The IRS continues to face the difficult challenge of working through a historically large number of unprocessed tax returns. This has created significant issues for those attempting to resolve open matters because amended returns and written communications continue to sit unprocessed. The agency recognized the challenge and in early February made the decision to suspend automatic notifications which were exacerbating the matter. While it has certainly helped taxpayers living within the U.S., challenges have persisted for those abroad.
Since expatriates need to file IRS Form 8802, Application for United States Residency, which in certain cases requires the submission of the current year tax return. However, given that so many returns have gone largely unprocessed, it has created a new dimension of problems. Unfortunately, the certification is needed for expatriates to claim certain tax benefits including the foreign tax credit and the earned income exclusion credit. The IRS has announced a new policy for that allows certain applicants to file the submitted copy of the current year return without accompanying schedules. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.
About Form 8802 and Letter 6616
Form 8802, Application for United States Residency Certification, is used to certify a U.S. taxpayer’s residency when the taxpayer lives and works in a foreign country. Form 8802 must be filed to request Letter 6166, a letter of U.S. residency certification. As seasoned expats know, foreign governments require Letter 6166 if the taxpayer wishes to claim tax benefits under an income tax treaty or value added tax (VAT) exemption.
U.S. taxpayers that may file Form 8802 include:
- Trusts and estates
- Tax-exempt entities
Form 8802 is used to verify an appropriate tax return has been filed for the year tax benefits are requested. Letter 6616, then, helps the taxpayer to reduce or eliminate foreign withholding tax and/or double taxation.
Because the most recently filed tax return is required, that has presented some extra challenges for expats. The National Taxpayer Advocate and the IRS itself have both been transparent that COVID-19 combined with years-long budget cuts strained the agency to its breaking point.
That backlog means that many may still be waiting on the IRS to post the most recently filed tax return, thus delaying their U.S. citizenship status and the international tax benefits that go along with it.
In some cases, the foreign withholding agent will withhold the foreign earned income tax at the reduced treaty rate, but not always. Others will withhold the full amount and only refund the tax paid once they receive Letter 6616.
Temporary IRS Policy Change
Those requesting a two-year certification of citizenship via Form 8802 now have an option to speed up the certification process.
Effective April 4, 2022, certain U.S. taxpayers seeking residency certification need only submit a signed copy of the current year income tax return. Accompanying forms, schedules, or attachments are not required.
Taxpayers who aren’t sure if the IRS posted their most recent tax return can submit a signed copy along with Form 8802 to speed up the application process. This policy change is in a trial run for two years and could be extended longer.
When to File Form 8802
Expats should mail Form 8802 along with the most recently posted tax return or the current year signed return, including the fee, at least 45 days before Letter 6616 is needed.
Individuals must pay a nonrefundable $85 fee regardless of how many countries request or the number of tax years covered by a certification. Businesses, estates and trusts, and tax-exempt entities must pay a nonrefundable $185 fee. Custodial accounts will pay a user fee of either $85 or $185 depending on whether the account holder is an individual or not. Taxpayers with multiple requests should include all Letter 6616 requests on the same Form 8802 to avoid paying duplicate fees.
The IRS is supposed to notify taxpayers after 30 days if there will be a delay in processing; however, considering the backlog and staffing issues the agency has been dealing with, it’s likely this standard is not being met.
The recently announced change will provide relief to certain taxpayers that need to acquire certification to receive foreign tax benefits. If you have questions about the information outlined above or need assistance with another international tax concern, JLK Rosenberger can help. For additional information call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.