n-05-77.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Elimination of Filing Requirement for Nonresident Alien Individuals with United
States Source Effectively Connected Wages below the Personal Exemption
Amount

Notice 2005-77

SECTION 1. PURPOSE

This notice announces that Treasury and the Internal Revenue Service (the
Service) will amend Treas. Reg. §1.6012-1(b)(2) by adding a new exception from
the filing requirement for nonresident alien individuals. Subject to the limitation
described below, the new exception will eliminate the filing requirement for
nonresident alien individuals who are required to file a return under the present
regulations solely because they earn wages that are effectively connected with a
United States trade or business in the tax year. This new exception will only
apply to those nonresident alien individuals who earn wages that are less than
the amount of one personal exemption under section 151 of the Internal Revenue
Code (the Code).
SECTION 2. BACKGROUND
In general, section 6012(a)(1)(A) requires every individual having gross
income in the taxable year that equals or exceeds the exemption amount to

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make a return with respect to income taxes under subtitle A of the Code. Flush
language at the end of section 6012(a) provides that, subject to certain
conditions, limitations, and exceptions and under such regulations as may be
prescribed by the Secretary, nonresident alien individuals subject to the tax
imposed by section 871 of the Code may be exempted from the requirement of
making returns under section 6012.
Under §1.6012-1(b) of the regulations, every nonresident alien individual who
is engaged in a trade or business in the United States at any time during the
taxable year must make a return on Form 1040NR, U.S. Nonresident Alien
Income Tax Return. For this purpose, it is immaterial that the gross income for
the taxable year is less than the minimum amount specified in section 6012(a) for
making a return. Thus, a nonresident alien individual who is engaged in a trade
or business in the United States at any time during the taxable year is required to
file a return on Form 1040NR, even though (a) he has no income that is
effectively connected with the conduct of a trade or business in the United
States, (b) he has no income from sources within the United States, or (c) his
income is exempt by reason of an income tax convention or any section of the
Code.
Section 864(b) of the Code defines the term “trade or business within the
United States” to include the performance of personal services within the United
States at any time during the taxable year. Section 864(b)(1) provides an
exception to this definition for the performance of personal services (A) for a
nonresident alien individual, foreign partnership or foreign corporation not

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engaged in a trade or business within the United States; or (B) for an office or
place of business maintained in a foreign country or in a possession of the United
States by an individual who is a citizen or resident of the United States or by a
domestic partnership or corporation, by a nonresident alien individual temporarily
present in the United States for a period or periods not exceeding a total of 90
days during the taxable year and whose compensation for such services does
not exceed $3,000 in the aggregate.
Assuming the nonresident alien individual engages in a United States trade or
business under section 864(b) because he performs personal services in the
United States during the tax year, §1.864-4(c)(6)(ii) of the Income Tax
Regulations provides that wages, salaries, compensations, or other
remunerations received by the nonresident alien individual for performing those
personal services in the United States constitute income that is effectively
connected for the taxable year with the conduct of a trade or business in the
United States by that individual.
Section 871(b) of the Code provides that a nonresident alien individual
engaged in a trade or business within the United States during the taxable year is
taxable as provided in sections 1 or 55 of the Code, on his taxable income that is
effectively connected with the conduct of a trade or business within the United
States.
Section 873(b)(3) of the Code allows a nonresident alien individual a
deduction under section 151 of the Code for only one personal exemption, unless
the individual is a resident of a contiguous country or a national of the United

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States. The personal exemption amount under section 151 for tax year 2006 is
$3,300.
SECTION 3. DISCUSSION
Treasury and the Service will amend the regulations under §1.6012-1(b)(2) to
eliminate the Form 1040NR filing requirement for a nonresident alien individual
who earns less than the amount of one personal exemption as United States
source wages that are effectively connected with a United States trade or
business (effectively connected wages) and who is required to file a United
States income tax return because of those wages. All nonresident alien
individuals who earn effectively connected wages are entitled to at least one
personal exemption under section 151. Therefore, by amending the regulations,
the new exception would treat nonresident alien individuals who earn effectively
connected wages in an amount that is less than the amount of one personal
exemption more similarly to United States citizens and residents who earn wages
of less than the exemption amount. The exception would apply even if the
nonresident alien individual also has United States source fixed or determinable
annual or periodical gains, profits, or income (FDAP), provided that his United
States tax liability for such income is fully satisfied by the withholding of tax at
source.
The amendment to the regulations, however, will not affect the filing
requirements of a nonresident alien individual who seeks a refund of an
overpayment of United States tax, has a United States income tax liability with
respect to FDAP that is not fully satisfied by withholding at source, or who has

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income exempt or partially exempt by reason of an income tax convention or any
section of the Code.
SECTION 4. EFFECTIVE DATE
Regulations incorporating the guidance set forth in this notice will apply to tax
years beginning on or after January 1, 2006. Until such regulations are issued,
nonresident alien individuals may rely on this notice.
SECTION 5. DRAFTING INFORMATION
The principal author of this notice is Paul J. Carlino of the Office of Chief
Counsel (International). For further information regarding this notice, contact Mr.
Carlino at (202) 622-3840 (not a toll free call).