IRS Admits $100m Error Over Expats Taxes After 11 Years

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The US tax man has finally admitted wrongly demanding millions of dollars from Americans living in France after a seven-year legal battle.

The Internal Revenue Service  (IRS) agreed in a French court that the wording of a tax treaty had been wrongly interpreted for more than a decade.

Now, American expats in France are considering reclaiming the money they were forced to pay in error.

Stuart Horwich, the London lawyer who represented two expats in the case, suggests repaying the taxes could cost the IRS up to $100 million as thousands of US expats are affected by the ruling.

He hinted just one claim adds up to $1.5 million, but many taxpayers may not ask for their money back because they no longer have income records and must pay to file for a refund.

Double taxation mistake

The row dates to 2008, when the IRS declared that US expats in France could not offset some French taxes against their US tax liabilities.

The IRS then undertook a compliance campaign to ensure the expats paid their tax bills without the deductions.

Under the US double taxation agreement with France, expats in France should have paid US tax on their French incomes after deducting taxes paid in France. The IRS wrongly argued elements of French income tax were social taxes and failed to consider them under the treaty.

“I am relieved that the IRS has finally admitted its error over treating income taxes as social charges,” said Fabien Lehagre, head of the Association of Accidental Americans, a lobby group campaigning against US tax laws impacting on expats.

Social charges

The case was brought by Ory and Linda Eshel, dual French-American citizens.

They disputed the IRS decision that French the contribution sociale généralisée (CSG) and the contribution pour le remboursement de la dette sociale (CRDS) income levies were social charges rather than income taxes that could be offset against US taxes under the double taxation agreement.

CSG and CRDS add up to around 10% of a French resident’s taxable income, said Horwich, adding the Eshels have also asked the IRS to cover their legal costs.

The USA is one of only a handful of countries that orders citizens living overseas to pay taxes to the IRS.

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