service
SE:LB:TTPO:APMA:TAIT:K
1111 Constitution Ave, NW
Washington, DC 20224

(3) Requests for help must contain the necessary information outlined in Rev. Proc. 2006-23. Refer taxpayers to the following offices for special information about the islands:

• PUERTO RICO

Departmento de Hacienda
Negociado de Asistencia Contributiva
Intendente Alejandro Ramírez Building
P.O. Box 9024140
San Juan, Puerto Rico 00902-4140

• U.S. VIRGIN ISLANDS

Virgin Islands Bureau of Internal Revenue
6115 Estate Smith Bay Suite 225
St. Thomas, U.S. Virgin Islands 00802-1332

• GUAM

Department of Revenue and Taxation and Taxpayer Services
Government of Guam
P.O. Box 23607
GMF, GU 96921

• AMERICAN SAMOA

Tax Division
Government of American Samoa
Executive Office Building
PagoPago, AS 96799

• CNMI

Commonwealth of Northern Mariana Islands
Division of Revenue and Taxation
P.O. Box 5234 CHRB
Dandan Commercial Center
Saipan, MP 96950

(4) To resolve double taxation cases, the IRS has established general ledger accounts for the following territories:

• Guam

• Commonwealth of the Northern Mariana Islands

• American Samoa

• U.S. Virgin Islands

(5) When transferring/covering over money to or from one of the U.S. Territories identified in paragraph (4) above, use Form 3809, Miscellaneous Adjustment Voucher. Accounting uses a specific Blocking Series when numbering the Form 3809. The chart below lists how Accounting numbers the document and this DLN Blocking Series gives the indication of which territory is involved in the transfer.

(6) When preparing a Form 3753, Manual Refund Posting Voucher, for one of the territories, the following information must be included on the form:

(1) IRC §937 and accompanying regulations contain the U.S. tax rules for determining if an individual is a bona fide resident of a territory and whether income is territory sourced or effectively connected with the conduct of a territory trade or business. Special income tax rules apply to bona fide residents of U.S. territories.

(1) Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession, is created based on the American Jobs Creation Act of 2004. (See IRC 937(c)).

(2) The Form is used to notify the IRS that an individual became or ceased to be a bona fide resident of a U.S. Possession.

(3) Beginning with tax year 2011, the Form 8898 is filed by individuals who have worldwide gross income in the tax year of more than $75,000.00 and meet one of the following conditions:

1. They take a position for U.S. tax purposes that they became a bona fide resident of a U.S. territory after a tax year for which they filed a U.S. tax return as a citizen or resident of the U.S.

2. They are a citizen or resident of the U.S. and take the position for U.S. tax purposes that they ceased to be a bona fide resident of a U.S. territory after a tax year for which they filed an income tax return as a bona fide resident of a territory.

3. They take a position for U.S. tax purposes that they became a bona fide resident of Puerto Rico or American Samoa after a tax year for which they are required to file an income tax return as a bona fide resident of the U.S. Virgin Islands, Guam, or the CNMI.

(4) Taxpayers are instructed to send Form 8898 to the Austin Campus. Route any Form 8898 received to the Austin Campus at:
Austin Campus
3651 South IH 35.
Mail Stop 4301 AUSC
Austin, TX 78741.

(1) Non-resident aliens are not subject to self-employment (SE) tax unless an international social security agreement in effect determines coverage under the U.S. social security system or they are bona fide residents of a territory. If a nonresident alien return is received claiming to owe SE tax, make the assessment using normal assessment procedures.

(2) Bona fide residents, including nonresident aliens, of the following territories are subject to SE tax:

• Puerto Rico

• Guam

• American Samoa

• U.S. Virgin Islands

• The Commonwealth of the Northern Mariana Islands

(3) Puerto Rican residents liable for SE tax must report and pay tax to the United States IRS on Form 1040-PR or 1040-SS. Part V or VI on Page 4 of the Form 1040-PR/1040-SS must be completed for SE Tax.

(4) SE tax is reported and paid to the United States IRS on Form 1040-SS for residents of:

• Guam

• American Samoa

• U.S. Virgin Islands, and

• The Commonwealth of the Northern Mariana Islands

(5) Additional information about self-employment tax, as applicable to each U.S. territory, is contained in subsequent chapters.

(6) For 2024 the self- employment tax deduction is 7.65 percent (1/2 the SE Tax rate).

• 6.2 percent is social security

• 1.45 percent is hospital insurance (Medicare)

(7) For 2024, the self-employment tax rate is 15.3 percent;

• 12.4 percent for social security tax

• 2.9 percent for hospital insurance (Medicare)

(8) The maximum net earnings subject to social security is $168,200 in 2024. The maximum net earnings subject to the Medicare portion remains unlimited.

(1) While the income tax rules are coordinated for an individual who is a bona fide resident of a territory, individuals are still subject to U.S. self-employment tax and that tax is payable to the IRS.Form 1040-PR and Form 1040-SS are filed by taxpayers residing in Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands or the Commonwealth of the Northern Mariana Islands (CNMI) to:

1. Report net earnings from self-employment and pay self-employment taxes

2. Pay any household employment taxes (reported on Schedule H or H-PR)

3. Claim excess social security tax withheld (can be used in lieu of filing Form 843)

4. Pay any employee social security and Medicare tax on unreported tips, wages from an employer with no social security or Medicare tax withheld, or uncollected employee social security and Medicare tax on tips or group term insurance

5. Claim the Refundable Child Tax Credit (only qualified bona fide residents of Puerto Rico) for 2021.

6. Claim the Additional Child Tax Credit (available only to qualified bona fide residents of Puerto Rico) for years before and after 2021

7. Report and pay the Additional Medicare Tax

(2) Form 1040-PR and Form 1040-SS are 2 page returns with two parts :

• Part I (Total Tax and Credits)

• Part II (Bona Fide Residents of Puerto Rico Claiming Additional Child Tax Credit). For tax year 2021, bona fide residents of Puerto Rico claimed the Refundable Child Tax Credit.

(3) For tax year 2023 only, the Refundable Child Tax Credit (RCTC) is claimed directly on the Form 1040-PR, or Form 1040-SS.

(4) The RCTC is entered on Part I, Line 9 of the 2023 Form 1040-PR and 1040-SS .

(5) When RCTC is claimed, the taxpayer’s city and U.S. Territory residence must be present on the document to verify residency in Puerto Rico. If not in Puerto Rico, disallow the RCTC using letter 105C and formal claim rejection procedures.

(6) The filing status is used to accurately compute the RCTC. Five filing statuses are available on the Form 1040-PR or Form 1040-SS. They are:

• Single

• Married filing jointly

• Married filing separately

• Head of Household

• Qualifying Widow(er)

(7) Dependent information from Part 1, line 2, Qualifying Children, is used to compute the child tax credit.

(8) Schedule 8812 is not required, but the filer must include the qualifying child or children's names, SSN and relationship on the Form 1040-SS or Form 1040-PR.

(9) There must be at least one qualifying child for the RCTC.

(10) The instruction booklets for Form 1040-PR and Form 1040-SS contain the specific guidelines for this credit. Do not use Publication 17.

(11) For tax year 2020 a new line 11 is added to enter the deferral of self-employment and household employment taxes as permitted by Section 2302 of the CARES Act (PL 116-136). The instructions, and a worksheet to be included in the instructions, will be used to calculate the deferral reported on line 11.

(12) For tax year 2021 line 11 is designated for Credit for qualified sick and family leave wages

(13) Duplicate filing conditions may result from U.S. Virgin Island bona fide resident information returns posting to Form 1040-SS accounts, or vice versa. Follow procedures in IRM 21.8.1.7.11 for processing resultant CP36 notices.

(1) Employers in Puerto Rico, the U.S. Virgin Islands and the other U.S. Territories pay their social security tax and Medicare tax to the U.S. Government on Form 941-SS, or Form 941-PR .

(2) If the employee works for two or more employers during the same calendar year and the total social security tax withheld is greater than the maximum amount for the year, the excess social security tax withheld can be claimed on Form 1040-PR or Form 1040-SS. Employees are encouraged to file these returns to claim refund of excess social security tax withheld from two or more employers.

(3) When an individual taxpayer is claiming excess social security tax, withheld from two or more employers, but does not have a Form 1040 filing requirement, a Form 843 claim can be filed.

(4) The Form 843 claim or Form 1040-SS or 1040-PR must have a withholding statement attached:

• Form W-2

• Form W-2 AS

• Form W-2 CM

• Form W-2 VI

• Form W-2 GU

• Form 499R-2/W-2 PR or

• A letter to substantiate all credits attached

(5) Please see IRM 21.6.3.4.2.4, Excess Social Security and RRTA Tier I Tax Credits , and IRM 21.6.4.4.18, Additional Medicare Tax, to calculate the correct amount of excess social security tax withheld.

(6) Excess social security tax claims are processed as "Territory" claims when the taxpayer is not required to file a U.S. tax return, and as "Domestic" claims when required to file a U.S. tax return.

(7) Territory Claims:

1. Most taxpayers filing excess social security tax claims are not required to file a U.S. tax return. However, Form 1040-SS or 1040-PR can be used, as there is now a provision to report excess social security tax in Part 1, Line 8 on these returns.

2. When the taxpayer is not required to file a U.S. return, process the claim as noted in paragraph 8, below.

(8) Processing Territory claims:

1. Check the Master File (MF), using CC TXMOD or CFOL, for the possible filing of a return.

If ...	Then ...
A return is on the MF	Verify that the excess social security tax has not been previously refunded.
The refund has not been previously allowed but a return is on MF	Allow the refund, adjust the account using a TC 290.00, Reason Code 055, source Code 1 . Input Credit Reference Number 252 for the amount of the excess social security tax. Note: Input an override code of "N" on Command Code ADJ54.
There is no record of a return on the MF	Check the Automated Non-Master File (ANMF) system to determine if a claim is previously processed. If you do not have access to the ANMF, see your lead or manager for help.
A refund has been previously issued	No consider the claim. Issue a 916c letter explaining to the taxpayer their refund had been previously allowed. Follow all other procedures in IRM 21.5.3.4.6.3, No Consideration Procedures.
A refund has not been issued and there is no return posted on MF	Process the claim, by doing the following: Prepare Form 1040-SS based on the information provided by the claimant. Ensure the proper entity information is entered on the dummy return. Enter the excess social security on part 1, line 8 of the Form 1040-SS On the signature line enter "signature on attached claim, do not detach" Maintain the signed Form 843, or taxpayer claim in the CII data base. Send completed Form 1040-SS for processing, attach the claim containing the taxpayer signature.

