IRS Form 8840- A Guide On Closer Connection Exception To Avoid US Tax

You might be surprised to know that the Internal Revenue Service (IRS) USA can still categorize you as a US tax resident even if you don't have a green card. This often happens to business travelers. Temporary or seasonal workers and individuals who spend long vacations in the USA.

If you are a foreign national or a US-based NRI who meets the requirements to be treated as a US tax resident but wants to avoid the stay, then you must know about IRS Form 8840.

In this blog, we will discuss all aspects of IRS Form 8840. We will talk about the filing requirements for this form, how to claim a closer connection exception, and how to avoid being classified as a US tax resident if you meet the substantial presence test but have stronger ties to another country.

What Is IRS Form 8840

The IRS Form 8840 is a closer connection exception statement for aliens. It is used by certain foreign nationals to claim non-resident alien status for U.S. tax purposes.

When you file Form 8840, you declare that you have a closer connection to another foreign country or countries and therefore you must not be treated as a US resident for taxation purposes, even if you meet the substantial presence test.

After filing Form 8840, you may be able to avoid being taxed as a US resident, which would require reporting worldwide income and complying with the US foreign asset reporting rules.

What Is A Substantial Presence Test?

The substantial presence test is used to determine whether an individual qualifies as a US tax resident. You meet this test if.

• You are present in the United States for at least 31 days during the current year and.
• The total number of days you are present over the current and the previous two years (calculated by using a weighted formula) exceeds or equals 183 days.

In case you are classified as a tax resident under this test, you can still avoid the status by filing Form 8840 and claiming a closer connection exception.

If you do not claim a closer connection exception but meet the substantial presence test, in that case you will be subject to US taxation and reporting requirements (FBAR, FATCA, PFIC, etc.) on your global income, investments, accounts, and assets.

Who Needs to File IRS Form 8840?

Some groups of foreign nationals are most likely to need the Form 8840 to avoid being treated as U.S. tax residents, including,

• Seasonal or temporary workers on visas who return to their home country each year.
• Business travelers whose employment and primary residence remain abroad.
• The foreign nationals visiting the US frequently for family reasons, property management, studies, or vacations (such as Canadian "snow birds") who have strong ties to another foreign country or countries.

You are not eligible to file Form 8840 if you:

• Are a lawful permanent resident of the United States (green card holder).
• Either you have applied for, or taken steps to apply for, a green card.
• If you have an application pending to change your residential status to that of a lawful permanent resident of the United States.

Note: You are not eligible to claim the exception if you were physically present in the United States for 183 days or more during the tax year.

How To Show A Closer Connection With Another Country?

The closer connection exception recognizes that, even if you haven't spent much time in the United States, your real home, economically, socially, and personally, is elsewhere. To qualify for this, you have to prove that your ties to another country are stronger than your ties to the USA.

The IRS considers factors such as the:

• Country of residence listed on your official documents.
• The types of forms and documents filed in the United States.
• Location of your permanent home, family, and personal belongings.
• Location of your financial accounts and business activities.
• Social, cultural, and community connections.

In certain limited cases (such as certain visa holders), the IRS allows you to claim ties to two foreign countries. If you tend to believe you may qualify for this exception. It is highly advisable to consult a good expat tax professional to ensure you meet all the necessary criteria and to help you navigate the entire process of claiming a close connection to two foreign countries.

A key requirement is that you have a tax home in a foreign country for an entire tax year. Typically, your tax home is the main place of business or regular place of abode.

What If You Do Not Qualify For Closer Connection Exception?

If you do not meet the closer connection requirements, you may still avoid U.S. tax residence under an income tax treaty between the US and your home country. In such cases, the treaty "tie-breaker" rules may determine your residency status.

To claim the treaty-based residency, you need to file Form 8833. Without a treaty claim, you will likely be treated as a US tax resident.

What Are The Special Exceptions for Certain Visa Holders?

The teachers, students, and trainees on certain U.S. visas may qualify as "exempted individuals" and are not required to file Form 8840. Instead, they file Form 8843 to confirm their exemption from the substantial presence test.

However, this exemption from counting days does not mean that you are exempt from US tax obligations if you have US-source income; you may still be required to file Form 1040-NR. After you no longer qualify as an exempt individual, you must determine your US residency status by using the substantial presence test and consider filing Form 8840.

What Is The Form 8840 Filing Process

If you are filing a U.S. federal income tax return, attach the Form 8840 to your income tax return. Now, if you are not required to file a federal return, you can send Form 8840 to the Department of the Treasury, Internal Revenue Service Center, Austin, TX 73301-0215. You shall file the form by the due date of your tax return (including the extensions)

However, no such penalty is imposed on individuals for late filing. Failing to file Form 8840 means you will not be able to claim the closer connection exception, even if you are eligible, and you will be treated as a US resident for the purpose of taxation.

The Bottom Line

The Form 8840 (Closer Connection Exception Statement For Aliens) lets you avoid the US resident/alien status even if you meet the (Substantial Presence Test by proving you have a close connection to another foreign country other than the USA.

As a US-based NRI, if you need any help with Form 8840 filing, Savetaxs is the name to trust. We have a dedicated team of CAs and CPAs working hand in hand to ensure you never miss a step in IRS compliance.

Connect with us as we serve our clients 24/4 across all time zones.