Via Andrew Mitchel as well as The Tax Times blog, we learn that the IRS has published Chief Counsel Advice regarding a U.S. citizen wife who tried to file a joint U.S. income tax return with her “nonresident alien” husband. Most likely this means the wife lives in her husband’s country, or the two together as expats in a third country (though they might also be living in the U.S. with the husband on a student visa). I reproduce the entire text of the advice (CCA 201325013) after the jump. If you’re thirsty for more, you can see all of the latest & greatest hits from the IRS at their Written Determinations page, which is updated about once per week.
Anyway, in February 2013, an IRS examiner combing over the couple’s return — probably in hopes of assessing penalties, since now the tax law rather than the nationality law must bear the burden of punishing Americans for the traitorous act of sleeping with foreigners — wanted to know whether the wife’s act of submitting a “married filing jointly” Form 1040 had accidentally turned the husband into a U.S. person, even if they had not explicitly made a § 6013(g) election for a nonresident alien spouse to be treated as a resident alien for tax purposes. Such treatment would saddle him with an obligation to file Form 3520 on what the IRS hilariously calls “foreign trusts” and what the husband probably thinks of as “my local & fully-tax-compliant retirement account” — and since the would-be joint return apparently didn’t include any 3520s for him, the couple would have been subject to penalties.
The response from the Office of the Chief Counsel was that it had not. The IRS cannot infer intent to make a § 6013(g) election from the filing status check-box on Form 1040; the election must be stated explicitly in writing, for example in a cover letter. This means the wife’s return was invalid; she’s not eligible to submit a “married filing jointly” return and will probably face a higher rate of tax, though she might be able to file as “head of household”. However, the situation is much rosier for the husband: he did not become a U.S. person by this error. (If only we emigrants & accidentals could dodge that bullet so easily!)
Perhaps the IRS will “solve” this little problem in the future by introducing a tiny checkbox on an obscure form with confusing wording and a $10,000 failure-to-file penalty, but for now the happy couple can get back to arguing about the FBARs & Form 8938s that the wife has to file on their joint “offshore” bank accounts which they use to pay the mortgage and buy groceries.
You asked whether a nonresident alien who filed, possibly in error, Forms 1040 income tax returns jointly with his wife (who is a U.S. citizen) is now subject to the section 6677 penalty for the failure to file information returns required under section 6048 with respect to certain foreign trusts. If the nonresident alien did not make a proper election under section 6013(g) to be treated as a resident alien for certain tax purposes, then the answer is no, he is not subject to the section 6677 penalty for the failure to file information returns required under section 6048. See the response below from [name blacked out in original]. Please let me know if you have any questions.
You asked for our opinion on whether a nonresident alien who filed a joint income tax return becomes subject to the section 6048 reporting requirements and section 6677(a) penalties as a result of section 6013(g). We specifically address the situation in which the nonresident alien and his spouse did not make a proper election under section 6013(g).
Section 6013(g) allows a nonresident alien individual who is married to a citizen or resident of the United States to elect to be treated as a resident of the United States for purposes of chapter 1 and 24 of the Internal Revenue Code. Sec. 6013(g)(1) and (2). The regulations require the nonresident alien and his spouse to make the election by attaching a statement to a joint return for the first taxable year for which the election is to be in effect. Treas. Reg. §1.6013-6(a)(4)(i). The statement must contain a declaration that the election is being made and that the requirements of Treas. Reg. §1.6013-6(a)(1) are met for the taxable year, it must contain the name, address, and TIN of each spouse, and it must be signed by both persons making the election. Treas. Reg. §1.6013-6(a)(4)(ii). Failure to make such an election renders section 6013(g) inoperative. See Kravetz v. Commissioner, T.C. Memo. 1985-486.
Because the nonresident alien and his spouse did not make a proper election, section 6013(g) is inoperative and does not affect the taxpayer’s status as a nonresident alien for purposes of chapters 1 and 24 of the Internal Revenue Code. Although section 6048 is under [blank], it is our understanding that a nonresident alien is not subject to section 6048 reporting requirements. See Treas. Reg. §§ 16.3-1, 404.6048-1.
Please note that our answer may potentially be different if a proper section 6013(g) election was made or if the nonresident alien has since become a United States person. If you would like to discuss further or have any other questions, please feel free to contact me.
Obligatory disclaimer: if you’re on your way to Tax Court, note that Chief Counsel Advice cannot be cited as precedent. Of course, your lawyer already knows this, and if you can’t afford a competent lawyer because of the OVDI penalties you paid last year, well, good luck getting justice in Tax Court!
All links to Internal Revenue Code & Treasury Regulations sections above were added for this post (not present in the original document) and go to the Legal Information Institute at Cornell University. Unfortunately, I cannot give you a freely-accessible link to Kravetz v. Commissioner; the Tax Court only has memorandum decisions from 1995 & later in its online database, and the Google Books scans aren’t freely accessible. However, Kravetz appealed to the DC Circuit Court, whose opinions — unlike those of the Tax Court — are widely available, even “unpublished” ones like this one (though if you go to 802 F.2d 1483 (1986), all you’ll see is the single word “affirmed”; you’ll have to visit FindACase.com for the full text).
The circuit judge included a brief summary of the facts and what happened in the inferior court:
For the taxable years 1980 and 1981, Sydney C. Kravetz was a resident of Mexico and married to a non-resident alien. In filing his tax returns for both of these years, Mr. Kravetz utilized the “maximum tax” provision of section 1348 of the Internal Revenue Code. 26 U.S.C. § 1348 (1982). This section permits qualifying individuals to limit the maximum tax rate on their personal service taxable income to 50 percent. In some circumstances, use of section 1348 can be advantageous to the taxpayer, resulting in a lower total tax bill.
The availability of section 1348 is limited in several respects, one of which is important to this case. Specifically, subsection (c) mandates that section 1348 apply to “a married individual only if such individual and his spouse make a single return jointly for the taxable year.” Although they were eligible to do so, Kravetz and his non-resident alien spouse did not elect to file a joint return. Thus, the IRS took the position that Kravetz was not allowed to invoke section 1348 to calculate his 1980 and 1981 taxes. The Tax Court, in a memorandum opinion, agreed with the IRS. So do we.
26 USC § 1348 is a now-repealed provision created by the Revenue Act of 1978 (HR 13511, Pub.L. 95-600); you can see the relevant portion at 92 Stat. 2848. Mr. Kravetz was a Gillette executive, and did business in Mexico as early as the 1950s. He appears to have remained in Mexico for the rest of his life; his 2001 obituary listed his place of death as Mexico City.
Kravetz’s case is an example of a ruling which hurt the taxpayer in question but later turned out to offer protection to others, like the husband and wife mentioned above. Sadly we see the opposite situation far more often, especially in nationality law. In the mid-20th century, the Supreme Court made a plethora of rulings intended to protect Americans abroad from being stripped of citizenship against their will. However, those are now used to argue that emigrants who never intended to continue being U.S. citizens, but then later accidentally or carelessly asserted one of the “benefits” of U.S. citizenship (like applying for an SSN after a confused IRS official saw their U.S. birthplace & rejected their ITIN application), should nevertheless be punished by the tax code as if they were U.S. citizens, pour encourager les autres to strip themselves of their U.S. citizenship.