I have written a few blog posts on the thorny side of filing US income tax returns, FBARs and various information returns when one is married to a non-resident alien (NRA) spouse. It may be helpful to read those posts here and here before embarking on this one as the earlier posts set out some basics.
Here’s a quick overview of the Internal Revenue Code Section 6013(g) election –
Electing to Treat the Foreign Spouse as a US “Resident”: The Section 6013(g) Election
Many people are under the mistaken belief they can file the income tax returns as a “single” individual if they are married to an NRA spouse. This is incorrect. You cannot file as a “single” individual if you are considered to be legally married. Others mistakenly believe that they can use the status “married filing jointly,” or MFJ, with the NRA spouse by simply ticking the relevant box on the tax return. When married to an NRA, however, more is required to use the MFJ filing status.
One can actively choose to treat the foreign spouse as “resident” alien for certain US income tax purposes by making what is known as an Internal Revenue Code Section 6013(g) election. Making the election generally means the couple can file the US income tax return using MFJ status. My earlier posts discuss how this can be very advantageous in some cases, even though most clients cannot imagine it would ever be a good idea to treat the non-US spouse as a US “resident” for income tax purposes.
Certain procedures are required to make a valid election. The relevant Treasury Regulations require the nonresident alien and the US spouse to make the election by attaching a statement to a joint return for the first taxable year for which the election is to be in effect. See Treas. Reg. §1.6013-6(a)(4)(i). The statement must contain a declaration that the election is being made and that the requirements of Treas. Reg. §1.6013-6(a)(1) are met for the taxable year, it must contain the name, address, and TIN of each spouse, and it must be signed by both persons making the election.
What Happens if You Don’t Properly Make the Election? Is the MFJ Filing Valid?
The issue addressed in today’s post is whether the failure to make such an election as required by the Treasury Regulations renders Section 6013(g) inoperative. In most cases I see, the husband and wife simply use MFJ status but they failed to file the required election statement. Quite often, even though they file MFJ they do not understand that this means the NRA’s worldwide income is also subject to tax and must be reported on the US tax return. So, in cases when the NRA has significant foreign income, when the couple learns the ugly truth about filing MFJ the couple is hoping the MFJ filing will NOT be treated as valid.
There’s not much guidance on the effect of this type of failure. But here is what we’ve got – and the latest information shows that taxpayers may be in for a very difficult time if they make a mistake with the election.
- IPU – Election Under IRC § 6013(g) (8/28/2014)
First, the Internal Revenue Service (IRS) has issued a so-called IPU (International Practice Unit) covering the topic of the Section 6013(g) election. An IPU is a learning tool for IRS agents in the complex area of international tax matters. The IPU can be accessed here. The IPU emphasizes over and over that the election must be “properly” made and sets out the requirements for a proper election. This would lead one to believe that absent a proper election, the case is closed. Recent case law, however, shows that this is not the case.
- Kravetz v. Commissioner (1985)
Kravetz v. Commissioner, T.C. Memo. 1985-496, (affirmed by the US District Court for the District of Columbia, here) did not deal specifically with Code Section 6013(g), however it is useful to help us in determining what happens if the election is not properly made. In this case, it benefited the IRS to deny the taxpayers MFJ status. The taxpayers in Kravetz (a US husband and NRA wife) wished to use a now-repealed Code section that would have given a tax benefit on the tax rate for personal service income. This benefit was available only if the taxpayers filed a joint tax return. The couple did file a joint tax return, but it was not treated as valid by the IRS because the wife was a NRA and no Code Section 6013(g) election had been made. The Tax Court agreed with the IRS and noted that because the couple was eligible to file a joint return but did not make a proper election in order to do so as required, Section 6013(g) was not applicable. Naaaay for the taxpayer.
- CCA 2013021415392015 (2013)
In an apparently very charitable mood, the IRS took a similar stance (even though it favored the taxpayer) when it issued Chief Counsel Advice 2013021415392015 Number: 201325013 Release Date: 6/21/2013. While a CCA cannot be used or cited as precedent, it provides valuable input as to the IRS view of the matter at hand. In that Advice, the issue addressed whether certain penalties for failure to file information returns pertaining to a foreign trust could apply against a NRA who improperly filed joint income tax returns with his US citizen wife. The couple did not make a proper election under section 6013(g) to treat the husband as a resident alien and thus they should not have filed MFJ. The CCA cited Kravetz and stated:
“Because the nonresident alien and his spouse did not make a proper election, section 6013(g) is inoperative and does not affect the taxpayer’s status as a nonresident alien for purposes of chapters 1 and 24 of the Internal Revenue Code. … [I]t is our understanding that a nonresident alien is not subject to [foreign trust] reporting requirements.”
Accordingly, a penalty for failure to file the foreign trust information returns was not assessed. Yaaay for the taxpayer.
- Zuhovitzky v. Commissioner (Filed September 20, 2018)
In Jonathan and Esther Zuhovitzky v. Commissioner T.C. Memo. 2018-158 (September 2018), the IRS asked for summary judgment that Esther, an NRA wife of a US citizen, be subject to tax on her worldwide income even though she and her husband, Jonathan, never filed a Section 6013(g) election. The couple had filed their tax returns using MFJ status but omitted the NRA wife’s foreign income from a Swiss bank. The IRS surmised that the reason they filed MFJ was to obtain favorable treatment on their US taxes and Jonathan’s world-wide income, while Esther did not reveal her Swiss bank account and did not pay US taxes on the income related to it. The taxpayers argued that before processing their tax returns the IRS well knew that Esther had never filed a proper Section 6013(g) election, and that she needed to do so. Thus, in a nutshell taxpayers’ position is that Esther didn’t either surprise the IRS or hit the agency blindside on this issue and therefore, since the election was not made, their MFJ filing status was invalid. As such, the NRA wife’s Swiss income should not be taxed.
