Form 8833, Nonresident Status Under a Treaty, and PenaltiesMarch 2, 2018 - Phil HodgenFriday Edition
A taxpayer who wishes to invoke an income tax treaty to claim nonresident alien status for U.S. income tax purposes–must Form 8833 be filed to claim this status?
The answer is no. A taxpayer may claim nonresident alien status for U.S. income tax purposes without filing Form 8833 to tell the IRS about this tax reporting position.
The follow-up question is also interesting:
What’s the worst that can happen if the IRS audits an income tax return and claims that Form 8833 is missing?
The worst that can happen is that the IRS can impose a $1,000 penalty. But the IRS cannot disallow the treaty claim to nonresident status.
Treaty-Based Return Position
When you file an income tax return, the stuff you put on the tax return is called your return position:
A taxpayer is considered to adopt a “return position” when the taxpayer determines its tax liability with respect to a particular item of income, deduction or credit. A taxpayer may be considered to adopt a return position whether or not a return is actually filed.1
U.S. tax law is derived from two2 sources:
- the Internal Revenue Code, and
- tax treaties between the United States and other countries.
As a result, you can either file your income tax return (take a return position):
- according to the Internal Revenue Code, or
- according to the rules found in an applicable income tax treaty.
If you decide that you want to compute your income tax liability using the rules found in an income tax treaty, then, you will adopt a “return position” by reporting your income and calculating your tax liability using those rules. It will not shock you to discover that the IRS calls this a treaty-based return position.
Note the important feature here: a return position is taken by filing a tax return. Indeed, a return position can be taken by NOT filing a tax return. In that case, you are taking the position that the law does not require you to file an income tax return.
Again: you can file a tax return and claim the application of treaty rules simply by preparing the tax return using those rules.
Reporting a Treaty-Based Return Position
This is astonishing. The Internal Revenue Code has a paperwork requirement for everything. Yet you can override the effect of the Internal Revenue Code by simply filing a tax return using treaty rules rather than Internal Revenue Code Rules?
Surely there must be a paperwork requirement here.
And indeed there is. In fact, there are two.
IRC § 6114 Reporting Requirements
The Internal Revenue Code requires a taxpayer to disclose a treaty-based reporting position:
(a) 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—
(1) on the return of tax for such tax (or any statement attached to such return), or (2) if no return of tax is required to be filed, in such form as the Secretary may prescribe.3
The Secretary (of the Treasury) has prescribed Form 8833 as the method for disclosing treaty-based return positions.4 There are some exceptions to the requirement to report a treaty-based position.5 Every self-respecting tax law requires an exception or two.
Reporting Under the 7701(b)-7 Regulations
There is a second place where the IRS has required disclosure of a treaty-based reporting position. A resident alien who wants to use a treaty to compute U.S. tax liability as if he or she is a nonresident must file Form 1040NR6 and attach Form 8833.7
This helps you understand why Form 8833’s full title is “Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)”. There are two different rules that trigger the filing requirement for Form 8833.
Failure to Disclose a Treaty-Based Return Position
We have seen that you take a reporting position simply by filing a tax return. That includes a treaty-based reporting position. We know that the IRS wants to see Form 8833, disclosing exactly what you did.
What happens if you do not file Form 8833? Well, penalties.
Section 6114 Penalties
If Section 6114 says you must disclose a treaty-based return position (on Form 8833, remember) and you don’t, there will be a penalty:
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.8
Penalties Under the 7701(b)-7 Regulations
The same penalty rules are invoked if a taxpayer is required to disclose a nonresident status claim under Regs. § 301.7701(b)-7(b):
If the taxpayer fails to file the statement required by paragraph (b) of this section on or before the date prescribed in paragraph (b) of this section, the taxpayer will be subject to the penalties imposed by section 6712. See section 6712 and § 301.6712-1.9
This is a curious — and lazy — way for the IRS to impose a penalty. Invoking Section 6712 penalties seems self-defeating on its face. It should not work:
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.10
Congress has said that the $1,000 penalty is imposed if there is a failure to meet the requirements of IRC § 6114. Congress specifically did not say that the penalty can be imposed for a failure to meet the requirements of IRC § 7701(b).
The Secretary of the Treasury generally has power to impose reporting requirements needed to enforce the Internal Revenue Code.11 So, the Regulations requiring a resident alien electing nonresident status by treaty to report that election will almost certainly be valid.
But the ability of the IRS to impose a penalty under IRC § 7701(b) Regulations — without a companion authorization in the Internal Revenue Code from Congress — is questionable.
Amounts of Penalties
Note that the penalty for failure to disclose a treaty-based reporting position is not just $1,000. It is $1,000 per position. You might take dozens of reporting positions on an income tax return. The penalties, in aggregate, might be quite high.
This is not the time to talk about how penalties are calculated. I just want to bring to your attention this small fact: don’t blithely assume that your maximum exposure for failure to file Form 8833 is a puny $1,000.
Treaty-Based Position Not Invalidated by Failure to File Form 8833
The last point is the important one.
You claim a treaty-based reporting position — for my example, the claim that you can file a U.S. tax return as a nonresident alien rather than a resident alien. You do not file Form 8833, but you prepare your income tax return consistently with your treaty-based reporting position.
If the IRS audits you, can they disallow your treaty-based reporting position and force you to be taxed as a resident alien?
This requires a bit of logic, rather than reference to a specific authority. Remember there are two sources of Federal tax law: the Internal Revenue Code and treaties. The IRS derives all of its power from the Internal Revenue Code (Title 26, United States Code).12 Everything it can do is there, explicitly granted to the IRS by Congress.
Treaties are a completely separate body of law, and none of them contain language granting the IRS authority of any kind. When a taxpayer takes a treaty-based reporting position, the IRS cannot take that treaty-based reporting position away from the taxpayer. The IRS has not been granted that power by Congress or by the treaty itself.
Penalties, Yes. But You Win
In short, someone who wants to be treated as a nonresident alien for U.S. income tax purposes can do so, if a relevant income tax treaty allows it. Form 8833 is required, and a $1,000 penalty (of questionable legality) may be imposed for failure to disclose the election of nonresident alien status.
But failure to file Form 8833 will not doom this person to resident alien status. The treaty-based reporting position will be effective.
- Regs. § 301.6114-1(a)(2)(i). ↩
- There is actually a third source of tax law: little nubbins of tax law embedded in the Statues at Large, which for one reason or another never find their way into the Internal Revenue Code. I commend to you Jack Townsend’s blog post that explains the difference between the Statutes at Large (all the laws that Congress passes) and Title 26 (the Internal Revenue Code) (an insidious replicant of the Statute of Large that is not actually the Federal law itself. His explanation tickled my inner tax nerd. Thanks, Jack. ↩
- IRC § 6114(a). ↩
- Regs. § 301.6114-1(d)(1). ↩
- Regs. § 301.6114-1(c). ↩
- Regs. § 301.7701(b)-7(b). ↩
- Regs. §§ 301.7701(b)-7(b), (c)(1)(i). ↩
- IRC § 6712(a). ↩
- Regs. § 301.7701(b)-7(d). ↩
- IRC § 6712(a). ↩
- IRC § 6001. ↩
- Yes, I know I am ignoring Jack Townsend’s technical explanation. The law is in the Statutes at Large, not Title 26 (the Internal Revenue Code). The IRS receives its authority and power from the Statutes at Large, not the Internal Revenue Code. So sue me. ↩