How IRS Form 8833 is an Expatriate Tax Trap
Form 8833 Expatriation Tax Trap: The United States has entered into income tax and estate tax treaties with more than 50 countries. When a US Person wants to rely on a treaty position involving taxes, they will file a Form 8833 — unless an 8833 form exception applies and the form is not required.
There are many reasons to take a treaty position.
One reason US persons take a treaty position is to seek being treated as a foreign resident for US tax purposes.
But, when it comes to expatriation, there is a Form 8833 Expatriation Tax Trap to be aware of.
Purpose of IRS Form 8833
There are several purposes of the form, but when it comes to dual-residents (not “dual-citizens” per se), the form provides the following:
“The form must also be used by dual-resident taxpayers (defined later) to make the treaty-based return position disclosure required by Regulations section 301.7701(b)-7.”
“A separate form is required annually for each treaty-based return position taken by the taxpayer, although a taxpayer may treat payments or income items of the same type received from the same payor as a single item for reporting purposes.”
Regulations section 301.7701(b)-7
“(a) Consistency requirement
The application of this section shall be limited to an alien individual who is a dual resident taxpayer pursuant to a provision of a treaty that provides for resolution of conflicting claims of residence by the United States and its treaty partner.
A “dual resident taxpayer” is an individual who is considered a resident of the United States pursuant to the internal laws of the United States and also a resident of a treaty country pursuant to the treaty partner’s internal laws.
If the alien individual determines that he or she is a resident of the foreign country for treaty purposes, and the alien individual claims a treaty benefit (as a nonresident of the United States) so as to reduce the individual’s United States income tax liability with respect to any item of income covered by an applicable tax convention during a taxable year in which the individual was considered a dual resident taxpayer, then that individual shall be treated as a nonresident alien of the United States for purposes of computing that individual’s United States income tax liability under the provisions of the Internal Revenue Code and the regulations thereunder (including the withholding provisions of section 1441 and the regulations under that section in cases in which the dual resident taxpayer is the recipient of income subject to withholding) with respect to that portion of the taxable year the individual was considered a dual resident taxpayer.”
What Does This Mean?
In any year that a resident claims Form 8833 treaty benefits to be treated as a foreign resident, then they will be treated as a foreign resident for US tax purposes. This is crucial for taxpayers who may be approaching or over the 8-of-15-year Long Term Resident benchmark.
Expatriation from the US is the process of relinquishing US Citizenship or Lawful Permanent Resident Status. Some expatriates who are considered Covered Expatriates may become subject to an exit tax.
Two categories of filers may fall into the Covered Expatriate category:
- U.S. Citizens
- Legal Permanent Residents (8 of the last 15 years)
8 of the last 15 Years
To avoid the Covered Expatriate conundrum, an LPR can avoid LTR status by not meeting the definition of long-term. And, any year you claim foreign residence under a treaty can help eliminate that year as counting towards the 8 of 15 years. For example, if you had your Green Card from January 2010 to January 2019, you would be considered a Long-Term Resident. If you claimed 8833 treaty benefits as a foreign resident at the time you filed your 2012-2015 tax returns, you would not meet the definition of a Long-Term Resident because those years would not count toward the 8 of the last 15 years.
Exception to Green Card Status
“You aren’t treated as a lawful permanent resident if you commenced to be treated as a resident of a foreign country under a tax treaty, didn’t waive the benefits of such treaty applicable to foreign residents, and notified the IRS of such a position on a Form 8833 attached to a timely filed income tax return.”
Here is the Kicker
If you were already an LTR at the time you commence to be treated as a resident of such foreign treaty country, then you will be “treated as having expatriated as of that date.” (Instructions for Form 8854)
Form 8833 Termination of U.S. Residency
As provided by Form 8833:
“Termination of U.S. Residency. If you are a dual-resident taxpayer and a long-term resident (LTR) and you are filing this form to be treated as a resident of a foreign country for purposes of claiming benefits under an applicable U.S. income tax treaty, you will be deemed to have terminated your U.S. residency status for federal income tax purposes.”
Why is this important?
Because it is high-risk to file Form 8833 treaty benefit retroactively. If it is not accepted, and you never filed the 8854 (because you presumed you were not an LTR), you may be subject to taxes, fines, and penalties even after you have relinquished your Green Card.
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