Form 8840 Closer Connection Exception Guide

Content
Contents

Key Takeaways

  • An individual meets the Substantial Presence Test (SPT) if present 31 days in the current year and 183 days using the 3-year weighted formula.
  • The Form 8840 closer connection exception is available only if the client was in the U.S. for fewer than 183 days in the current year.
  • The client must maintain a foreign tax home and demonstrate stronger personal and economic ties to that country than to the U.S.
  • The exception is not available if a green card application was filed or lawful permanent resident status was held during the year.
  • Form 8840 is generally due by June 15 (if no Form 1040-NR filing obligation), and late filing can invalidate the claim.
  • If the client is present 183 days or more in the current year, consider a treaty tie-breaker (Form 8833) instead of the closer connection exception.

Introduction

As Indian CAs expanding into U.S. tax services, one of the most common issues you will face is clients who frequently travel to the United States for business. Many of them inadvertently meet the Substantial Presence Test (SPT) and assume they are automatically U.S. tax residents.

This is where the Form 8840 closer connection exception becomes a critical planning and compliance tool. Used correctly, it can prevent unintended U.S. worldwide taxation for India-based business owners, consultants, and executives.

In this guide, you will learn how the exception works, who qualifies, how to evaluate “closer connection” factors using a practical checklist, how to document Indian tax home ties, and how to complete Form 8840 line by line. You will also understand when this route is unavailable and when a treaty-based position is required instead.

What Is the Form 8840 Closer Connection Exception?

Overview of the Substantial Presence Test

Under U.S. domestic law, an individual becomes a U.S. tax resident if they meet the Substantial Presence Test. The test requires:

  • Presence in the U.S. for at least 31 days in the current year, and
  • A total of 183 days using the weighted formula:

Current year days + 1/3 of prior year days + 1/6 of second prior year days ≥ 183.

Meeting this threshold generally results in U.S. tax residency, exposing the client to worldwide income reporting and information returns.

How the Closer Connection Exception Works

The closer connection exception allows a client who meets the SPT formula to still be treated as a nonresident alien if specific conditions are satisfied. This is a statutory exception under IRC Section 7701(b).

The individual must demonstrate a tax home and stronger connections to a foreign country than to the United States.

For technical background, refer to the IRS guidance on the Closer Connection Exception to the Substantial Presence Test.

Why Form 8840 Matters for Nonresident Aliens

Form 8840 is the formal declaration required to claim this exception. Without filing it timely, the client may be treated as a U.S. resident even if substantively eligible.

Do not confuse this with treaty tie-breaker rules. The closer connection exception is domestic law relief. Treaty-based residency claims require Form 8833 and are used when the client is present 183 days or more in the current year.

Who Should File Form 8840?

Basic Eligibility Requirements

Your client must satisfy all of the following:

  • Meet the SPT using the 3-year formula.
  • Be present in the U.S. for fewer than 183 days in the current tax year.
  • Maintain a tax home in a foreign country for the year.
  • Have a closer connection to that foreign country than to the U.S.

183-Day Limitation in the Current Year

If the client is physically present in the U.S. for 183 days or more in the current year, the closer connection exception is not available—regardless of other ties.

In such cases, evaluate treaty tie-breaker provisions under the India–U.S. DTAA and disclose the position via Form 8833.

Disqualifying Factors (Green Card and Residency Applications)

The exception is not available if the individual:

  • Was a lawful permanent resident (green card holder) at any time during the year, or
  • Applied for a green card during the year and had not formally abandoned the application.

Always ask clients about pending immigration filings.

Visa Waiver Program (VWP) Considerations

Many short-term business visitors enter under the Visa Waiver Program (ESTA). VWP status does not automatically prevent claiming the closer connection exception.

However, frequent 90-day visits across multiple years can cause the SPT threshold to be met. Carefully track entry/exit dates from I-94 records.

Practitioner Tip: Maintain a standardized travel-day computation worksheet for all U.S.-traveling clients.

What Is a Tax Home and Why It Matters

Definition of Tax Home

A tax home is generally the individual’s main place of business or employment, regardless of where the family home is located.

If there is no regular place of business, the tax home may be the regular place of abode.

Business Activities vs. Temporary Assignments

If a client is on a temporary U.S. assignment (generally expected to last one year or less), their tax home may remain in India.

