Form 8840: The Form 8840 is an International Tax Form that is used as an IRS exception to the substantial presence test. When a person is neither a U.S. citizen nor legal permanent resident, they are typically not subject to tax and reporting on their worldwide income — because they are not a U.S. Person. But, when a person meets the substantial presence test they may become subject to the U.S. tax and worldwide reporting requirements.
Substantial Presence & Form 8840
Nevertheless, a person may meet the exception by showing they have a closer connection to a foreign country. When a person meets the closer connection exception, they are no longer subject to U.S. tax and worldwide reporting requirements. And, with the Internal Revenue Service taking an aggressive position towards foreign accounts compliance and unreported foreign income, offshore compliance is crucial to avoid offshore fines and penalties.
The Form 8840 is the closer connection exception statement for aliens. It is filed at the same time a person files their U.S. tax return (1040 NR). The reason the foreign person files a 1040 NR and not a 1040, is because they are a nonresident, and NR stands for nonresident.
Let’s review the form.
Purpose of the 8840 Form
Use Form 8840 to claim the closer connection to a foreign country(ies) exception to the substantial presence test. The exception is described later and in Regulations section 301.7701(b)-2.
Regulations section 301.7701(b)-2.
In pertinent part:
- 301.7701(b)-2 Closer connection exception.
(a) In general. An alien individual who meets the substantial presence test may nevertheless be considered a nonresident alien for the current year if the following conditions are satisfied –
(1) The individual is present in the United States for fewer than 183 days in the current year;
(2) The individual maintains a tax home in a foreign country during the current year; and
(3) Except as provided in paragraph (e) of this section, the individual has a closer connection during the current year to a single foreign country in which he or she maintains a tax home than to the United States.
(b) Foreign country.
For purposes of section 7701(b) and the regulations thereunder, the term “foreign country” when used in a geographical sense includes any territory under the sovereignty of the United Nations or a government other than that of the United States.
It includes the territorial waters of the foreign country (determined in accordance with the laws of the United States), and the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the foreign country and over which the foreign country has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources. It also includes the possessions and territories of the United States.
What is a Tax Home?
Your tax home is the general area of your main place of business, employment, or post of duty, regardless of where you maintain your family home. Your tax home is the place where you permanently or indefinitely work as an employee or a self-employed individual. If you do not have a regular or main place of business because of the nature of your work, then your tax home is the place where you regularly live.
If you have neither a regular or main place of business nor a place where you regularly live, you are considered an itinerant and your tax home is wherever you work. For determining whether you have a closer connection to a foreign country, your tax home must also be in existence for the entire year, and must be located in the foreign country (or countries) in which you are claiming to have a closer connection.
Part I General Information
The first part of the form only requires General Information:
- Type of U.S. visa (for example, F, J, M, etc.) and date you entered the United States
- Of what country or countries were you a citizen during the tax year?
- What country or countries issued you a passport?
- Enter your passport number(s)
- Enter the number of days you were present in the United States during: 2019 2018 2017
- During 2019, did you apply for, or take other affirmative steps to apply for, lawful permanent resident status in the United States or have an application pending to change your status to that of a lawful permanent resident
Form 8840 Part II Closer Connection to One Foreign Country
The next part of form refers to the closer connection to one foreign country test. Primarily, internal revenue service wants to know where your tax home was during the tax year at issue, in the name of the foreign country
- Where was your tax home during 2019?
- Enter the name of the foreign country to which you had a closer connection than to the United States during 2019.
Form 8840 Part III Closer Connection to Two Foreign Countries
Some individuals may have a closer connection with more than one country. Therefore, if this is the case then the personal complete part three which goes into more detail about the different countries, the status in each country, and whether or not tax returns were filed in those countries.
- Where was your tax home on January 1, 2019?
- After changing your tax home from its location on January 1, 2019, where was your tax home for the remainder of 2019?
- Did you have a closer connection to each foreign country listed on lines 9 and 10 than to the United States for the period during which you maintained a tax home in that foreign country? . . ….. …
If “No,” attach an explanation.
- Were you subject to tax as a resident under the internal laws of (a) either of the countries listed on lines 9 and 10 during all of 2019, or (b) both of the countries listed on lines 9 and 10 for the period during which you maintained a tax home in each country?
- Have you filed or will you file tax returns for 2019 in the countries listed on lines 9 and 10? If “Yes” to either line 12 or line 13, attach verification.
If “No” to either line 12 or line 13, please explain
Form 8840 Part IV Significant Contacts With Foreign Country or Countries
Part 4 is the most complex part of the form 8840. It is that part of the form that requires the taxpayer to provide extensive personal information sufficient for the internal revenue service to determine whether the taxpayer meets the substantial presence test. There are many questions the taxpayer must answer such as
Where was your regular or principal permanent home located during 2019? See instructions.
- If you had more than one permanent home available to you at all times during 2019, list the location of each and
- Where was your family located?
- Where was your automobile(s) located?
- Where was your automobile(s) registered?
- Where were your personal belongings, furniture, etc., located?
- Where was the bank(s) with which you conducted your routine personal banking activities located?
Did you conduct business activities in a location other than your tax home? .
If “Yes,” where?
- Where was your driver’s license issued?
- If you hold a second driver’s license, where was it issued?
Where were you registered to vote?
- When completing official documents, forms, etc., what country do you list as your residence? Have you ever completed:
Form W-8BEN or any other W-8 form (relating to foreign status)?
- Form W-9, Request for Taxpayer Identification Number and Certification?
- Any other U.S. official forms? If “Yes,” indicate the form(s)
In what country or countries did you keep your personal, financial, and legal documents?
From what country or countries did you derive the majority of your 2019 income?
Did you have any income from U.S. sources? If “Yes,” what type?
Did you qualify for any type of “national” health plan sponsored by a foreign country?
- If “Yes,” in what country?
- If “No,” please explain
- If you have any other information to substantiate your closer connection to a country other than the United States or you wish to explain in more detail any of your responses to lines 14 through 30, attach a statement to this form
Ineligibility for Form 8840 Closer Connection Exception
- You were present in the United States 183 days or more in calendar year 2019.
- You are a lawful permanent resident of the United States (that is, you are a green card holder).
- You have applied for, or taken other affirmative steps to apply for, a green card; or have an application pending to change your status to that of a lawful permanent resident of the United States.
Steps to change your status to that of a permanent resident include, but are not limited to, the filing of the following forms
- Form I-508, Waiver of Rights, Privileges, Exemptions and Immunities.
- Form I-485, Application to Register Permanent Residence or Adjust Status.
- Form I-130, Petition for Alien Relative, on your behalf.
- Form I-140, Immigrant Petition for Alien Worker, on your behalf.
- Form ETA-750, Application for Alien Employment Certification, on your behalf.
- Form DS-230, Application for Immigrant Visa and Alien Registration.
Even if you are not eligible for the closer connection exception, you may qualify for nonresident status by reason of a treaty.
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