IRS Relaxes Bona Fide Residency Rules in the Wake of Hurricanes Irma and Maria

IRS Relaxes Bona Fide Residency Rules in the Wake of Hurricanes Irma and Maria

By: Heather L. Marello, Esq.

In the wake of recent hurricanes that devastated Puerto Rico and the U.S. Virgin Islands, IRS released Notice 2017-56, Physical Presence of Certain Individuals in the Commonwealth of Puerto Rico or the United States Virgin Islands Under Section 937(a) Following Hurricane Irma or Hurricane Maria, to provide relief under the strict bona fide residency rules of I.R.C. § 937 and the corresponding Treasury Regulations by extending the 14-day disaster period of § 1.937-1(c)(3)(i)(C)(1) to 117 days.  The full text of Notice 2017-56 can be found here.

Bona fide residents of Puerto Rico or the U.S. Virgin Islands are eligible to take advantage of certain favorable tax treatments under I.R.C. §§ 932 and 933.  Under current law, except as provided in the Regulations, the term “bona fide resident” means that an individual must:

  • Be physically present in the possession for at least 183 days during the taxable year;
  • Not have a tax home outside of that possession, as determined under I.R.C. § 911(d)(3) (without regard to the second sentence thereof); and
  • Not have a closer connection to the United States or a foreign country.

Pursuant to Treas. Reg. § 1.937-1(c)(v)(3), an individual is considered to be present in the relevant possession on:

  • Any day that the individual is physically present in that possession at any time during the day;
  • Any day that an individual is outside of the relevant possession to receive, or to accompany on a full-time basis a parent, spouse, or child (as defined in section 152(f)(1) who is receiving, qualifying medical treatment as defined in paragraph (c)(4) of this section; and
  • Any day that an individual is outside the relevant possession because the individual leaves or is unable to return to the relevant possession during any —
    • 14-day period within which a major disaster occurs in the relevant possession for which a Federal Emergency Management Agency Notice of a Presidential declaration of a major disaster is issued in the Federal Register; or
    • Period for which a mandatory evacuation order is in effect for the geographic area in the relevant possession in which the individual’s place of abode is located.

IRS Notice 2017-56 extends the 14-day disaster period above to 117 days, effective beginning September 6, 2017 and ending December 31, 2017.  Accordingly, “any individual who is outside of an impacted U.S. territory on any day during this 117-day period will be treated as leaving or being unable to return to the relevant U.S. territory as a result of Hurricane Irma and Hurricane Maria on such day.”

Failure to comply with the bona fide residency provisions can result in substantial adverse tax consequences.  Andreozzi Bluestein LLP has successfully represented taxpayers in litigation before the U.S. Tax Court involving bona fide residency and related issues and can assist taxpayers in ensuring compliance with these complex rules and regulations.