If the assignment becomes indefinite, the U.S. may become the tax home.

Difference Between Tax Home and Residence

Immigration status does not determine tax home. A B1/B2 visitor can have a U.S. tax home if business activities shift substantially.

For India-based entrepreneurs, continued business operations, GST registration, and payroll in India are strong indicators of a foreign tax home.

Checklist: Factors That Determine Closer Connection

Personal and Family Ties

  • Location of permanent home.
  • Where spouse and minor children reside.
  • Schooling of children.
  • Primary doctors and health insurance coverage.

Economic and Business Ties

  • Principal place of employment or active business operations.
  • Location of bank and investment accounts.
  • Where income is generated.
  • Where income tax returns are filed.

Social, Political, and Legal Ties

  • Driver’s license (Indian vs. U.S.).
  • Voter registration.
  • PAN and Aadhaar (India context).
  • Membership in professional bodies (ICAI, trade associations).

Location of Permanent Home and Belongings

  • Ownership or lease of residential property in India.
  • Location of vehicles and valuables.
  • Where personal belongings are maintained.

Practitioner Tip: Before filing Form 8840, complete this checklist internally and document conclusions in your working papers.

How to Document Ties to India (Practical Guide)

Core Documents to Maintain

  • Indian income tax return acknowledgment (ITR-V).
  • Employment agreement or business registration certificate.
  • Lease agreement or property ownership documents in India.
  • Utility bills and Indian bank statements.

Supporting Evidence for Indian Tax Home

  • GST registration and filings.
  • Board resolutions for company directors.
  • Payroll records for Indian employees.
  • School enrollment records for children in India.
  • Indian driver’s license, PAN, Aadhaar.

How to Prepare a Documentation File

Form 8840 is filed without attachments. However, in case of IRS inquiry, documentation must be readily available.

Create a structured digital folder: Travel Logs, Tax Home Evidence, Personal Ties, Economic Ties, and Immigration Records.

This becomes especially important if later years involve residency shifts, dual-status returns, or positions similar to those discussed in our guide on dual status tax return preparation.

Sample Form 8840: India-Based Individual Example

Profile of the Taxpayer

Assume an Indian consultant present in the U.S. for 140 days in 2025, 120 days in 2024, and 90 days in 2023.

SPT calculation: 140 + 40 (1/3 of 120) + 15 (1/6 of 90) = 195 days. SPT met.

How Key Lines of Form 8840 Are Completed

Use the official Form 8840 PDF and instructions while reviewing:

  • Part I: List exact U.S. days for current and prior two years.
  • Part II: Identify India as tax home.
  • Part II: Identify India as country of closer connection.
  • Disclose visa type (e.g., B1/B2).
  • Confirm no green card application pending.

Common Mistakes to Avoid

  • Miscalculating days (ignore partial-day myths—most days count).
  • Confusing treaty claim with closer connection exception.
  • Missing signature.
  • Late filing.

How to Claim the Closer Connection Exception

Attach to Tax Return or Mail Separately

If the client has no U.S.-source income and is not required to file Form 1040-NR, mail Form 8840 separately to the IRS address listed in the instructions.

If Form 1040-NR is required, attach Form 8840 to the return.

Due Date and Submission Address

For individuals not filing Form 1040-NR, the due date is generally June 15 of the following year. Always verify annually.

Consequences of Late Filing

Failure to file timely may result in denial of the exception. The client may then be treated as a U.S. resident and face worldwide taxation, potentially requiring foreign tax credit planning such as outlined in our Foreign Tax Credit Form 1116 guide or evaluation of exclusions under the Form 2555 Foreign Earned Income Exclusion guide.

Conclusion

The Form 8840 closer connection exception is a powerful tool for Indian CAs advising clients with recurring U.S. travel. The key practitioner tasks are accurate day counting, confirming the less-than-183-day current year rule, validating foreign tax home status, and documenting stronger ties to India.

Build standardized travel trackers, closer-connection checklists, and documentation folders into your engagement process. Also identify early when the exception is unavailable and a treaty-based position is required. With proper controls, you can prevent unintended U.S. residency exposure for your clients.

