The Closer Connections Exception - An Escape Route

The Closer Connections Exception is one of the main remedies used to set aside a “substantial presence” determination, which in turn, alleviates the visiting foreign national from being subject to worldwide income taxation, FBAR filings, and other IRS and FinCEN reporting requirements. However, to successfully invoke it, you must qualify.

Step 1: Determine if you are Disqualified

You are ineligible for the Closer Connection Exception if: (1) you spent 183 days or more in the U.S. for the calendar year in question or (2) filed any of the following U.S. immigration forms during or before the year in question as they evidence your intent to become a Lawful Permanent Resident of the U.S.:  

(i)             Form I-508, Waiver of Rights, Privileges, Exemptions and Immunities

(ii)            Form I-485, Application to Register Permanent Residence or Adjust Status

(iii)          Form I-130, Petition for Alien Relative

(iv)           Form I-140, Immigrant Petition for Alien Worker

(v)            Form ETA-750, Application for Alien Employment Certification

(vi)           Form OF-230, Application for Immigrant Visa and Alien Registration

Assuming you are not disqualified, continue to Step 2.

STEP 2: Demonstrate your “Tax Home” is in a Foreign Country

What is a “Tax Home”?

Under the tax rules, a “tax home” is defined generally as the main place of business, employment, or post of duty, regardless of where you maintain your family home. The tax home focuses on the place of your permanent (or indefinite) vocation or employment, regardless of whether you are an employee or self-employed. If there is no regular or main place of business because of the nature of the work, your tax home may be the place where you regularly live. If you do not have either a regular or main place of business or a place where you regularly live, you will be considered an itinerant, and your tax home will be wherever you work.

STEP 3: File Form 8840 “Closer Connections Exception Statement for Aliens” by June 15th

Claiming a closer connection with a foreign country requires filing Form 8840 - Closer Connection Exception Statement for Aliens, which may be filed with your Form 1040-NR, or if no return is due, then as a standalone document to the Department of the Treasury, Internal Revenue Service Center, Austin, TX 73301. Form 8840 must be filed by the 15th of June the year after a given tax year to be valid for that tax year.  If the form is not timely filed, you cannot claim the closer connection exception, unless a difficult burden is met. It must be shown by clear and convincing evidence that you took reasonable actions to become aware of the filing requirements and significant steps to comply with those requirements.  This is not so easy to do – do yourself a favor and make this a priority.

Those who successfully claim the Closer Connection Exception will remain classified as nonresident aliens and can avoid facing tax obligations on their worldwide income for that tax year. Additionally, you will not be subject to foreign bank secrecy requirements, such as the FBAR.

Note: Tax residency is a year-by-year analysis, which means that Form 8840 is not a one-time filing. You must separately file for every tax year you expect to meet the substantial presence test. For some taxpayers that will mean filing annually, and for others it will mean filing on an as-needed basis.