(9) Domestic Claims:

1. Excess social security claims are processed as domestic when the taxpayer is liable to file a U.S. tax return.

2. The adjustments are done on the Master File using IDRS.

3. Normal interest is allowed when processing these claims.

   Note: Normal interest includes consideration of IRC 6611(e)(2) (i.e., amended claims date processing). See IRM 20.2.4, Overpayment Interest.

(10) Processing Domestic claims:
Research the Master File, using CC TXMOD and/or CFOL, for the tax return consistent with the claim filed.

(1) Public Law No. 111-97, 123 Stat. 3007 (2009) established the Military Spouses Residency Relief Act, (MSRRA).

(2) MSRRA was enacted on November 11, 2009 and applies to all taxable years 2009 and subsequent.

(3) MSRRA applies to certain spouses of active duty service members (civilian spouses) who:

• Were away from their residence or domicile (tax residence) in one of the 50 States or the District of Columbia solely to be with the service member spouse serving in compliance with military orders at a military duty station in American Samoa, Guam, the Northern Marianna Islands, Puerto Rico or the U.S. Virgin Islands.

• Supported their tax residence in one of the 50 States or the District of Columbia.

• Kept the same tax residence as a service member spouse.

(4) MSRRA also applies to civilian spouses who:

• Were away from their tax residence in one of the U.S. territories solely to be with the service member spouse serving in compliance with military orders at a military duty station in one of the 50 States or the District of Columbia.

• Maintained their tax residence in one of the U.S. territories under MSRRA.

• Maintain the same tax residence as a service member spouse.

(5) Notice 2010-30 provided certain civilian spouses claiming MSRRA relief with the following:

• For eligible civilian spouses claiming tax residence in a State or the District of Columbia under MSRRA, an extension of time through October 15, 2010 for paying the amount of tax shown on a federal income tax return for the tax year ending December 31, 2009.

• For eligible civilian spouses claiming tax residence in a U.S. territory under MSRRA, a refund of federal income taxes paid to the IRS by civilian spouses meeting certain criteria.

(6) Notice 2011-6 dated April 8, 2011, extends the relief and procedures under Notice 2010-30 to tax year 2010. Notice 2012–41 further extends the relief set forth in Notice 2010-30 to 2011 and subsequent years.

(7) Under Notice 2012-41, such civilian spouses may be eligible for an extension of time to pay their income tax to October 17, 2012 for the 2011 tax year. For subsequent tax years, the same procedures will be adjusted for the correct filing date. To receive the extension taxpayers should mark "MSRRA" in red ink at the top of their returns and include the Form W-2, or equivalent that they received from their employers in the U.S. territory where they worked with their returns. Civilian spouses must mail the forms to the IRS Service Center shown in the Form 1040 instructions.

(8) Pursuant to IRC 303(a)(2)(B) of the Veterans Benefits and Transitional Act of 2018, the spouse of a service member may elect to use the same residence for purposes of taxation as the service member regardless of the date on which the marriage of the spouse and the service member occurred.

(9) Civilian spouses filing married filing separately will also attach the following declaration:

(10) Taxpayers present and working in one of the 50 States or the District of Columbia and claiming a tax residence in one of the territories may file a claim for refund. The refunds will be for income tax withheld and remitted by their U.S. employers to IRS, or for estimated tax payments that the taxpayer remitted to the IRS . Taxpayers claiming a tax residence in one of the territories under MSRRA and seeking a refund will:

• Complete the correct Form 1040 and mark "MSRRA" in red ink on the top of the return.

• Attach the statement signed under penalties of perjury described in paragraph (9) above, verifying the taxpayer’s qualifications for relief under MSRRA, and

• Mail the Form 1040 and attachments to the IRS Service Center shown in the Form 1040 instructions.

(11) If civilian spouses who qualify under MSRRA call or submit correspondence requesting abatement of Failure to Pay penalties previously assessed for take the following actions:

• Research the account to verify a Failure to Pay Tax timely penalty is assessed.

• Secure an originally signed perjury statement described in paragraph (9), above from the civilian spouse or their authorized representative.

• When the perjury statement is provided, grant penalty relief for the Failure to Pay Tax Timely penalty and the amount of FTP penalty computed to the original extension date. Input transaction code 271 for the amount of the assessed penalty, use source code 1 and reason code 065.

(12) Refer to IRM 20.1.2.2.3.3.1, Relief for Certain Spouses of Military Personnel for more information.

(1) Pursuant to IRC 7654, the following guidelines and procedures are written to administer United States cover over of income tax to the governments of bona fide residents serving in the United States Military.

(2) The United States Defense Finance and Accounting Service (DFAS) and U.S. Coast Guard forward to the Territories Program Manager, a listing of all Active Duty Military Personnel who claim a U.S. territory as their State of Legal Residence, along with a list of reservists whose units are in the territories. This listing includes the name, SSN, tax year, amount of military pay, and amount of tax withheld.

(3) The Territories Program Manager reviews the listings, separates them by territory and forwards them to the PAMC Planning and Analysis Staff. The PAMC Planning and Analysis Staff Analyst then forwards the listings to the international Accounts Management Department for processing.

(4) The international Accounts Management Department researches each account identified on the listing for the presence of a TC 150.

(5) Use the following chart for determining the tax accounts to include in the cover over.

(6) If the account shows a jointly filed return of a military employee and their non-military spouse, an allocation may be necessary.

(7) Cover over only the portion of the tax on the joint return attributable to the income of the military spouse. Do not cover over the portion of the tax attributable to the non-military spouse. To allocate the tax to be covered over, divide the income attributable to the military spouse by the total income on IMFOLR. Multiply the resulting percentage by the net tax on IMFOLT for the joint account. The result is the amount of tax to be covered over on the joint account.

(8) Do not cover over tax on income earned that is not for services performed for the armed forces (for example, employment at a retail establishment in the United States prior to or subsequent to the military service in the same year).

(9) If self-employment tax and/or unreported tip income is present, do not abate the self- employment tax or unreported tip income portions.

(10) Upon completion of all research, prepare a "Non-Filer Listing" showing the names, SSN's and withholding amounts for accounts where it is determined in step (5) that there is no return on file. Send the completed "Non-Filer Listing" to the Territory Program Manager through the PAMC Planning and Analysis staff prior to the input of any account adjustments.

(11) Input all abatements using FLC 66, IRS Received Date (use current date), Category Code "ISPJ ", Source Code 3, Reason Code 036 (Tax Credits), Hold Code 4, and in remarks notate "SD-Military cover over."

(12) Every account identified on the list must have an annotation on the DOD listing:

1. The amount of the cover over, or

2. The explanation of why there is no cover over. The key is as follows:

(13) Every account where tax is abated requires a transfer of the credit from the individual's account to the specific territory general ledger account. This transaction requires the preparation of Form 3809.

(14) Request for Accounting to number the Form 3809 using the Blocking Series specified for the territory that you are transferring funds for taxes paid. See IRM 21.8.1.5.1 (5).

(15) Complete the Debit Portion of Form 3809 as follows:

• Name and Address box - The individual's entity information

• TIN - The individual's SSN

• MFT - 30

• Check the MF box

• Tax period - Tax period being debited

• Transaction date - Current date

• 1st TC (Transaction Code) - TC 820

• Debit Amount - TC 291 amount or available credit

  Reminder: Consider previously assessed penalties and interest affected by the adjustment action. Any decrease in penalties or interest paid, must be added to the overpayment amount. In addition, unassessed accruals of penalty and/or interest may reduce the overpayment amount.

(16) The total amount of the duplicate military cover overs and adjustment corrections (IRM 21.8.1.5.8.2) must be deducted from the amount covered over to the territory.

(17) Complete the Credit Portions of Form 3809 as follows:

1. Name and address box - specify the territory and "6900 Account"

2. Check the NMF Box

3. Transaction date - current date

4. 1st TC (transaction code) -TC 700

5. Credit amount - TC 291 amount or available credit (whichever is less)

(18) The Explanation Box must read "Military Cover Over - territory name."

(19) The package sent to Accounting must include the following:

• Forms 3809

• Adding machine tape showing individual Form 3809 amounts including the total

• Amount column totaled and noted on the DOD listing

  Note: Amounts on the adding machine tape and the DOD listing must match.

• Clip Forms 3809, DOD listing and adding machine tape together.

(20) When all Forms 3809 are completed and totaled, return all DOD listings and the individual Forms 3809 to the Manager for review.

(21) After review, prepare one master refund and a cover letter listing the amount of the cover over transmittal and any repayments.

(22) Each military cover over must include deposit routing information. A sample of this deposit form can be found as an exhibit in revisions to this IRM prior to 1-1-2006. If this information is missing, correspond with the U.S. Territory Program Manager for routing instructions.

(23) Place a monitoring control under IDRS profile number 0533311112 on the accounts to await the posting of the TC 820 amounts. Check the weekly CCA/42/43 (ZERO OVERAGE LISTING) to ensure that by reviewing the columns, the " -K" Freeze is still reflected in the "BOC CLC FREEZE CODES" column, and the "MF MODULE BALANCE AMT" column shows a credit. If these two items are not present on the listing, it is possible that an erroneous refund of the module credit balance occurred prior to the posting of the TC 820 debit. Further research of the account is necessary if the CCA/42/43 zero overage listing items have changed in these columns, see IRM 21.4.1.5.10, Refund Intercept Command Code NOREF with Definer P.

1. If credit release occurs and the TC 846 has not yet been issued (check 23C date of refund), initiate refund intercept procedures included in IRM 21.4.1.5.10, Refund Intercepts CC NOREF with Definer P.

2. If the refund is not stopped, send Letter 510C to the taxpayer requesting return of the refund check.

3. Coordination with the unpostable area is necessary as the TC 820 will not post if the TC 846 is not intercepted. CAUTION: Monitor until the TC 820 is posted.

Note: Local procedural deviations may need to be negotiated if taxpayer does not return the erroneous refund. Bring this to the managers' attention for coordination with the Planning and Analysis Staff for resolution.