FAQ

1. Can Form 8840 be filed if the client has U.S. rental income?

Yes, but it must be attached to Form 1040-NR. The presence of U.S.-source income does not disqualify the closer connection exception. Ensure the client is present fewer than 183 days in the current year. Report rental income appropriately on 1040-NR.

2. What if the client crosses 183 days in the current year?

The closer connection exception is not available. You must analyze treaty tie-breaker rules under the India–U.S. DTAA. This requires disclosure on Form 8833. Proper residency analysis becomes critical.

3. Does holding a U.S. bank account weaken closer connection?

Not by itself. The IRS looks at the totality of facts and circumstances. However, multiple financial accounts and significant U.S. investments may weaken the foreign connection. Document primary banking activity in India.

4. How do we count days for SPT purposes?

Generally, any day of physical presence counts as a full day. Certain exceptions apply (e.g., medical conditions, exempt individuals). Always reconcile against I-94 travel history. Maintain a year-wise computation sheet.

5. Can a client on B1/B2 visa claim closer connection?

Yes, if all eligibility conditions are satisfied. Visa category alone does not determine tax residency. The critical factors are days present, tax home, and closer connection. Immigration and tax rules operate independently.

6. Is Form 8840 required every year?

Yes, for each year the client meets the SPT but qualifies for the exception. It is not a one-time declaration. Annual day counts must be recalculated. Do not rely on prior-year filings.

7. What happens if Form 8840 is filed late?

The IRS may deny the exception. The client could be treated as a U.S. resident for that year. This may trigger worldwide reporting and potential penalties. Timely filing is essential.

8. Can business owners with U.S. clients claim closer connection?

Yes, if their primary place of business remains in India. Occasional U.S. meetings do not shift tax home. However, if substantial operations move to the U.S., the analysis changes. Evaluate operational control and revenue sources.

9. How is closer connection different from treaty residency?

Closer connection is a domestic law exception available only if present fewer than 183 days in the current year. Treaty residency applies when dual residency arises under domestic laws. Treaty claims require Form 8833 disclosure. The legal basis differs.

10. Should we attach supporting documents to Form 8840?

No, attachments are not required. However, maintain complete documentation in your working papers. The IRS can request substantiation later. Organized documentation reduces audit risk.

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Key Takeaways

  • An individual meets the Substantial Presence Test (SPT) if present 31 days in the current year and 183 days using the 3-year weighted formula.
  • The Form 8840 closer connection exception is available only if the client was in the U.S. for fewer than 183 days in the current year.
  • The client must maintain a foreign tax home and demonstrate stronger personal and economic ties to that country than to the U.S.
  • The exception is not available if a green card application was filed or lawful permanent resident status was held during the year.
  • Form 8840 is generally due by June 15 (if no Form 1040-NR filing obligation), and late filing can invalidate the claim.
  • If the client is present 183 days or more in the current year, consider a treaty tie-breaker (Form 8833) instead of the closer connection exception.

Introduction

As Indian CAs expanding into U.S. tax services, one of the most common issues you will face is clients who frequently travel to the United States for business. Many of them inadvertently meet the Substantial Presence Test (SPT) and assume they are automatically U.S. tax residents.

This is where the Form 8840 closer connection exception becomes a critical planning and compliance tool. Used correctly, it can prevent unintended U.S. worldwide taxation for India-based business owners, consultants, and executives.

In this guide, you will learn how the exception works, who qualifies, how to evaluate “closer connection” factors using a practical checklist, how to document Indian tax home ties, and how to complete Form 8840 line by line. You will also understand when this route is unavailable and when a treaty-based position is required instead.

What Is the Form 8840 Closer Connection Exception?

Overview of the Substantial Presence Test

Under U.S. domestic law, an individual becomes a U.S. tax resident if they meet the Substantial Presence Test. The test requires:

  • Presence in the U.S. for at least 31 days in the current year, and
  • A total of 183 days using the weighted formula:

Current year days + 1/3 of prior year days + 1/6 of second prior year days ≥ 183.

Meeting this threshold generally results in U.S. tax residency, exposing the client to worldwide income reporting and information returns.

How the Closer Connection Exception Works

The closer connection exception allows a client who meets the SPT formula to still be treated as a nonresident alien if specific conditions are satisfied. This is a statutory exception under IRC Section 7701(b).

