Introduction and summary
1. Internal Revenue Code 6114 creates a general requirement to “report” when a taxpayer takes the benefit of a tax treaty.
2. Reporting takes place on Form 8833 which is an “information return”.
3. Not all “treaty positions” are required to be reported.
4. The failure to report the “treaty position” (if it must be reported) does NOT mean that one does NOT benefit from the treaty position. (The treaty benefit is NOT dependent on it being reported.)
5. Internal Revenue Code 6712 creates a $1000 penalty for failing to report a “treaty position” that is required to be reported.
Now on to the explanation
The United States has many tax treaties with many nations. A comprehensive list is here. As a general principle the “savings clause” prevents Americans abroad from having the benefit of treaty provisions. That said, there are situations where a U.S. citizen abroad can benefit from the specific provisions of a specific treaty. In some cases the benefits are found ONLY in the Treaty. In some cases the Internal Revenue Code specifically references a possible treaty benefit (example resourcing income to create a “foreign tax credit” under IRC S. 904). A second (and very relevant) example of the Internal Revenue Code referencing the benefits of a treaty in S. 877A(d) of the Internal Revenue Code, where with respect to an “eligible pension”, the taxpayer: “makes an irrevocable waiver of any right to claim any reduction under any treaty with the United States in withholding on such item”.
As always, we begin with the code …
IRC S. 6114 https://t.co/fXpWvOlbmH : Form 8833, Treaty-Based Return Position Disclosure Under S. 6114 or 7701(b) https://t.co/bB6Kg8lRdi
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) July 13, 2016
Subtitle F (Procedure and Administration) is where the requirement to report the treaty position is found …
26 U.S. Code § 6114 – Treaty-based return positions
(a) In general Each taxpayer who, with respect to any tax imposed by this title, takes the position that a treaty of the United States overrules (or otherwise modifies) an internal revenue law of the United States shall disclose (in such manner as the Secretary may prescribe) such position—
on the return of tax for such tax (or any statement attached to such return), or
if no return of tax is required to be filed, in such form as the Secretary may prescribe.
(b)Waiver authority
The Secretary may waive the requirements of subsection (a) with respect to classes of cases for which the Secretary determines that the waiver will not impede the assessment and collection of tax.
Note that S. 6114 became law in 1988. Treaties have existed since before 1988. S. 6114 creates a requirement to report a treaty position. In general, the applicability of the treaty based position is NOT dependent on having complied with S. 6114. That said, Internal Revenue Code S. 6712 authorizes a $1000 penalty (subject to reasonable cause) which may be assessed for failure to disclose the position.
Form 8833 – the mechanism to comply with S. 6114
Form 8833 is how the treaty based position is disclosed “(in such manner as the Secretary may prescribe)”. Interestingly, the IRS is using form 8833 for:
Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)
It is common for the IRS to use one form to comply with the reporting requirements of multiple sections of the Internal Revenue Code.
Form 8833 and the instructions:
f8833
Are you required to file form 8833 to get the benefit of the treaty?
The answer is NO. Form 8833 is an “information return”. The treaty benefit exists whether the treaty position if disclose on Form 8833 or not.
Internal Revenue Code 6114 is a relatively new provision in the Internal Revenue Code. In fact, it was first enacted in 1988.
“Pub. L. 100–647, title I, § 1012(aa)(5)(D), Nov. 10, 1988, 102 Stat. 3533, provided that:
“The amendments made by this paragraph [enacting this section and section 6712 of this title and renumbering former section 6114 as section 6115 of this title] shall apply to taxable periods the due date for filing returns for which (without extension) occurs after December 31, 1988.”
Internal Revenue Code 6114 allows Treasury to exempt certain things from Form 8833 reporting
Internal Revenue Code 6114(b) specifically states:
(b) Waiver authority
The Secretary may waive the requirements of subsection (a) with respect to classes of cases for which the Secretary determines that the waiver will not impede the assessment and collection of tax.
The exercise of that “waiver authority” is found in the Regulations that describe situations where “reporting is specifically waived“.
(Americans abroad who are “tax residents” of other countries should be aware of this specific instance of a waiver of reporting found in § 301.6114-1 Treaty-based return positions – (c)(4):
(iv) That a treaty reduces or modifies the taxation of income derived from dependent personal services, pensions, annuities, social security and other public pensions, or income derived by artistes, athletes, students, trainees or teachers;
)
Bottom line: Not all “treaty positions” need to be reported on a Form 8833.
Penalty for failure to report (file Form 8833) when it is required
This is a $1000 penalty and is found in Internal Revenue Code 6712.
(a) General rule
If a taxpayer fails to meet the requirements of section 6114, there is hereby imposed a penalty equal to $1,000 ($10,000 in the case of a C corporation) on each such failure.
(b) Authority to waive
The Secretary may waive all or any part of the penalty provided by this section on a showing by the taxpayer that there was reasonable cause for the failure and that the taxpayer acted in good faith.
(c) Penalty in addition to other penalties
The penalty imposed by this section shall be in addition to any other penalty imposed by law.