(1) The United States Defense Finance and Accounting Service (DFAS) and U.S. Coast Guard forward to the Territories Program Manager, a listing of all Active Duty Military Personnel who claim Guam as their State of Legal Residence, along with a list of reservists in the territories. This listing includes the name, SSN, tax year, amount of military pay, and amount of tax withheld.

(2) Pursuant to IRC 7654, the Service must cover over (transfer) the net withholding on these individuals to the respective territory treasury on an annual basis. After the listing is received, it is reviewed by the Territory Program Manager and forwarded to the international Analyst on the Accounts Management Planning and Analysis Staff at the Philadelphia IRS Campus.

(3) The Department of Defense will transmit the listing of state of legal residence personnel no later than six months following the close of the wage- earning year. PAMC will commence research by November 1st with a target completion date of January 31.

(4) The tax amounts shown on the listing are verified against IRS transcripts and the net withholding is calculated. Do not make any adjustments to the individual taxpayer accounts. Forward the net totals, along with documentation to establish an audit trail, to the Deputy Commissioner, International (LBI). Any accounts that are not found on the Master File get reported back to the Deputy Commissioner, International through the Territories Program Manager for forwarding to the Guam Department of Revenue and Taxation (DRT) to match against their filing records.

(5) DRT provides verification (transcripts) of all taxpayers that they find on their file. The Territory Program Manager will add the gross amount of withholding reported on the DFAS and Coast Guard listings for those TP's who filed with DRT to the net calculated by PAMC. This amount is then reported by the Territory Program Manager to the Chief, Revenue Accounting Systems and is included in their annual certification to the Department of Interior.

(1) Use the following chart to determine the taxpayer's filing requirement for income tax and self-employment tax and Foreign Tax Credit. Publication 570, Tax Guide for Individuals with Income from U.S. Possessions, is also helpful.

(2) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡, to the IMF Examination Classification unit as CAT A claims. Follow local routing procedures and include CC DDBKD prints for each dependent listed on the Form 1040-PR.

(1) Taxpayers required to file both a U.S. income tax return and a Puerto Rico income tax return may not claim deductions or credits applicable to exempt PR income on their U.S. income tax return.

(2) Deductions which do not specifically apply to any particular type of income are allocated between the PR sources and income from other sources to find the amount of deductions claimed on their U.S. tax return.

(3) The following are examples of deductions which do not definitely apply to a particular type of income:

• Alimony payments

• Standard deductions

• Certain itemized deductions (i.e., medical expenses, charitable contributions, real estate taxes and mortgage interest)

(4) Use the following formula to determine the allowable portion of the deductions.

(5) Personal exemptions are allowed in full.

(6) Any U.S. citizen who must report Puerto Rico source income on their U.S. tax return may claim a Foreign Tax Credit on the U.S. return, to the extent computed on Form 1116 for income taxes paid to Puerto Rico on Puerto Rico source income. Form 1116 is attached to the U.S. tax return, Form 1040. Pursuant to the terms of an agreement with the United States (5 U.S.C. Section 5517), withholding taxes for Puerto Rico resident who are U.S. government employees are paid directly to Puerto Rico. For more information refer to Pub 80, (Circular SS), Federal Tax Guide for Employers in US Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands.

(7) When computing the Foreign Tax Credit, taxpayers who have both excludable and non-excludable income from Puerto Rican sources must reduce the foreign tax paid or accrued by the taxes allocable to the exempt income. Use the following formula to determine the reduction in foreign taxes.

(8) The only withholding tax credit that is allowed on a U.S. income tax return filed by a bona fide resident of Puerto Rico is that paid to the United States. Taxpayers may also be allowed a Foreign Tax Credit on their U.S. income tax return for income tax paid to a U.S. territory.

1. The only withholding that is allowed is the withholding on W-2s that have an address in one of the 50 states or the District of Columbia.

2. If the address of the employer is not in one of the 50 states or the District of Columbia, disallow the credit.

(9) Consider social security tax paid on a Puerto Rico W-2 when verifying excess social security tax claimed on Form 1040.

(1) A child tax credit is allowed for each qualifying child under the age of 17 at the end of the year. For tax year 2021, the credit is allowed for each qualifying child under the age of 18 at the end of the year.

(2) The Child Tax Credit may be both a non-refundable credit and a refundable credit. Refer to IRM 21.6.3.4.2.8, Additional Child Tax Credit for information on Schedule 8812, Credits for Qualifying Children and Other Dependents.

(3) The credit has different rules depending on the tax year. For tax year 2021:

• credit is $3,000 for children ages 6 through 17 and $3,600 for children ages 5 and under by December 31, 2021

• the entire credit is refundable

• no earned income is required

• the qualifying child must have an SSN issued before the due date of the return (including extensions)

• the taxpayer and spouse, if filing jointly, must have a valid SSN or ITIN issued by the due date of the return (including extensions)

• the total of the Child Tax Credit is phased out by $50 for each $1,000 (or fraction thereof) the AGI exceeds $150,000 in the case of a joint return/qualifying widow(er), $112,500 if HOH, $75,000 for all other filing statuses

• when the 2021 increased CTC amount is reduced below what would have otherwise been applicable based on prior legislation, then the rules for tax years 2018-2020 and 2022-2025 apply (as shown below)

• Form 1040 Schedule 8812 is required to claim CTC.

• the credit is $2,000 per child, $1,400 is refundable

• the earned income threshold for making the credit refundable is decreased from $3,000 to $2,500

• the child must have an SSN issued before the due date of the return

• the credit is phased out by $50 for each $1,000 or fraction thereof the AGI exceeds $400,000 in the case of a joint return, $200,000 for all other filers.

• credit is $2,000 per child, up to $1,500 is refundable

• the qualifying child must have an SSN issued on or before the due date of the return (including extensions)

• the taxpayer and spouse, if filing jointly, must have a valid TIN issued on or before the due date of the return (including extensions)

• the total of Child Tax Credit and Credit for Other Dependents is phased out by $50 for each $1,000 (or fraction thereof) the AGI exceeds $400,000 in the case of a joint return, $200,000 for all other filing statuses

• Schedule 8812 is required for those taxpayers claiming the Additional Child Tax Credit (ACTC).

• the credit amount is $1,000 per child

• the child must have a valid ITIN, SSN, or ATIN. For returns / amended returns filed after Dec. 18, 2015, it is required that the TIN is issued by the due date of the return (including extensions)

• the credit is phased out by $50 for each $1,000 that the AGI exceeds $110,000 for married filing jointly; $55,000 for married filing separately; and $75,000 for all other others.

(4) The Child Tax Credit reduces the amount of tax owed by the taxpayer. In addition, if the credit exceeds the tax liability, U.S. Government employees in Puerto Rico can claim the difference as a refund. Refer to the Form instructions and in Publication 972, Child Tax Credit for details on how to compute the credit.

(5) To claim the Child Tax Credit, the taxpayer must file Form 1040.

(6) U.S. Government employees in Puerto Rico are able to reduce their Federal tax liability by the amounts listed in paragraph 3 above for each qualifying child under 17 years of age (under 18 years of age for tax year 2021). A qualifying child for this credit is someone who:

• Is claimed as a dependent on the tax return

• Is a son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half- brother, half- sister, or a descendant of any of them (for example, your grandchild, niece, or nephew). A foster child is any child placed with you by an authorized placement agency or by a judgment, decree, or other order

• Is under the age of 17 (under the age of 18 for tax year 2021) at the end of the tax year

• Was a U.S. citizen, U.S. national, or a U.S. resident alien.

  Caution: The Child Tax Credit is not available on Form 1040 to bona fide residents of PR who are not U.S. Government employees.

(7) The "Protecting Americans from Tax Hikes (PATH) Act of 2015" signed into law on December 18, 2015 prohibits an individual from retroactively claiming the child tax credit by amending (or by filing an original or supplemental return) for any year in which the taxpayer, spouse, or qualifying child did not have a valid TIN issued on or before the due date, or extended due date of the return. This provision applies to any return, or claim filed after December 18, 2015, as well as math error responses received after that date. For more information of processing these claim types refer to IRM 21.6.3.4.2.8.2, ACTC Adjusting The Credit.

(1) Under the American Rescue Plan (ARP), the child tax credit has been enhanced for 2021

(2) Bona Fide residents of Puerto Rico can claim the Refundable Child Tax Credit (RCTC):

• if they didn't work and if they received no income. They are not required to have social security or Medicare taxes withheld, or have paid self-employment (SE) tax

• if they only have one qualifying child

• may receive an enhanced credit amount of up to $3,600 for a qualifying child under age 6 and up to $3,000 for a qualifying child over age 5 and under age 18.

(1) Bona fide residents of Puerto Rico generally do not pay income tax to the U.S. on income sourced in Puerto Rico, however they do pay self- employment tax to the United States on income from a Puerto Rico trade or business.

(2) Residents of Puerto Rico with income from a trade or business from sources within Puerto Rico, not required to file Form 1040 (U.S.), must file Form 1040-PR, Planilla Para La Declaracion De La Contribucion Federal Sobre el Trabajo por Cuenta Propia, or Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico), with the United States to report self-employment income and pay self- employment tax, in addition to the income tax return filed with the Government of Puerto Rico.

1. The Form 1040-PR and the Form 1040-SS resemble a combination of Form 1040 Schedules C, F, SE and Schedule 8812. It also has a provision in Part I, line 4 to enter the total tax from Anexo H-PR.

2. See IRM 21.8.1.5.5 for information on the use of Form 1040-PR and Form 1040-SS.

(3) Bona fide residents of Puerto Rico, who have both U.S. source income and self-employment income of $400 or more, must file Form 1040 to report U.S. source income and attach Schedule SE to report self-employment tax.

(4) When the taxpayer files both Form 1040 and Form 1040-PR,

1. If the Form 1040 posted first, do not change ENMOD when the account is adjusted to assess the Form 1040-PR.

2. If the Form 1040-PR posted first, change the ENMOD to the information on the Form 1040, when the 1040 is processed.

(5) The posting of an amended Form 1040-PR generates the following CP notices:

• CP29, if an original return is not posted

• CP36, if an original return is posted

(6) Taxpayers who file U.S. Form 1040 and exclude self-employment income reported on either the Form 1040-PR or 1040-SS from their gross income, cannot take the deduction of one-half of the self-employment Tax on Form 1040.

