Changes to the Tax Code, tax reporting, and tax policy are generally reflective of the state of mind of the country at any given time. In other words, Congress uses taxes to modify your behavior (gasp). Think about it… We tax cigarettes and alcohol (sin taxes) to discourage those behaviors and we call those taxes “sin taxes.” We impose luxury taxes on goods that we believe to be extravagant because, well, why shouldn’t the wealthy pay more, right? And of course, we offer incentives to purchase homes rather than rent because that’s the American dream.
So, what’s going on now that would merit a mention in tax policy? There’s a lot of talk lately on the federal level about immigrants, their effect on our economy, and how our government should treat immigrants, both legal and illegal. It should come as no shock to anyone then that the IRS seems to be focusing on international taxpayers and immigrants with their latest round of revisions.
Take federal forms 8898 and 8840, for example. Those forms involve the residency requirements of taxpayers in American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the United States Virgin Islands. To qualify as a resident of those US possessions, you must pass the physical presence test, which means that you have been present in the US possession for at least 183 days during the taxable year, you must not have an established tax home outside of the U.S. possession during the taxable year, and you must not have a closer connection to the United States or a foreign country than to the U.S. possession. This is significant because many individuals want to be classified as a resident for tax purposes to tax advantage of certain tax attributes only allowable to US residents, such as the ability to itemize deductions.
In 2006, the IRS released federal form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession, so that taxpayers who change their residency to or from a US possession post-2001 (to present) can formally notify the IRS of the change. If an exception applies, a resident alien will file federal form 8840, Closer Connection Exception Statement for Aliens.
However, this has proven to be a bit tricky. Apparently, the forms (I’ll admit that I haven’t prepared either one) are quite detailed. The IRS has received feedback that the reporting requirements on certain sections of the form are quite burdensome. As a result, the IRS is going to modify the forms to require less information. Yeah, you read that right. The IRS is going to require fewer details. Specifically, the information on lines 17 and 29 of federal form 8898 and lines 20 and 31 of federal form 8840 will be modified. Until then, taxpayers can simply disregard these line items by relying on Notice 2006-73. The catch (there had to be one) is that supporting documents for the information requested on those lines must be available for inspection, if necessary. You didn’t really think the IRS was going to give you that much of a break, did you?
