Under US law, any citizen living abroad is subject to US tax, but individuals can get a credit for taxes paid in a foreign country as long as these are not classified as social security taxes.
In a case brought by Ory and Linda Eshel, the plaintiffs argued that French income and social taxes – the General Social Contribution (CSG) and the Repayment of the Debt of Social Security (CRDS) – should not be considered as a social security tax and therefore be eligible for deduction.
After a seven-year court battle, the IRS has admitted that it was wrong not to allow US taxpayers living in France to deduct such taxes from their US ones.
Grey area in France-US treaty
“US citizens living in France have to pay US tax but any French income tax that they pay reduces the US liability dollar for dollar,” Stuart Horwich, a US attorney based in London, told International Adviser.
“Social security taxes are not creditable, so there’s a distinction between the two. The way that the determination is made as to what something is, is to actually look at a social security tax treaty between the two countries and in the US and French one there are eight different taxes.
“But that treaty was done in 1987.
“The treaty is an old one and the taxes that they are referring to are newer. So, there is a catch-all in the treaty which says that new taxes which amend or supplement the eight listed ones will also be covered, and the question is did CSG and CRDS amend or supplement [those taxes].
“The IRS took the position it did and they are wrong,” Horwich added.
Eligible for compensation
Following the admission from the IRS, US citizens living in France will be able to claim a refund over the overcharged tax, dating back 10 years.
Horwich told IA: “On a go-forward basis, now everybody is going to claim these and on a retrospective basis. The IRS was being quite aggressive with their audits and publications, and people would have paid US tax because they wouldn’t have been able to offset CSG and CRDS against that tax limit.
“And now people could file refund claims to ask for their money back for the last 10 years. There’s a statute that says in all foreign tax credit situation you get 10 years, normally you only get three.”
Getting the money back
According to Horwich, the IRS might be forced to refund US expats a sum that could total hundreds of millions of dollars.
People have already started to claim their taxes back as the refund will not happen automatically: “You must file a refund claim,” he said.
While the majority of people have seen their situations settled, there is still an ongoing case where a taxpayer has over $1m (£800,000; €894,000) at stake, but Horwich said that most people won’t have such a high amount to claim back.
This is just one of the legal battles US citizens abroad are fighting against the taxman, as they have also been fighting the “discriminatory nature” that Fatca has on people living in France.