(1) The Social Security Domestic Employment Reform Act (SSDERA) of 1994 provides that domestic service employment taxes are now collected with income tax rather than employment taxes.

(2) Domestic employees under the age of 18 are excluded from coverage if being a "Domestic Employee" is not their principal occupation. This provision is effective regardless of the amount of wages paid to the employee under 18.

(3) A domestic employee receiving less than $2,700.00 from an employer for tax year 2024 is not subject to Household employment taxes. The thresholds for prior years are as follows:

1. $2,600 for 2023 and $2,400 for 2022.

(4) Wages paid are reported on the domestic employers Schedule H/H-PR attached to Form 1040, Form 1040-NR, Form 1040-PR, Form 1040-SS, or Form 1041. Domestic employers not required to file a Form 1040, Form 1040-NR, Form 1040-PR, or Form 1040-SS must file a "stand-alone" Schedule H/H-PR.

(5) Employers reporting the additional tax with their individual taxes report the tax on schedule 2 and line 23 of Form 1040, line 23b of Form 1040-NR, or line 4 of Form 1040-SS.

1. Include this additional tax with the TC 150 amount.

2. Use the right Blocking Series and RC 050 to adjust employment taxes from Schedule H/H-PR.

   Caution: See IRM 21.6.4.4.8, Schedule H, Household Employment Taxes, for more instructions.

(6) Social Security Domestic Reform Amendments (SSDERA) of 1994 requires the Schedule H/H-PR be filed for a calendar year.

(7) Employers who pay wages for employment, other than domestic employment, may choose to pay the employment taxes for the domestic employment with the employment taxes for the non-domestic employment (e.g., Form 941).

(8) See IRM 21.7.2.3.4, Deposits, for deposit requirements.

(1) Schedule H/H-PR has four parts:

1. Part I - Social Security, Medicare, and Federal Income Taxes (Contribuciones al Seguro Social y al Medicare);

2. Part II - Federal Unemployment (FUTA) Tax (Contribucion Federal para el Desempleo (FUTA);

3. Part III - Total Household Employment Taxes (Total de Contribuciones sobre el Empleo de Empleados Domesticos); and

4. Part IV - Address and Signature (Direccion y Firma). Part IV is completed ONLY if the employer is not required to file a tax return or is filing a Form 1041.

(2) A schedule H/H-PR must be present if an amount is present in Part I, Line 4 of the Form 1040-PR/1040-SS.

(3) Schedule H/H-PR may be filed by both the Primary and Secondary taxpayers for international Form 1040 filers.

(4) Use the Item Adjustment Code chart below to determine the correct reference numbers to use to adjust Part I, Social Security, Medicare, and Federal Income Taxes.

(5) FUTA State Codes currently valid with MFT 10 must be input for adjusting the primary taxpayer information. The FUTA State Code is a three- character code made up of T (for RN 997) or W (for RN 998) followed by a two- character state.

(6) The three character State Code input is systemically converted to the applicable reference number.

(1) The interest-free provisions for adjustments on employment taxes are in effect for errors discovered on the Schedule H/H-PR. See IRM 20.2.10.5.3, Household Employment Taxes, for more information. The provisions apply to errors discovered on or after January 1, 2009. See Treas. Reg. 31.6205-1, 31.6413(a)-1, and 31.6413(a)-2. Additional information is also found in TD 9405, Employment Tax Adjustments and Publication 926, Household Employer's Tax Guide.

1. The interest-free provisions may apply to adjusted returns and original returns in certain cases of worker mis-classification. The adjustment to Schedule H is made by filing a Form 1040X with a corrected Schedule H (together being an adjusted return), or just an amended Schedule H if the employer has no Form 1040 filing requirement.

2. Taxes imposed under the Federal Unemployment Tax Act FUTA (Part II, Schedule H) are not subject to the interest-free provision. As a result, when adjusting Schedule H taxes, it is sometimes necessary to use both TC 298 (for interest -free income and FICA adjustments, Part I, Schedule H) and TC 290 for the FUTA portion.

3. Underpayment adjustments to income tax withholding, social security and Medicare taxes can be made interest-free if reported by the due date of the return for the return period the error is ascertained.

4. Generally, adjustments to income tax withholding and Additional Medicare Tax withholding may only be made for quarters during the same calendar year. Adjustments to amounts reported as income tax or Additional Medicare Tax withheld in a prior calendar year may only be made to correct an administrative error. An administrative error occurs if the amount entered on Schedule H/H-PR as income tax or Additional Medicare Tax withheld is not the amount the employer withheld.

   Note: Income taxes are only required to be withheld from wages for domestic employment if the employer and employee agree to the withholding.

(2) For Schedule H/H-PR, the due date of the period the error is ascertained is the due date of the income tax return for the period the taxpayer discovered the error.

1. An error is ascertained when the employer has sufficient knowledge of the error to correct it.

2. For underpayment errors discovered on or after January 1, 2009, the provisions require that the underpayment be paid at the time the adjusted return is filed or interest will begin to accrue. The interest computation date used is the received date of the adjusted return.

3. Ascertained dates are not needed for tax decreases.

4. A statement (could be an amended Schedule H) must be attached to the return on which the adjustment is reported explaining the correction and designating the return period in which the error is ascertained and the return period to which the error relates.

5. Use the following chart to help in determining when to use a TC 298.

If...	Then...
An ascertained date is provided and the amended Schedule H/H-PR is filed by the due date of the return for the return period, in which the error is ascertained	Assess the increase using TC 298 with an interest computation date.
The ascertained date is not provided	Contact the taxpayer by telephone to obtain the information. Note: Do not correspond for the ascertained date unless corresponding for other information.
The ascertained date is not provided and is unable to be secured	Assess the increase using a TC 290.

Note: When contacting taxpayers, follow procedures in IRM 21.1.3.2.3, Required Taxpayer Authentication, for purposes of identification and to prevent unauthorized disclosures of tax information. Also, use caution when leaving information on answering machines or voice mails. (See IRM 11.3.2.6, Methods for Communication of Confidential Information.)

(3) Interest-free adjustments provisions.

(1) When processing a loose Schedule H or H-PR, use the procedures in Household Employment Taxes - IMF Procedures (see IRM 21.8.1.6.6) and in Schedule H/H–PR see IRM 21.8.1.6.7) in conjunction with procedures outlined in IRM 21 listed below:

(1) Form 8689, Allocation of Individual Income Tax to the U.S. Virgin Islands, is used to determine the amount of tax payable to the U.S. Virgin Islands.

(2) The Form 8689 must be attached to each copy of Form 1040. See IRM 21.8.1.7.

(3) On Form 8689 the calculation entry from line 36, in Part III, "Allocation of Tax to the U.S. Virgin Islands," is not always brought forward to Form 1040. A comparison to Line 41 in Part IV, "Payments of Income Tax to the U.S. Virgin Islands", must first be done, and the lesser of the two amounts combined with the entry on line 44, and brought forward to Form 1040 next to line 18 with the notation "Form 8689." This prevents the allocation amount from being more than the amount of payments/credits paid to the U.S. Virgin Islands.

(4) The credit for taxes paid to the U.S. Virgin Islands is nonrefundable. Use TC 29X with Reason Code 063 (U.S. Virgin Islands Credit on Form 8689) when applying or adjusting the tax. Do not credit as a TC 766 at any time. (These instructions apply to NON-PIPELINE functions ONLY.)

(1) Individual taxpayers may claim estimated tax (ES) credits or credit elect on the return they are required to file, regardless of the jurisdiction (United States or Virgin Island) in which the return is filed. Provisions written in the law may provide for the "cover over" of these credits and other credits on the account.

(2) Individual taxpayers that have a U.S. tax liability and request to have credit elect or estimated tax credit held by the U.S. Virgin Islands transferred to the U.S. must:

1. First file their U.S. tax return, and

2. Submit a formal (written) request to the United States IRS for credit transfer from the Virgin Islands Bureau Of Internal Revenue (BIR).

3. Once the taxpayer has complied with (2) a) and b), forward the case to the technician having authorization to contact the U.S. Virgin Islands

4. The employee having authorization to contact the U.S. Virgin Islands must follow the instructions in Cover Over of Credits to the U.S. Virgin Islands on Repayment Cases. See IRM 21.8.1.7.6.

(3) Individual taxpayers that do not have a U.S. tax liability, but request to have United States ES credits or a credit elect transferred to satisfy their U.S. Virgin Islands liability, must:

1. Submit a written request to the Virgin Islands BIR for credit transfer from the U.S. IRS.

2. The BIR will submit a copy of the U.S. Virgin Islands return to verify filing

3. Once the documentation in a) and b) above is received, refer the case to the international Unit where the U.S. Virgin Islands cases are worked.

4. The employee having authorization to contact the U.S. Virgin Islands must follow the instructions in Cover Over of Credits to the U.S. Virgin Islands on Special Cases. See IRM 21.8.1.7.6.

(4) Requests from taxpayers, their authorized representatives, or claims requesting credit transfers from the U.S. Virgin Islands, must be forwarded to the international Department where the U.S. Virgin Islands cases are worked.

(5) Citizens and residents of the U.S. Virgin Islands with income from a trade or business from sources within the U.S. Virgin Islands, who do not file a U.S. Form 1040, must file Form 1040-SS, U.S. Self-Employment Tax Return.

1. The Form 1040-SS resembles a combination of Form 1040 Schedules C, F, SE and Schedule 8812. It also has a provision in Part I, line 4 to enter the total tax from Schedule H. The Form 1040-SS is now used for more than just reporting of self-employment income and paying self-employment tax.

2. Bona fide residents of the U.S. Virgin Islands do not generally pay income tax to the United States on income, regardless of source. Their income tax return is filed only with the government of the U.S. Virgin Islands. However, their self-employment tax return must be filed with the IRS.

(6) Individual taxpayers claiming the Schedule H tax that are not required to file Form 1040, but file Form 1040-SS, must report the tax on Form 1040-SS.

(7) IRM 21.6.4.4.8.10 contains procedures for processing individual taxpayer's Schedule H tax when the individual is not liable to file the U.S. Form 1040. Also, Part IV of the Schedule H must be completed.

(8) Individuals required to file Form 1040-SS may also be required to report and pay Additional Medicare tax on line 5.

