Treaties between the U.S. & Foreign Countries can change the results of U.S. Federal Tax Laws

By Coleman Jackson, CPA, Attorney & Counselor At law
June 15, 2015

Residency is defined pursuant to the definition established by the United States and the country in question.  U.S. tax laws do not overrule an applicable treaty’s definitions of residency.   Treaties between the U.S. and foreign countries can change the results of U.S. federal tax laws.

If a taxpayer’s residency is determined by an applicable treaty, the taxpayer must file Form 8833, Treaty-Based Position Disclosure Under Section 6114 or 7701(b) of the Internal Revenue Code.  In some instances, a taxpayer may be a citizen of the United States and another country under both countries tax laws; in which case, the taxpayer is a dual citizen.  Dual citizens who take a tax treaty-based position under U.S. Federal  Tax Laws must timely disclose the tax-treaty position when filing Form 1040NR, U.S. Nonresident Alien Income Tax Return or Form 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No DependentsDual residents taking a tax-treaty return position must compute their tax as a nonresident alien.  They must also file Form 8833.

Under 26 CFR Chapter 1, Section 301.6114-1, a taxpayer is considered to have adopted a “return position” when the taxpayer determines its tax liability with respect to a particular item of income, deduction or credit.  It does not matter whether a return was filed.  In other words, even if the taxpayer does not file a U.S. tax return, under U.S. tax law, the taxpayer has taken a “return position”.  26 CFR Chapter 1, Section 301.6114-1, treaty based return position applies if the taxpayer takes a return position that any treaty of the United States (including, but not limited to, an income tax treaty, estate and gift tax treaty, or friendship, commerce and navigation treaty) overrules or modifies any provision of the Internal Revenue Code and thus effects or potentially effects a reduction of any tax incurred at anytime.  If a taxpayer adopts a “treaty-based return position”, the taxpayer’s residency dictates how the taxpayer is required to disclose their return position as discussed above.

In the event the taxpayer concludes that a return position is not a treaty-based position, and decides not to follow the disclosure requirements of Section 301.6114-1; the taxpayer, if challenged by IRS correspondence, IRS field auditors or otherwise, must show that it has a substantial probability of successful defense of its return position.

Seek appropriate legal counsel with regards to any specific factual situation.  This Overview is supplied for educational purposes and do not create an attorney-client relationship with the Immigration & Tax Law Firm of:

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