IRS Chief Counsel Concedes Tax Treaty Residency Position for LPR German Taxpayer in Tax Court
Those who have their “lawful permanent resident” status and live largely outside the U.S. (or plan on moving to do so in the future) should be keenly aware of the definition of a “long-term” resident. See, IRC Section 877 (e)(2).
See an earlier 2014 post, Who is a “long-term” lawful permanent resident (“LPR”) and why does it matter?
Importantly, the U.S. Tax Court just entered a Decision for a case involving a German citizen who had been a lawful permanent resident for many years (U.S. Tax Court Docket 18451-19). In that case the IRS revenue agent took the position the German citizen was a “United States person” and therefore subject to U.S. taxation on his worldwide income and subject to “international information reporting requirements.”
See, an earlier post (May 2020) Few LPRs Who Leave (Emigrate from) the U.S. Formally Abandon their Immigration Status: Important Tax Consequences (Part I) for a more complete discussion of the statutory definition and potential tax treaty override for those non-U.S. citizens.
As previously explained (Oct. 2018) Legal Question of the Day: FBAR Penalties for USCs and LPRs Residing Outside the U.S. Is the IRS Website correct as a matter of law?, “Lawful permanent residents (“LPRs”) may, but are not necessarily defined as “United States persons” under title 26, Section 7701(a)(30)(A) by application of an applicable tax treaty and the flush language of Section 7701(b)(6). See, Timing Issues for Lawful Permanent Residents (“LPR”) Who Never “Formally Abandoned” Their Green Card and see the IRS practice unit discussion, Determining Tax Residency Status of Lawful Permanent … – IRS.gov
The determination of if or when one becomes a “long-term resident” is highly complex, due to different cross-provisions in the tax law. Specifically, Section 7701(b)(6) has a provision that can have unintended consequences for the unwary LPR. See, for instance, LPR status can be abandoned for tax purposes (since 2008 tax law changes) by merely leaving and moving outside the U.S. in some cases?
As is increasingly common in IRS tax audits of international individual matters, information penalties become a cudgel to impose greater
economic pressure (when the income tax determinations are relatively modest) to pursue cross border cases. In the recent U.S. Tax Court case (U.S. Tax Court Docket 18451-19), the IRS had assessed substantial penalties for more than 10 tax years for failure to file IRS Form 8865.
What was striking about the German citizen case who had been a lawful permanent resident for many years (U.S. Tax Court Docket 18451-19) is that the IRS conceded the case as part of a “qualified offer” procedure (Section 7430) where the taxpayer offered what was less than 1% of the total tax, penalty and statutory interest amounts determined by the IRS. Plus, there was both a statutory notice of deficiency (90/150 day letter) on income tax and negligence penalties plus a separate direct assessment of information penalties under IRC Section 6038(b) for not filing IRS Form 8865.
The importance of an international information penalty assessment, is that the U.S. Tax Court will often times not have jurisdiction to address the issue; at least not on first blush. See, Flume v. Commissioner, T.C. Memo 2017-21, Judge Goeke addressing 5471 penalties and IRC Sections 6330(c)(2)(B) and 6330(c)(4)(A). For an excellent discussion on these issues, see two outstanding tax authors –
- Megan Brackney. Problems Facing Taxpayers with Foreign Information Return Penalties and Recommendations for Improving the System (Parts 1 through 3) in Procedurally Taxing.
- Robert Horwitz. Can the IRS Assess or Collect Foreign Information Reporting Penalties? TAX NOTES, Jan. 2019.