(1) Citizens and residents of the U.S. Virgin Islands with income from a trade or business who do not file a U.S. Form 1040, must file Form 1040-SS, U.S. Self-Employment Tax Return to report self-employment income and pay self-employment tax (SE).

(2) Review the tax module to determine if SE tax is assessed on U.S. Virgin Island returns on the cover over listing with one-half of self-employment tax claimed on Page 1 of Form 1040, or if SE income is shown on the cover over return that shows a Form 1040-SS should be filed. Use the following table for case resolution guidelines.

(3) Payments for SE tax made to the BIR in error are returned to the taxpayer and the taxpayer is advised by the BIR that the Form 1040-SS must be filed with and paid to the IRS. Do not deduct these credits from the cover over.

(4) Consider statute issues when assessing SE tax on Virgin Island filers.

• The filing of an income tax return with the Virgin Islands starts the running of the ASED for tax periods and covered persons.

• The filing of a Form 1040-SS does not start the running of the ASED for Form 1040 income tax.

• Per Treasury Regulation 1.932-1(c)(2)(ii), an income tax return filed by a bona fide resident of the U.S. Virgin Islands (USVI) with the U.S. Virgin Islands Bureau of Internal Revenue (BIR) will be deemed to be a U.S. income tax return for purposes of IRC 6501(a). An "income tax" return as provided in Treasury Regulation § 1.932-1(c)(2)(ii) includes the Form 1040-SS. Therefore, the statute of limitations period for assessing self-employment tax per IRC § 6501(a) begins the earlier of when a bona fide resident of the USVI files a Form 1040-SS with the IRS or files an income tax return with the BIR.

Note: See IRM 21.8.1.7.11 for definitions of covered and non-covered persons.

(1) Under IRC 932(c)(2), a bona fide resident of the U.S. Virgin Islands is generally required to report worldwide income to the U.S. Virgin Islands. A bona fide resident of the U.S. Virgin Islands, who fully reports and pays tax on their worldwide income to the U.S. Virgin Islands, and identifies the source of each item shown on the U.S. Virgin Islands return is not required to file a return with the IRS under IRC 932(c)(4).

(2) A bona fide resident of the U.S. Virgin Islands who has U.S. income tax withheld should contact the USVI tax department to determine whether they can claim a tax credit on their USVI return for income taxes paid to the IRS.

(3) The cover over of U.S. withholding that the U.S. Virgin Islands has allowed their taxpayers as a credit is accomplished through the cover over process. This process is performed in two phases.

(4) Pursuant to IRC 7654(a), the following guidelines and procedures are written to administer United States cover over of income tax to the government of the U.S. Virgin Islands in respect of U.S. Virgin Islands bona fide residents.

(5) In phase I, the Virgin Islands Bureau of Internal Revenue (BIR) sends a listing containing taxpayer identification information and amounts for cover over and, in some cases, amounts to be refunded directly to the taxpayers and/or transferred to the BIR, and a copy of pages 1 and two of the taxpayer’s USVI income tax return. Send these items to the Austin Submission Processing (SP) international Analyst in Planning and Analysis.

(6) The Austin Submission Processing international Analyst must hand carry the listings and tax return information to the pipeline coordinators/designees for processing. The U.S. Virgin Island received date should be stamped on the return. If it is not present, the IRS received date is entered.

(7) A copy of the list is made by the Submission Processing analyst and given to the Austin Accounts Management international Analyst.

(8) Austin Accounts Management receives a computerized U.S. Virgin Islands residents listing identifying bona fide residents of the U.S. Virgin Islands who have U.S. withholding, credit elects and/or estimated tax credits. The listing will contain two types of claims:

• Refund to Taxpayer (RT) Claims - These claims involve refunds paid directly to the taxpayer. Process these claims first to reduce interest paid.

• Refund to Virgin Islands (RV) Claims - These claims involve cover over to the Virgin Islands.

Note: RV claims may involve splitting a portion of the withholding to the taxpayer and a portion to the BIR.

(9) Work U.S. Virgin Islands returns having U.S. withholding credits submitted to the IRS for processing under the "U.S. Virgin Islands cover over" agreement. VI cover over returns are processed at the Austin Submission Processing Campus and are identified by a 21221 DLN.

1. The return is posted as a TC 150 .00.

2. No amounts are transcribed from the return.

3. The withholding credit is entered by Accounts Management prior to the preparation of the credit transfer Form 3809.

4. The TC 820 that transfers the tax credit from the individual taxpayer's account to the U.S. Virgin Islands via the U.S. Virgin Islands account is entered on Form 3809 and is numbered as 21258 with 050-059 Blocking Series.

   Note: In the Explanation Box on Form 3809, note the VI transmittal number and date of the transmittal. This notation is helpful if a duplicate TC 820 is posted and is covered over to the VI. See IRM 21.8.1.7.7 for repayment procedures if a duplicate credit goes to the VI.

(10) Tax Examiners trained on VI Cover Over must not adjust the taxpayer's account until:

1. The copies of the returns are received from Submission Processing.

2. A TC 150 .00 is posted in the account.

3. The credits in the tax module have been verified against the U.S. credits on the U.S. Virgin Islands listing.

4. The refund statute expiration date is calculated.

(11) Do not assess or cover over an account when the taxpayer filed directly with the IRS. Maintain a spreadsheet listing the name, TIN, tax period, and refund amount of all cover over requests that show a United States income tax filing. Submit the spreadsheet to the U.S. Territories Program Manager on a quarterly basis.

(1) Phase II begins with returns received in Accounts Management international from Submission Processing and the returns have posted to Master File. Control all cases on IDRS using Category Code ISPJ with the date the case is received in Accounts Management.

(2) Before processing cover over cases, check for outstanding balances (OBLs) on the taxpayer's other accounts. Only offset credit available for refund to a taxpayer to pay OBLs on that taxpayer's account(s). Do not offset any amount from the cover over payment to the Virgin Islands to cover outstanding taxpayer balances.

(3) Process RT claims with one adjustment.

1. Input TC 290 .00 and TC 806 for the withholding credit amount. Withholding WILL NOT be posted to these accounts on IDRS during pipeline processing.

2. Use Blocking Series 63, Reason Code 51 and a Hold Code 3.

(4) The processing of RV claims requires two adjustments.

1. First adjustment: Input TC 290 .00 and a TC 806 for amount of credit to be refunded to the taxpayer. Use Blocking Series 05, Reason Code 51, and a Hold Code 3 to prevent the issuance of a notice.

2. Second adjustment: Input a TC 290 .00 and a TC 806 for the cover over amount. Use Blocking Series 63, Priority Code 8, Posting Delay Code 1, and a Hold Code 4, to prevent the issuance of a notice or refund. The transfer will post as a TC 820.

3. Close the IDRS control base.

Note: Use withholding documents received from the BIR to validate the U.S. withholding amount. CC IRPTR is available for use to verify withholding for cases without paper documents and as a tool to help in researching payment documents. You DO NOT need to verify withholding using CC IRPTR.

(5) Prepare Form 3809 to transfer the cover over amount to U.S. Virgin Islands 4702 ledger account. Note the VI transmittal number in the explanation box of the Form 3809 and complete the form as follows:

(6) Maintain an IDRS control on the account in "M" monitoring status under the designated IDRS profile number xxxxx11111 (i.e., 0635311111). Monitor weekly CCA/42/43 (Zero Overage Listing) for holding of the credit freeze until the posting of TC 820 to ensure that erroneous refunds are not issued to the taxpayer. Monitor IDRS until the TC 820 posts.

(7) If the account freeze is released prior to the posting of the TC 820:

USVI Bureau of Internal Revenue
Attn: Yvonne Hughes, Disclosure Officer
6115 Estate Smith Bay Suite 225, St. Thomas, VI 00802
Phone (340) 715–1040 extension 4215
Fax (340) 774-2672

(8) Once the TC 820 posts, check to see if listing shows an amount due the taxpayer.

1. Check again for OBL’s before releasing and allow the computer to offset if the remaining credit in the account is to be refunded to the taxpayer.

2. Input TC 290 .00, Priority Code 8, Blocking Series 63, Hold Code 3 to release the remaining credit, if applicable.

3. Once all actions have posted, prepare cover over letter for the VI.

4. Close IDRS control.

(9) If there is already a posted return, a CP 36 generates:

1. The CP 36 is worked only by those designated to process cover over cases.

2. Check to see if TC 150 on the posted return reflects SE Tax.

If ...	Then ...
The taxpayer is amending SE tax amount	Adjust accordingly and reduce cover over amount to cover this balance before proceeding with cover over procedures.
SE tax is NOT assessed	Consider SE tax or any tax due to the U.S. and any EITC credits erroneously allowed on this return. Once net is calculated, only this amount is covered over to the VI. Notate difference on the listing. See IRM 21.8.1.7.3

Note: Do not offset any amount from the cover over payment to the Virgin Islands to cover outstanding taxpayer balances. However, Virgin Island credit can be applied to SE tax assessments in the same module. Notate the transmittal accordingly.

(10) Verify that there are no outstanding accounts which require either a cover over payment from the U.S. Virgin Islands or a repayment of an erroneous amount sent to the U.S. Virgin Islands. If either of these situations exist, continue with Cover Over Payments or Repayments from the U.S. Virgin Islands. See IRM 21.8.1.7.7.

(11) Prepare the letter to the U.S. Virgin Islands informing them of:

1. The amount of the cover over check

2. The Transmittal or Special number along with the credits being added to the current cover over listing (in accordance with procedures in Cover Over Payments or Repayments from the U.S. Virgin Islands). See IRM 21.8.1.7.7.

3. The amounts deducted for the agreed outstanding balances (in accordance with procedures in Cover Over Payments or Repayments from the U.S. Virgin Islands.) See IRM 21.8.1.7.7, and

4. Any discrepancies found with the return or listing

(12) Forward the cases and all documentation to the manager for review. After managerial review, forward the VI letter, along with copies of the listings, to the Refund Unit in the Accounting Branch. Also, efax a copy of the VI letter to the Program Manager, U.S. Territories Program, Tax Treaty Assistance and Interpretation Team, LBI, U.S. Competent Authority at (866) 814-5271.

