Temp. regs. expand relief for foreign persons failing to file U.S. returns.

• Author: Lisecki, Cleve
• Position: IRS temporary regulations

On Jan. 29, 2002, the IRS issued temporary regulations under Secs. 874 and 882. The regulations revise existing rules for nonresident aliens (NRAs) and foreign corporations (collectively referred to as "foreign persons") required to file U.S. returns. Generally, these rules pertain to foreign persons that have not filed a U.S. return and are in danger of losing the ability to claim deductions against U.S. effectively connected income. The temporary regulations' standard for relief is a considerable improvement over the standard in the prior regulations, which granted relief to taxpayers only in rare and unusual circumstances.

Obligation to File a Return

In general, a foreign person engaged in trade or business in the U.S. at any time during the tax year or subjected to U.S. income tax must file a U.S. income tax return; see Regs. Secs. 1.6012-1(b)(1)(i) (NRAs) and-2(g)(1)(i) (foreign corporations). A foreign person is exempt from this requirement if it (1) was not engaged in a trade or business in the U.S. during the tax year, (2) fully satisfied its tax liability by withholding tax at source (under chapter 3 of the Code) and (3) is not required to report a treaty-based return position; see Regs. Sec. 1.6012-1(b)(2)(i) (NRAs) and -2(g)(2)(i) (foreign corporations), and Regs. Sec. 301.6114-1 (treaty-based reporting requirements). Basically, the exemption pertains to income subject to U.S. taxation on a gross basis, under Secs. 871(a) and 881(a), for which the taxpayer withholds the proper U.S. tax amount.

For income subject to tax on a net basis, a foreign person will receive the benefit of deductions and credits only by filing a true and accurate U.S. return; see Secs. 874(a) (NRAs) and 882(c)(2) (foreign corporations). Under Sec. 874(a), if an NRA files a return for the immediately preceding tax year (or for the current tax year, if it is the first tax year that he has to file), he would have to file the return within 16 months of the due date set forth in Sec. 6072. If he has not filed a return for the tax year immediately preceding the current tax year (other than the one that he had to file for the first tax year), he must file the return no later than the earlier of (1) 16 months after the due date set forth in Sec. 6072 or (2) the date the IRS mails a notice advising him that he has not filed a current-year return and therefore is not entitled to any deductions or credits (other than those allowed under Secs. 31, 32, 33, 34 and 852(b)(3)(D)(ii)); see Regs. Sec. 1.874-1(b). For foreign corporations, the regulations under Sec. 882 generally contain a similar role, substituting 18 months for 16 months, while also allowing a deduction for charitable contributions...