IRS Form 8833 – Treaty-Based Return Disclosure Under IRC 6114

IRS Form 8833 – Treaty-Based Return Disclosure Under IRC 6114 – When MUST It Be Filed?

While the light of my life was off at a family wedding in Fargo, ND this past weekend a friend flew into town unexpectedly from Minnesota with a complimentary ticket to the Broncos Vikings football game. Of course this necessitated that I abandon my 13 and 11 year old children Sunday.

Great game with good friends, amazing! Absolutely no regrets at the time.

As a result of shirking my parental responsibilities though there was a a LOT of bickering and mashing of teeth caused by a hastily arranged plan for the kids to attend catechism class Sunday evening un-escorted that did NOT end well. In the process of separating the two and sending them each off to bed a reflection of work reality from this past week wafted into consciousness, siblings everywhere it seems are the same.

I spent a fair amount of time most recently dealing with a much older brother and sister who were beating each other up, angry hearts and all, concerning a difference of opinion over their family’s perceived obligations to file IRS Form 8833 -Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)3.

It subtly dawned on me that I am more their pastor than their tax practitioner and as such adjusted my fees to a rate reserved only for my most privileged clients. This file was special though as it gave me the opportunity to drill down on IRC Section 6114– Treaty Based Return Positions.

The 8833 form is generally used by US taxpayers to make tax “treaty-based return position” disclosures to the IRS required by IRC section 6114, with a separate form for each treaty-based return position taken. Dual-resident are also required to make the treaty-based return position disclosure required by Regulations section 301.7701(b)-7 Coordination with Income Tax Treaties.

Quite often US Taxpayers are unclear as to whether they are required to file this form.Under 26 CFR 301.6114-1 – Treaty-based return positions there are mandatory filing requirements and of course exceptions.

Generally speaking though if you “adopt”a “tax return position” substantiating that a treaty of the US overrules or modifies the Internal Revenue Code in any way that causes you a reduction of tax, you must disclose your position, which is best done using IRS Form 8833.

A “tax return position” is “adopted” when you determine your tax liability with respect to any one particular item of income, deduction or credit. As such you may for example be arguably considered to have adopted a tax return position BEFORE a tax return is actually filed, a procedural nuance with other implications that we won’t delve into with this post.

To determine whether a “tax return position” is a “treaty-based return position” you must compare your tax liability under the tax treaty (including credits, carry-backs, carryovers, and other tax consequences or attributes for the current year as well as for any other affected tax years)to your tax liability that would be reported if the tax treaty provision did not exist.

If there is a difference (or potential difference) in these two amounts, the position taken on a return is a treaty-based return position that must be reported. Here are two examples I pulled out of the IRC:

1. “X, a Country A corporation, claims the benefit of a provision of the income tax treaty between the United States and Country A that modifies a provision of the Code. This position does not result in a change of X’s U.S. tax liability for the current tax year but does give rise to, or increases, a net operating loss which may be carried back (or forward) such that X’s tax liability in the carry back (or forward) year may be affected by the position taken by X in the current year. X must disclose this treaty-based return position with its tax return for the current tax year.”
2. “Z, a domestic corporation, is engaged in a trade or business in Country B. Country B imposes a tax on the income from certain of Z’s petroleum activities at a rate significantly greater than the rate applicable to income from other activities. Z claims a foreign tax credit for this tax on its tax return. The tax imposed on Z is specifically listed as a creditable tax in the income tax treaty between the United States and Country B; however, there is no specific authority that such tax would otherwise be a creditable tax for U.S. purposes under sections 901 or 903 of the Code. Therefore, in the absence of the treaty, the credit ability of this petroleum tax would lack a substantial probability of successful defense if challenged, and Z must disclose this treaty-based return position.”

• reduces the rate of withholding tax otherwise applicable to a particular type of fixed or determinable annual or periodical income subject to withholding under section 1441 or 1442, such as dividends, interest, rents, or royalties to the extent such income is beneficially owned by an individual or a State (including a political subdivision or local authority);
• 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
• exempts the taxpayer from the excise tax imposed by section 4371, but only if: the person claiming such treaty-based return position is an insured, as defined in section 4372(d) (without the limitation therein referring to section 4371(1)), or a U.S. or foreign broker of insurance risks
• generally involves payments or income items received by the individual during the course of the taxable year do not exceed $10,000.

For a complete list of waivers please go to 26 CFR 301.6114-1 – Treaty-based return positions

Reporting is specifically identified as being required in the regulation when for example a treaty:

• contains a nondiscrimination provision of a treaty precludes the application of any otherwise applicable Code provision, other than with respect to the making of or the effect of an election under section 897(i);
• reduces or modifies the taxation of gain or loss from the disposition of a United States real property interest;
• exempts a foreign corporation from (or reduces the amount of tax with respect to) the branch profits tax (section 884(a)) or the tax on excess interest (section 884(f)(1)(B));

For a complete list of mandatory reporting please go to 26 CFR 301.6114-1 – Treaty-based return positions

In summary it turned out that the taxpayers in question are indeed obligated to file the 8833 because the treaty in question reduced the rate of tax on:

1. both interest and dividends paid by a foreign corporation that are from sources within the United States by reason of section 861(a)(2)(B) or section 884(f)(1)(A)
2. income subject to withholding under section 1441 or 1442 that a foreign person receives from a U.S. person because the payments were not properly reported to the IRS on a Form 1042S.

For more information contact me anytime.