(1) When handling a request to transfer estimated credits or credit elects to the U.S. Virgin Islands, the technicians who have authorization to contact the U.S. Virgin Islands must:

1. Secure a written agreement from the U.S. Virgin Islands indicating the amount of each account in question to confirm tax liability.

2. Once the U.S. Virgin Islands confirms the tax liability, prepare Form 3809 to transfer the credits to the U.S. Virgin Island 4702 ledger account. If a transmittal is available from the V.I., enter the transmittal number and date in the Explanation Box of Form 3809.

3. List the Virgin Islands case reference number and credit amount on the memo/letter.

4. Input TC 590 CC 21 to the taxpayer's account after the TC 820 posts.

5. These procedures must be used in conjunction with the instructions in U.S. Virgin Islands Cover Over Process. See IRM 21.8.1.7.5.

(1) Situations may arise that require the use of the following procedures to deduct credits from the cover over of tax to the U.S. Virgin Islands such as, but not limited to, taxes filed and erroneously paid to the U.S. Virgin Islands on the:

• Form 1040-SS

• Form 1040 Schedule H

• Duplicate amount covered over

(2) When notified by the U.S. Virgin Islands tax authority of a taxpayer having erroneously filed and/or paid their Schedule H or Form 1040-SS tax in the U.S. Virgin Islands:

1. The U.S. Virgin Islands informs the taxpayer of their requirement to file these forms in the United States.

2. Research to determine if the taxpayer has also filed the Form 1040-SS and/or Schedule H with IRS.

3. When the taxpayer has also filed with the U.S. and is in debit status, input a STAUP and coordinate the forwarding of the case to the person(s) working the U.S. Virgin Islands cover over. The instructions in (4) below explain how authorized personnel will credit the taxpayer's account.

4. When the taxpayer hasn't filed in the United States, request that the U.S. Virgin Islands forward the original Schedule H and/or Form 1040-SS to the Austin Internal Revenue Campus immediately and contact the authorized personnel to have the taxpayer's account credited.

(3) Situations or cases which require a cover over payment or a repayment from the U.S. Virgin Islands must be handled by employees having the disclosure authorization to contact the U.S. Virgin Islands. This authorization list is kept by Disclosure Office 7 and is updated yearly via a memorandum from that office.

(4) Authorized employees then:

1. Contact the U.S. Virgin Islands government to inform them of the situation

2. Keep copies of the listing or secure a print of the account containing the amount outstanding

3. Secure a written agreement from the U.S. Virgin Islands, identifying the amount of each account in question

(5) Once an agreement is reached, perform the following:

1. Maintain a list of the cases containing outstanding balances due until there is a cover over payment from which to deduct the outstanding balance.

   Note: It may not be possible to handle all the cases having an outstanding balance with one cover over payment, but resolve as many cases as possible with each subsequent cover over.

2. Prior to the posting of the U.S. Virgin Islands credit to the accounts, ensure that the credits weren't previously substantiated. If so, reverse the substantiation prior to posting the credit.

   Note: Credits substantiated by other IRS offices are posted as a TC 766, but may be a TC 760 posted by Accounting.

3. Prepare a Form 3809 for each account being credited. The credit (TC 700 with a TC 570) section of the Form 3809 must reflect the taxpayer's account information and the agreed upon amount. Stamp the name and address portion with the name and address of the correct territory along with a matching amount for the debit (TC 820).

(6) Deduct the total of the Forms 3809 crediting the taxpayer's accounts from the total of the individual Forms 3809, debiting the taxpayer's account. The difference, when the debit portion is higher, is the amount of the consolidated Form 3753.

(7) These procedures must be used in conjunction with the instructions in U.S. Virgin Islands Cover Over Process. See IRM 21.8.1.7.5.

(1) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(2) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(3) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(4) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(5) ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(6) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡≡ ≡ ≡ ≡≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(7) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(8) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(9) ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

(1) Certain situations may require the back-out of IRS returns. These can be claims requesting a change of bona fide residency from the United States to the Virgin Islands or where a copy of a VI return has posted to IDRS in error. These requests may also be in the form of "Certifications of Filings" received from the BIR. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

1. DO NOT zero out accounts where there is any United States income shown on the return. Forward these cases to:
   Philadelphia Accounts Management
   2970 Market St.
   Mail Stop 3-E17.143
   Philadelphia, PA 19104
   Employees authorized to contact the BIR for information will prepare these claims for Examination consideration. If within 90 days of the ASED, first send the case to the Statute function for prompt assessment.

   Note: Austin Accounts Management will process requests involving cover over.

2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

3. In cases where there is a Taxpayer Delinquency Investigation (TDI) or Underreporter Program (URP) activity on the account, do not refer the case to Examination or input a TC 590. Coordinate with the correct area.

(2) If there is a TIN mismatch when the cover over return is processed, use the following table for case processing:

(3) Returns filed with IRS in addition to cover over activity:

1. Send Transcript Delivery System (TDS) prints or copies of returns filed by taxpayers with the IRS prior to or subsequent to the posting of cover over returns to the BIR. Include these return copies or transcripts with the cover over transmittals returned to the BIR through the U.S. Territories Manager after the cover over is processed.

   Note: Input a TC 290 .00 to refile the return to release the duplicate filing freeze for any subsequent return that posts as a TC 976/977.

2. Do not cover over accounts where there is a return already posted on Master File for the tax period in question, other than a Form 1040-SS.

3. On copies of returns sent to the BIR, notate on the transmittal whether a refund is issued.

(4) Credit Discrepancies: In the case of credit discrepancies, only cover over to the amount available in the module and notate the cover over transmittal document accordingly.

(5) U.S. Virgin Islands cover over cases with an open TC 420

1. Returns submitted by the BIR for cover over may post to an account with an open TC 420 AIMS indicator. Follow instructions in Exhibit 21.5.10-1, Audit Information Management System (AIMS) STATUS CODE GUIDE - FIELD CASES, for case disposition.

   Note: Instructions in Exhibit 21.5.10-1 stating "advise the taxpayer" will be substituted with "notate on the cover over transmittal."

2. For cases that need to be routed to international Compliance in Philadelphia, notate on the transmittal document that the return is a U.S. Virgin Islands cover over return. Include instructions for the exam classifier to contact the person sending the case for information concerning the cover over process and refer them to IRM 21.8.1.7.

(6) If there is a Criminal Investigation (-Z) freeze on the account, do not cover. Notate the listing "CI."

(7) Refunds by the BIR based on United States Credits:

1. The BIR may, on occasion, refund overpayments to a taxpayer that have already been refunded by the IRS. The BIR forwards these returns in separate groupings clearly marked as to the special processing necessary.

2. If instructions are unclear, have an individual authorized to contact the VI obtain clarification.

(1) In accordance with IRC 7654(a) and (b)(1) and Significant Service Center Advice, WTA-N-112721-99, use the following procedures to help in covering over net collections of tax to the U.S. Virgin Islands Bureau of Internal Revenue when the U.S. period of limitations has expired.

(2) When the U.S. Virgin Islands tax authority requests a cover over of the U.S. withholding and the statute has expired, follow the instructions below:

1. Use the instructions in U.S. Virgin Islands Cover Over Process. See IRM 21.8.1.7.5

2. Edit the received date on the return to reflect the date the return is received by IRS.

   Note: There is no statute of expiration for covering over credits to the U.S. Virgin Islands.

3. Circle out the U.S. Virgin Islands received date. It is used only when determining if the refund request is received timely in the U.S. Virgin Islands.

4. If the taxpayer filed timely with the U.S. Virgin Islands, the taxpayer is entitled to a refund of any overpayment after the cover over amount.

   Note: Per Significant Service Center Advice WTA-N-111044-00, dated October 26, 2000, if the taxpayer submitted the tax return to the U.S. Virgin Islands Bureau of Internal Revenue (BIR) within the Refund Statute Expiration Date (RSED), and part of the TC 806 is to be refunded to the taxpayer, the request is considered timely. Clear the refund request with the Statute Function and add the remarks on the document, "refund request was timely received in the U.S. Virgin Islands." Allow credit interest from the day the return was received in the U.S. Virgin Islands.

5. Cover over the entire credit to the VI when the taxpayer submitted the request in the VI past the Statute date, do not consider issuing a refund.

6. If a subsequent adjustment 54 document is necessary, the OVERRIDE-CD and RFSCDT fields may need to be addressed.

Note: See chart below:


If...	Then...
The current date is more than one year past the RSED	Enter override code "S" and use the RSED shown on TXMOD in MMDDYYYY format as the RFSCDT.
The current date is less than one year from the RSED	Enter override code "R" and use the RSED shown on TXMOD in MMDDYYYY format as the RFSCDT.

7. The Form 3809 transfers the credit from the taxpayer's account into the 4702 ledger account used for the U.S. Virgin Islands cover over. The 1st TC is a TC 820 for the withholding tax being transferred and the 2nd TC is a TC 570. The credit portion (TC 700 amount) must specify the U.S. Virgin Islands - 4702 Account (same as TC 820 amount).

   Note: Remember that Business Operating Division (BOD) codes must be on all Non-Master File documents.

8. Follow monitoring steps for the TC 820 posting shown in U.S. Virgin Islands Cover Over Process. See IRM 21.8.1.7.5.

9. If the withholding credits are less than the total tax, reduce the total tax to the amount of the withholding and only prepare the Form 3809. Follow the instructions in U.S. Virgin Islands Cover Over Process. See IRM 21.8.1.7.5.

(3) When notified by the BIR of a taxpayer for whom the BIR is requesting a cover over of the net collections of tax where the statute has expired and the credits have been moved to Excess Collections, follow the instructions below:

1. Follow the instructions in U.S. Virgin Islands Cover Over Process. See IRM 21.8.1.7.5.

2. Request the original excess collection transfer document, Form 8758, from Files.

3. If the credit for the tax is moved to Excess, it must be located and reapplied to Master File.

4. Determine the amount of credit requiring transfer to the taxpayer's account.

5. Research Excess Collections Files using CC XSINQ. Be sure to have the amount of the remittance, the name control, and DLN.

6. When the needed credits are found, prepare the Form 8765, IDRS Control File Credit Application, to have credits applied to the taxpayer's account.

7. Once Form 8765 is prepared, route the Form and supporting evidence to the Unidentified Remittance Function located in the Accounting Branch. Restore the credit to the taxpayer's account to offset the balance due resulting from the cover over.

