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Unexpected Consequences of the IRS Hunt for U.S. Tax Evaders


In recent years, the IRS has increased its efforts to identify U.S. citizens and residents (U.S. persons) who are not in compliance with their U.S. tax obligations. A major component of this effort has been the Foreign Account Tax Compliance Act (FATCA) which became law in 2010 and has key provisions which go into effect July 2014. Previous MNP blogs have discussed the details and implications of this law. Please see Kevyn Nightingale’s February 7, 2014 blog post for more information.

The stress and burden of FATCA has been expected since it became law. However, it appears this increased scrutiny on U.S. persons may be causing nets to be cast outside of the financial world. Recently, a U.S. citizen client’s employer requested that its U.S. employees fill out IRS Form W-4 Employee’s Withholding Allowance Certificate and IRS Form 673 Statement for Claiming Exemption from Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Section 911. The employer was not a U.S. company but was part of a multi-national group of companies with a presence in the U.S. The employee provided no services in the U.S.

The client had attempted to find an applicable exception on the face of Form W4. There were none. Further, Form 673 allowed only a partial exemption in this case. Based on the forms themselves, it appeared that the employee would be subjected to U.S. income tax withholding in addition to the taxes withheld by the countries in which he performed services.

Just as many U.S. persons are not aware of their U.S. tax filing obligations, most, if not all, would not be aware that there are provisions in the Internal Revenue Code (IRC) that require foreign corporations to withhold and remit income taxes to the IRS on wages paid to U.S. persons unless an exception exists. The provisions apply even if the foreign corporation is not engaged in a trade or business within the U.S.

Thankfully, an exception exists for U.S. citizens who perform services in a foreign country when the employer is required by law to withhold and remit income tax to any foreign country. The issue was resolved by attaching a statement to the employee’s Form W4 with the appropriate IRC citation. Unfortunately, if the employee had been a green card holder, rather than a citizen, this exception may not have applied.

The willingness or ability of the IRS to enforce its income tax withholding provisions on foreign corporations is debatable and it is not certain why this employer has begun to request U.S. income tax withholding forms. However, if an employer takes it upon itself to comply with U.S. tax law, U.S. persons may find themselves in a position where they seem to (and in some instances may in fact) have unexpected U.S. income tax withholding obligations. We hope this situation is an exception and will not lead to more mental and financial stress for U.S. persons living abroad.