The IRS requested summary judgment based on two grounds: substantial compliance and the so-called “duty of consistency” (quasi-estoppel). Basically the IRS position was that because the couple filed MFJ for many years, they manifested an “intent” to elect 6013(g) treatment. The taxpayers said, no, they did not manifest that intent. The Tax Court Judge refused to grant IRS summary judgment on grounds that this involves an issue of fact (which means it requires an examination of all the facts and circumstances so that a decision can be reached):
“Like the substantial compliance analysis, the duty of consistency analysis requires factual determinations. Without access to petitioners’ returns for the years at issue, we cannot discern what facts petitioners provided to respondent about Esther’s residency. Accordingly, we are not able to determine the nature of petitioners’ representation or whether respondent had actual or constructive knowledge that petitioners erroneously filed joint returns. Therefore, matters of material fact are in dispute, and this issue is inappropriate for summary judgment. As we cannot proceed with our analysis under either the duty of consistency or substantial compliance, we will deny respondent’s motion for partial summary judgment as a whole.” 2018 T. C. Memo. 158, at p. 10 (italics, mine).
Bodes as if a Naaaay for the Taxpayer may be on the way.
What Does All This Mean?
In summary, merely failing to file the proper statement for making the 6013(g) election is not dispositive of the issue and does not necessarily render Section 6013(g) inoperative. At least not under the most recent view of the IRS and the Tax Court, forked tongues notwithstanding!
This means that if you make an error and file tax returns with a NRA spouse using MFJ status improperly, you can potentially be looking at a very messy and expensive mistake. Apparently, depending on how it benefits the IRS, I can see the IRS saying that if you did not file the election statement properly, you are not to be treated as filing MFJ, unless of course, IRS wants you to be treated as filing MFJ!
Perhaps the real lesson here is this —
NRAs with significant income/assets should NOT marry a US citizen. AND if they do…… they must never (i) commingle property, (ii) live in a community property jurisdiction anywhere on the globe (that US tax mess is discussed here, here and here), (iii) make the Section 6013(g) election, (iv) make a mistake and file tax returns MFJ even without formally making the Section 6013(g) election, (v) have children if the children will be tainted with US citizenship and……
Well, maybe it’s just easier to find a NRA spouse, and live happily ever after … leaving Uncle Sam stateside.
If you need help evaluating your particular situation, I am here to assist. Please email to arrange a consultation.
Posted January 21, 2019
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6 thoughts on “Tax Court, IRS Speak with Forked Tongue? Section 6013(g) Election to Treat Foreign Spouse as US “Resident””
It is good that you have addressed the pitfalls of community property. The IRM discusses CP at https://www.irs.gov/irm/part25/irm_25-018-001 The IRS used to list the countries which it considered as CP jurisdictions; they seem to have omitted it: just as well because the list was faulty. Few who discuss the tax implications mention a key point: that the USA follows a rule of “partial mutability” whereas the rest of the world, including (according to Dicey, Morris & Collins, the UK) the rule of immutability, That is discussed here: https://ilr.law.uiowa.edu/assets/Uploads/ILR-103-5-Schoenblum.pdf Thus: although the IRS out of a fixation with American conflict of laws rules might not understand or accept it (I haven’t read through all the cases; the ones the IRS uses are listed in the linked IRM reference above) it is not present domicile or place of marriage which count but domicile of the marriage (generally I think the place the couple intend to live and do live immediately following the marriage; and in civil-law countries that generally means there is an official local registration and a family register of some kind) or the terms of a pre-nup (marriage contract). It is theoretically difficult to change one’s marital regime, but my Ph.D. mentor, Prof, Verwilghen, was also head of notarial (i.e. family law) studies at @unclouvain and he said that to his scholarly dismay judges (in Belgium anyway) tended to rubber stamp whatever regime-changing document a notaire put in front of them.
Aware of this, when one of my daughters married (with a reception at Mar a Lago, for what it’s worth, but that was long ago and yes, Trump was there on the premises) a French citizen and they both lived in France at the time as EU citizens, I drafted a pre-nup of which the sole substantive element was to choose the rule of partial mutability. As it happens they both live in California now. While I’ve seen no precedent that would tell me the pre-nup is recognizable by the IRS or anyone else, I hope it is: and unless commingled my daughter’s gifts and inheritance should be separate property and remain so. Commingling is the big risk to separate property in the context you wrote about.
There is yet another issue that not a few British owners of Spanish property have discovered: while a first marriage valid where solemnized is probably valid worldwide (some exceptions like the former Greek rule that an Orthodox couple’s marriage was only valid if solemnized in church; and the Sharia rule on interfaith marriages), in the event of divorce a second marriage may be a “limping” one.
Finally, I’m not sure that your analysis of Harry and Wilma’s Swiss (default) marital regime is correct. (And yes, full disclosure: we are both Swiss). Here’s a brief explanation in English of the three types of marital property, and the default regime is « participation aux acquets » the first one listed, confusingly translated I think as « Contribution to jointly acquired property »: https://www.ch.ch/en/matrimonial-regime/