   Note: Form 8765 does not require statute approval when all credit will be covered over to the VI.

(1) For tax periods ending before December 31, 2006, Notice 2007-19 provides that a U.S. citizen or resident alien with gross income of $75,000.00 or more who took the position that they are a bona fide resident of the U.S. Virgin Islands (referred to in the notice as a "non-covered" person) and who filed an income tax return with the U.S. Virgin Islands in accordance with §32(c)(2), may start the statute of limitations for U.S. federal income tax purposes by filing a U.S. Form 1040 with the IRS, reporting no gross income and no taxable income for that taxable year.

(2) For tax periods ending on or after December 31, 2006, Treasury Reg. §1.932 1(c)(2)(ii) provides that income tax returns filed with the U.S. Virgin Islands Bureau of Internal Revenue (BIR) under 932(c)(2) by U.S. citizens or resident aliens who take the position that they are U.S. Virgin Islands bona fide residents for the entire year will be deemed U.S. income tax returns. Therefore, the U.S. federal statute of limitations for all U.S. citizens and residents claiming bona fide resident status of the U.S. Virgin Islands generally commences upon the filing of an income tax return with the U.S. Virgin Islands. These taxpayers are generally not required to filed income tax returns with the IRS.

(3) These income tax returns are processed to Master File and can be identified by a 21211 or 21221 DLN with a TC 150 .00. The return will have "Filed Due to VI Notice 2007-31" stamped across the top of the return. Code and Edit will "X" all entries on the returns except:

• Entity information

• CCC and RPC edits

• Received date

(4) The posting of these returns to Master File results in duplicate filing conditions if the module contains a previously posted 1040-SS or U.S. Virgin Islands cover over return. Input TC 290 .00 to release the -A freeze with a Hold Code 2 to stop the issuance of a notice to the taxpayer and to prevent erroneous refunds of cover over credits. Update the ASED to 3 years from the U.S. Virgin Islands Bureau of Internal Revenue (BIR) received date stamped on the return, or return due date, whichever is later. Use CC FRM77 to update the ASED date when necessary.

(5) Bona fide residents of the Virgin Islands who fail to meet their USVI filing and payment requirements will have a Federal income tax return liability. However, such individuals are allowed a credit for amounts already paid to the U.S. Virgin Islands. Their "residual" Federal tax liability is equal to the difference between their entire income tax liability and the amount of income tax already paid to the U.S. Virgin Islands.

(1) Use the chart below for help in determining the jurisdiction (Guam or U.S.) with whom the taxpayers are required to file an income tax return:

(2) Use the following addresses once the filing jurisdiction is determined:

• GUAM

Government of Guam
Department of Revenue and Taxation
1240 Army Drive
Barrigada, GU 96913-1404

• UNITED STATES

Internal Revenue Service Center
Austin, TX 73301-0215

(1) An individual earning income from Guam must make an ES declaration with Guam if residing there on the declaration due date.

(2) If the taxpayer moves to the U.S. before the year is over, ES payments must be made to the jurisdiction where the taxpayer is residing at the time when the ES declaration is due. However, at the end of the year, the taxpayer must file a return with the United States if not considered a bona fide resident of Guam for that year. For more information on bona fide residency see IRM 21.8.1.5.2.

(3) Liability for underpayment of estimated tax is payable to the jurisdiction (United States or Guam) where the taxpayer files their return.

(4) All tax payments, credit elect amounts, and/or income taxes withheld in the United States or Guam are considered to determine if the return results in a balance of tax due or an overpayment. Do not allow a withholding tax credit unless the withheld income tax is paid to the United States or Guam.

(5) U.S. taxpayers may claim full credit on their Form 1040 for ES payments made to Guam and for credit elect amounts that were processed on returns filed in Guam for the prior year.

(6) When a CP 23, 24, or 25 generates indicating an ES payment or credit discrepancy due to the posting of a return claiming ES credits paid to Guam, we can grant the taxpayer a substantiated credit (TC 760).

1. Substantiated credits require that the taxpayer responds to the discrepancy notice with adequate proof, such as cancelled checks, that the payments claimed are paid to Guam.

2. Substantiated credit elect amounts claimed require a completed Form 8796, Request for Return/Information (Federal/State Tax Exchange Program), verifying the amount of Guam credit elect claimed on the Form 1040. To allow credit verification, e-fax the request to 877-891-6035. If you do not have e-fax capability mail, the completed Form 8796 to:
   IRS
   GLDS Support Services Stop 93A
   4800 Buford Highway
   Chamblee, Georgia 30341

3. Route requests for substantiation of Guam estimated payments and credit elect amounts substantiated by Disclosure Area 2 to the Austin Submission Processing Accounting Branch using Form 4446, as hard-core payment tracer cases. See IRM 3.17.64.33.1.1, Account 6570 Substantiated Credits Allowed (Nominal Account, DR Normal Balance)

Note: This procedure is different than the procedure used for the U.S. Virgin Islands and CNMI.

(1) Use the following chart to determine a U.S. or CNMI resident or citizen filing requirement. A return is not filed with both.

(1) Consider credit for income taxes withheld at the source, estimated tax payments and withholding credits in determining if the return results in a balance of tax due or overpayment, regardless of the jurisdiction (U.S. or CNMI) in which they were received.

(2) The taxpayer can take credit for these payments regardless of the jurisdiction to which they are liable. However, a taxpayer claiming credits other than U.S. credits, which cannot be verified via IDRS, must supply adequate documentation for the payments such as:

• A W-2, (CNMI W-2C allow box 2a only)

• A copy of a canceled check, or

• A dated receipt stamped by the jurisdiction that received the payment(s)

(3) Once proof of payment is received, credit the taxpayer's account for the substantiated amount using TC 766.

(1) Individuals who are bona fide residents of American Samoa must report their gross income from world-wide sources on their American Samoan tax return. Bona fide residents of American Samoa may have an income tax filing requirement with the United States, American Samoa, or both, depending on the source of their income. For more information on bona fide residency see IRM 21.8.1.5.2.

(2) Wages and salaries paid by the U.S. government to U.S. citizens and residents are subject to U.S. federal income tax and are not eligible for exclusion from gross income per IRC 931(d). These U.S. citizens and residents must file both U.S. and American Samoan tax returns.

(3) U.S. citizens and residents who are bona fide residents of American Samoa are required to file a U.S. return and pay taxes on a net basis if they receive income from sources outside American Samoa (either U.S. or foreign source income).

(4) U.S. citizens and residents who are bona fide residents of American Samoa may qualify to exclude income from sources in American Samoa, and income effectively connected with a trade or business in American Samoa, on their U.S. income tax return. See IRM 21.8.1.10.2 and Form 4563 for information on the territory exclusion.

(5) U.S. citizens and residents who are bona fide residents of American Samoa are not required to file a U.S. tax return, provided their income is derived solely from sources in American Samoa and does not include wages or salary received from the U.S. government.

(6) U.S. citizens and residents who are not bona fide residents of American Samoa report income from American Samoan sources on their American Samoan tax return. These taxpayers:

1. Must report world-wide income on their U.S. tax return

2. Can take credit on Form 1116 for taxes paid to the Government of American Samoa.

(7) Those who report U.S. government wages on both U.S. and American Samoan tax returns may take a credit on their U.S. tax return for income taxes paid or accrued to American Samoa.

(8) An agreement procedure exists to settle cases of double taxation between the U.S. and American Samoa. See IRM 21.8.1.5.1, Double Taxation.

(9) Social Security benefits received by an individual may be taxed under Section 1 or Section 871, depending on whether the recipient is or is not a bona fide resident (BFR) of American Samoa. If the recipient is a BFR, the benefits are subject to tax under Section 1, regardless of whether the individual is or is not a U.S. citizen or national. If the recipient is not a BFR and is not a U.S. citizen/national, the benefits would be subject to tax under the nonresident alien rules of Section 871.

(10) Bona fide residents of American Samoa with income from a trade or business, who do not file Form 1040 (U.S.), must file Form 1040-SS, U.S. Self-Employment Tax Return, with the IRS to report self-employment tax, in addition to the income tax return filed with the Government of American Samoa.

1. Bona Fide residents of American Samoa do not pay income tax to the U.S. on income earned in American Samoa, only SE tax. They are considered U.S. Nationals, not U.S. citizens

2. The Form 1040-SS resembles a combination of Form 1040 Schedules C, F, and SE. Only self-employment tax is calculated and paid with the return.

(1) The Tax Reform Act of 1986 amended IRC931 and therefore affected the previously known "territory exemption" for tax years after 1986. Formerly, a U.S. citizen had the option to exclude gross income received from sources in certain U.S. Territories. The IRC 931 exclusion currently applies only to individuals who are bona fide residents of American Samoa.

(2) See Publication 570 for a complete list of U.S. territories not eligible for the IRC 931 territory exclusion via IRC 932, IRC 933, IRC 934, and IRC 935.

(3) To claim the exclusion, taxpayers prepare Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, and attach it to their return.

(4) When the exclusion is taken, taxpayers cannot take any deductions or credits on Form 1040 related to the excluded income. This includes:

1. The standard deduction, and

2. Certain itemized deductions such as medical and dental expenses, gifts to charity and real estate taxes and mortgage interest on personal residence.

(5) Employees of the United States Government, including its agencies, do not qualify for the IRC 931 exclusion on wages earned from that employment.

(1) Some aliens must obtain a Certificate of Compliance (also known as a departure, exit, or sailing permit) signed by an agent of the Field Assistance Area Director before departing the United States or any territory. Taxpayers obtain the certificate by scheduling a visit to a Taxpayer Assistance Center (TAC) office. Accounts Management will not provide Compliance Certificates .

(2) This Certificate of Compliance is obtained by filing:

• Form 2063, U.S. Departing Alien Income Tax Statement, or

• Form 1040-C, U.S. Departing Alien Income Tax Return.

(3) The Form 2063 is not processed, and does not involve a tax computation. Route loose Forms 2063 to Files at the Austin Campus - Stop 6722.

(4) The Form 2063 can be filed by the following departing aliens:

1. Aliens, resident or nonresident, who have no taxable income for the tax year, up to and including the date of departure, nor for the preceding year, if the period for filing the income tax return for that year has not expired

2. Resident aliens who have received taxable income during the tax year or preceding year, and whose departure will not hinder the collection of any tax.