The individual must demonstrate a tax home and stronger connections to a foreign country than to the United States.

For technical background, refer to the IRS guidance on the Closer Connection Exception to the Substantial Presence Test.

Why Form 8840 Matters for Nonresident Aliens

Form 8840 is the formal declaration required to claim this exception. Without filing it timely, the client may be treated as a U.S. resident even if substantively eligible.

Do not confuse this with treaty tie-breaker rules. The closer connection exception is domestic law relief. Treaty-based residency claims require Form 8833 and are used when the client is present 183 days or more in the current year.

Who Should File Form 8840?

Basic Eligibility Requirements

Your client must satisfy all of the following:

  • Meet the SPT using the 3-year formula.
  • Be present in the U.S. for fewer than 183 days in the current tax year.
  • Maintain a tax home in a foreign country for the year.
  • Have a closer connection to that foreign country than to the U.S.

183-Day Limitation in the Current Year

If the client is physically present in the U.S. for 183 days or more in the current year, the closer connection exception is not available—regardless of other ties.

In such cases, evaluate treaty tie-breaker provisions under the India–U.S. DTAA and disclose the position via Form 8833.

Disqualifying Factors (Green Card and Residency Applications)

The exception is not available if the individual:

  • Was a lawful permanent resident (green card holder) at any time during the year, or
  • Applied for a green card during the year and had not formally abandoned the application.

Always ask clients about pending immigration filings.

Visa Waiver Program (VWP) Considerations

Many short-term business visitors enter under the Visa Waiver Program (ESTA). VWP status does not automatically prevent claiming the closer connection exception.

However, frequent 90-day visits across multiple years can cause the SPT threshold to be met. Carefully track entry/exit dates from I-94 records.

Practitioner Tip: Maintain a standardized travel-day computation worksheet for all U.S.-traveling clients.

What Is a Tax Home and Why It Matters

Definition of Tax Home

A tax home is generally the individual’s main place of business or employment, regardless of where the family home is located.

If there is no regular place of business, the tax home may be the regular place of abode.

Business Activities vs. Temporary Assignments

If a client is on a temporary U.S. assignment (generally expected to last one year or less), their tax home may remain in India.

If the assignment becomes indefinite, the U.S. may become the tax home.

Difference Between Tax Home and Residence

Immigration status does not determine tax home. A B1/B2 visitor can have a U.S. tax home if business activities shift substantially.

For India-based entrepreneurs, continued business operations, GST registration, and payroll in India are strong indicators of a foreign tax home.

Checklist: Factors That Determine Closer Connection

Personal and Family Ties

  • Location of permanent home.
  • Where spouse and minor children reside.
  • Schooling of children.
  • Primary doctors and health insurance coverage.

Economic and Business Ties

  • Principal place of employment or active business operations.
  • Location of bank and investment accounts.
  • Where income is generated.
  • Where income tax returns are filed.

Social, Political, and Legal Ties

  • Driver’s license (Indian vs. U.S.).
  • Voter registration.
  • PAN and Aadhaar (India context).
  • Membership in professional bodies (ICAI, trade associations).

Location of Permanent Home and Belongings

  • Ownership or lease of residential property in India.
  • Location of vehicles and valuables.
  • Where personal belongings are maintained.

Practitioner Tip: Before filing Form 8840, complete this checklist internally and document conclusions in your working papers.

How to Document Ties to India (Practical Guide)

Core Documents to Maintain

  • Indian income tax return acknowledgment (ITR-V).
  • Employment agreement or business registration certificate.
  • Lease agreement or property ownership documents in India.
  • Utility bills and Indian bank statements.

Supporting Evidence for Indian Tax Home

  • GST registration and filings.
  • Board resolutions for company directors.
  • Payroll records for Indian employees.
  • School enrollment records for children in India.
  • Indian driver’s license, PAN, Aadhaar.

How to Prepare a Documentation File

Form 8840 is filed without attachments. However, in case of IRS inquiry, documentation must be readily available.

Create a structured digital folder: Travel Logs, Tax Home Evidence, Personal Ties, Economic Ties, and Immigration Records.

This becomes especially important if later years involve residency shifts, dual-status returns, or positions similar to those discussed in our guide on dual status tax return preparation.

Sample Form 8840: India-Based Individual Example

Profile of the Taxpayer

Assume an Indian consultant present in the U.S. for 140 days in 2025, 120 days in 2024, and 90 days in 2023.

SPT calculation: 140 + 40 (1/3 of 120) + 15 (1/6 of 90) = 195 days. SPT met.

How Key Lines of Form 8840 Are Completed

Use the official Form 8840 PDF and instructions while reviewing:

  • Part I: List exact U.S. days for current and prior two years.
  • Part II: Identify India as tax home.
  • Part II: Identify India as country of closer connection.
  • Disclose visa type (e.g., B1/B2).
  • Confirm no green card application pending.

Common Mistakes to Avoid

  • Miscalculating days (ignore partial-day myths—most days count).
  • Confusing treaty claim with closer connection exception.
  • Missing signature.
  • Late filing.

How to Claim the Closer Connection Exception

Attach to Tax Return or Mail Separately

If the client has no U.S.-source income and is not required to file Form 1040-NR, mail Form 8840 separately to the IRS address listed in the instructions.

If Form 1040-NR is required, attach Form 8840 to the return.

Due Date and Submission Address

For individuals not filing Form 1040-NR, the due date is generally June 15 of the following year. Always verify annually.

Consequences of Late Filing

Failure to file timely may result in denial of the exception. The client may then be treated as a U.S. resident and face worldwide taxation, potentially requiring foreign tax credit planning such as outlined in our Foreign Tax Credit Form 1116 guide or evaluation of exclusions under the Form 2555 Foreign Earned Income Exclusion guide.

Conclusion

The Form 8840 closer connection exception is a powerful tool for Indian CAs advising clients with recurring U.S. travel. The key practitioner tasks are accurate day counting, confirming the less-than-183-day current year rule, validating foreign tax home status, and documenting stronger ties to India.

Build standardized travel trackers, closer-connection checklists, and documentation folders into your engagement process. Also identify early when the exception is unavailable and a treaty-based position is required. With proper controls, you can prevent unintended U.S. residency exposure for your clients.

FAQ

1. Can Form 8840 be filed if the client has U.S. rental income?

Yes, but it must be attached to Form 1040-NR. The presence of U.S.-source income does not disqualify the closer connection exception. Ensure the client is present fewer than 183 days in the current year. Report rental income appropriately on 1040-NR.

2. What if the client crosses 183 days in the current year?

The closer connection exception is not available. You must analyze treaty tie-breaker rules under the India–U.S. DTAA. This requires disclosure on Form 8833. Proper residency analysis becomes critical.

3. Does holding a U.S. bank account weaken closer connection?

Not by itself. The IRS looks at the totality of facts and circumstances. However, multiple financial accounts and significant U.S. investments may weaken the foreign connection. Document primary banking activity in India.

4. How do we count days for SPT purposes?

Generally, any day of physical presence counts as a full day. Certain exceptions apply (e.g., medical conditions, exempt individuals). Always reconcile against I-94 travel history. Maintain a year-wise computation sheet.

5. Can a client on B1/B2 visa claim closer connection?

Yes, if all eligibility conditions are satisfied. Visa category alone does not determine tax residency. The critical factors are days present, tax home, and closer connection. Immigration and tax rules operate independently.

6. Is Form 8840 required every year?

Yes, for each year the client meets the SPT but qualifies for the exception. It is not a one-time declaration. Annual day counts must be recalculated. Do not rely on prior-year filings.

7. What happens if Form 8840 is filed late?

The IRS may deny the exception. The client could be treated as a U.S. resident for that year. This may trigger worldwide reporting and potential penalties. Timely filing is essential.

8. Can business owners with U.S. clients claim closer connection?

Yes, if their primary place of business remains in India. Occasional U.S. meetings do not shift tax home. However, if substantial operations move to the U.S., the analysis changes. Evaluate operational control and revenue sources.

9. How is closer connection different from treaty residency?

Closer connection is a domestic law exception available only if present fewer than 183 days in the current year. Treaty residency applies when dual residency arises under domestic laws. Treaty claims require Form 8833 disclosure. The legal basis differs.

10. Should we attach supporting documents to Form 8840?

No, attachments are not required. However, maintain complete documentation in your working papers. The IRS can request substantiation later. Organized documentation reduces audit risk.

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