(5) Form 1040-C is used to report all income received and reasonably expected to be received during the tax year up to and including the departure date. This is not a final return, as the taxpayer must file Form 1040 or Form 1040-NR at the close of the tax year.

(6) The following taxpayers must file Form 1040-C:

• Non-residents having U.S. taxable income

• Residents having U.S. taxable income who do not intend to return to the United States

• Aliens involved in situations requiring a tax year termination.

(7) Taxpayers in the following categories do not have to obtain a sailing or departure permit before leaving the United States, but must support the claim for exemption with proper identification.

(8) Form 1040-C:

1. It is posted as a Transaction Code 430, using Doc Code 61.

2. Credit remains on the account until a Form 1040 or Form 1040-NR return posts.

3. Send loose forms to the Files at the Austin Campus - Stop 6722.

(9) Joint Return on Form 1040-C: Generally, departing husbands and wives who are nonresident aliens cannot file joint returns. However, if both spouses are resident aliens, they can file a joint return on Form 1040-C if:

• Both spouses can reasonably expect to qualify to file a joint return at the normal close of their tax year, and

• The tax years of the spouses end at the same time.

(1) An alien individual is considered a resident for U.S. income tax purposes during a year, and thus liable for taxes on income from world-wide sources during that year, if they:

1. Are lawfully admitted to the United States for permanent residence (the "green card test") including a taxpayer that holds a green card (Alien Registration Card) as a commuter from Canada or Mexico (see SCA-199950009), or

2. Are in the United States for at least 31 days in the current year and meets the substantial presence test. This test is met if the total number of days present in the year in question, plus 1/3 of the days present in the preceding year, plus 1/6 of the days present in the second preceding year add up to 183 days or more, or

3. Makes an election under 7701(b)(4) to be treated as a resident alien. See IRM 21.8.1.12.5, or Publication 519 for more information on this election.

(2) For purposes of the substantial presence test, an individual is treated as present in the United States every day that they are physically present in the country at any time during the day with the following exceptions:

1. Days they regularly commutes to work in the United States from a residence in Canada or Mexico

2. Days they were in the United States for less than 24 hours when they were in transit between two places outside the United States

3. Days they planned to be out of the United States, but were unable to leave because of a medical condition that originated while they were in the United States - Form 8843 or similar statement

4. Days they were in the United States as a crew member of a foreign vessel.

5. Days they were an exempt individual. See the Exemption Chart below for exempt individuals:

(3) An exception to the substantial presence test is made by showing a closer connection to a foreign country. Even though an alien would otherwise meet the substantial presence test, they do not meet the test for the current year, if:

1. The alien is present in the United States for less than 183 days during the current year,

2. It is established that for the current year the alien has a tax home in a foreign country, and has a closer connection to that country than to the United States and

3. The alien timely filed the Form 8840, Closer Connection Exception Statement for Aliens.

(4) This exception to the substantial presence test does not apply for any year during which the alien has an application for adjustment of status pending or takes other steps to apply for status as a lawful permanent resident of the United States.

(5) A resident alien is subject to tax under a special rule if their period of residence in the United States is interrupted with a period of non-residence. The special rule under IRC 7701(b)(10) applies if the resident alien meets all the following conditions:

1. They were a U.S. resident for a period that includes at least 3 consecutive calendar years

2. They were a U.S. resident for at least 183 days in each of those years

3. They ceased to be treated as a U.S. resident

4. They then again became a U.S. resident before the end of the third calendar year after the period described in (1) above.

(1) Resident aliens are those persons admitted for lawful permanent residence in the United States (the "green card test") meet the substantial presence test, or make a first year election under IRC 7701(b)(4).

(2) Generally, a resident alien taxpayer is entitled to deductions, exclusions, and credits under the same rules as a U.S. citizen.

(3) All individuals are required to include a social security number (SSN) or individual taxpayer identification number(ITIN) with their federal income tax return. An alien can also apply for a SSN using Form SS-5, Application for a Social Security Number Card (Original, Replacement or Correction). Individuals who do not have and are not eligible to get a SSN must apply for an ITIN using a Form W-7, Application for IRS Individual Taxpayer Identification Number. The Form W-7 is filed with an income tax return unless the individual qualifies for one of the exceptions listed in the form instructions.

(4) An individual who is a U.S. resident alien for an entire taxable year must generally file Form 1040. U.S. resident aliens have the same filing requirements as U.S. citizens. Like U.S. citizens, U.S. resident aliens generally cannot claim benefits provided by the United States under a tax treaty.

(5) A U.S. citizen or resident alien living outside the United States on the regular due date for filing an income tax return, is allowed an automatic 2- month extension for filing the return and paying tax if filing a calendar year return.

• Was living outside the United States or Puerto Rico, and

• Had a main place of business or post of duty outside the United States or Puerto Rico, or

• Was in the military or naval service on duty outside the United States or Puerto Rico.

(6) A resident alien must report all gross income from world-wide sources.

(7) An alien is a U.S. resident, for tax purposes, if they:

1. Are lawfully admitted to the United States for permanent residence as the holder of a green card at any time during the year, including a taxpayer that holds the green card as a Canadian/Mexican commuter (see SCA-199950009)

2. Meets the substantial presence test, or

3. Makes an election to be considered a U.S. resident. See IRM 21.8.1.12.5.

(1) A nonresident alien is an individual who is neither a U.S. citizen nor a U.S. resident within the meaning of IRC 7701(b)(1)(A).

(2) The following are unique definitions of aliens where special residency rules apply:

1. Alien Seamen - Alien seamen are not considered residents of the United States just because they are on a U.S. vessel. A residence can be established in the United States by acquiring a hotel or boarding house room, even if their work requires absence from the United States for long periods.

2. Alien crewmen - Alien crewmen of a foreign vessel engaged in transportation between the United States and a foreign country, or territory of the United States, are not treated as present in the United States on those days unless the individual otherwise engages in any trade or business in the United States on such day.

(1) First-year election – An alien individual who was a nonresident alien in the prior year and who does not meet either the substantial presence test or green card test in the current year (i.e, the election year) may elect to be treated as a U.S. resident for tax purposes if they:

• Meet the substantial presence test in the year following the election,

• are present in the United States for at least 31 consecutive days in the year of the election, and

• are present in the United States for at least 75 percent of the number of days during the period beginning with the first day of the 31-day period (described above) and ending with the last day of the year of election.

(2) In certain circumstances described below; a nonresident alien can make an election under IRC 6013(g) or (h) to be treated as a U.S. resident.

(3) A nonresident alien individual with respect to whom an election made under IRC 6013(g) or IRC 6013(h) is in effect for the taxable year shall be treated as a resident of the United States

• For purposes of Chapter 1, (Normal Taxes and Surtaxes), for all of such taxable year, and

• For purposes of Chapter 24 (relating to wage withholding) for payments of wages made during such taxable year.

(4) To qualify as a resident under IRC 6013(g), the nonresident alien at the close of the tax year for which the election is made:

• Must be married to a U.S. citizen or resident, and

• Both must elect to have the benefits of this subsection apply to them.

  Note: The election is made by attaching a statement to an originally filed joint return or a joint amended return.

(5) To qualify for treatment as a resident and file a joint return under 6013(h), the individual must be a nonresident alien at the beginning of the tax year but a U.S. citizen or resident at the end of the tax year and at the close of the tax year in which the alien becomes a resident of the United States:

• The alien must be married to a U.S. citizen, or resident, and

• Both must elect to have the benefits of the subsection apply to them.

(6) For more information, see Publication 519.

(1) Non-resident alien individuals engaged or considered to be engaged in a trade or business in the United States must file a return, even if:

• Their income did not come from a trade or business conducted in the United States

• Their income did not come from U.S. sources

• Their income is exempt from tax.

(2) Non-resident alien individuals not engaged or considered engaged in a trade or business in the United States must file a return when their tax liability is not satisfied by withholding at source.

(3) Non-resident alien students and trainees temporarily present in the United States under an F, J, M, or Q visa, are considered engaged in trade or business in the United States.

(4) A nonresident alien liable for filing a U.S. income tax return generally must file a Form 1040-NR.

(5) Beginning in 2017 (2016 tax year), nonresident alien filers have the option of filing Forms 1040-NR electronically through Modernized E-File (MeF). For an overview of MeF for individual filers refer to IRM 3.42.5.14, IRS e-file for 1040 Modernized e-File (MeF). For information about command code usage, for e-filed returns along with information about Form 8453, U.S. Individual Income Tax Transmittal For An IRS E-Filed Return refer to IRM 21.6.6.2.25, Electronic Filing System (e-file).

(6) Form 1040-NR is due:

1. On or before April 15, if using a calendar year, or the 15th day of the 4th month after the end of the tax year if a fiscal filer, who has earned wages subject to U.S. withholding tax under chapter 24. Generally, this is effectively connected income and is processed with Document Code 73.

2. On or before June 15, if using a calendar year, or the 15th day of the 6th month after the close of the tax year, if a fiscal filer who has income that is not subject to U.S. withholding. Generally, this is not effectively connected income and is processed with Document Code 72.

   Note: If the taxpayer has both earned wages subject to U.S. withholding tax, as well as non-U.S. earned income, the due date is on or before April 15th if using a calendar year, or the 15th day of the 4th month after the end of the tax year, if a fiscal filer.

(7) For tax years beginning on or after January 1, 2006 and ending before January 1, 2018, the requirement to file a return is eliminated for nonresident aliens who earn wages effectively connected with a U.S. trade or business less than the amount of one personal exemption. The nonresident alien also must have no other income in the U.S. that would trigger a filing requirement and would not otherwise be required to file a return. See Notice 2005-77 for more information.

(8) For tax years beginning after December 31, 2017 and ending before January 1, 2026, the amount of the personal exemption is reduced to $0. As a result of this change, nonresident aliens with gross income in excess of $5 are required to file an income tax return for tax years 2018 through 2025.

(9) The following Reason Codes identify changes from 1040 to 1040-NR filings and vice versa.

• RC 100 - Form 1040-NR filing requirement

• RC 101 - Form 1040 filing requirement.

(10) Facsimile signatures may be used on Form 1040-NR in situations where a substantial number of returns are filed by preparers, subject to conditions, See Rev. Rul. 68-500.