US Court of Appeal Decision Serves as Reminder of Non-Resident US Citizen Tax Obligations

January 3, 2022

Written on behalf of Feigenbaum Consulting

The United States is one of the few countries in the world that taxes its citizens based on citizenship rather than residency. It’s a topic we have blogged about in the past, particularly as it relates to the obligations of dual citizens of the United States and Canada who live in Canada. Many dual citizens living in Canada may not know that they still have to file taxes in the United States even if they pay Canadian taxes.

In today’s blog, we wanted to expand the scope of this discussion and look at a taxpayer who lives in the US Virgin Islands (USVI). The taxpayer in question believed their tax obligations to the United States were satisfied when they filed taxes in the USVI as the USVI shared the information with the United States Internal Revenue Service (IRS). The matter made its way to the US Court of Appeals for the Eighth Circuit.

The case also addresses when the clock starts ticking in the limitation period under which the IRS can pursue an assessment of someone who has already filed taxes.

IRS found taxpayer to be deficient in filings for failing to file in both United States and US Virgin Islands

Many US citizens choose to spend time in the USVI or other warmer locations, either permanently or just for the winter. In Coffey v. Commissioner of Internal Revenue, the taxpayer in question was not a bona fide resident of the US Virgin Islands (USVI) and therefore had an obligation to file tax returns in both the USVI and the United States. Bonafide USVI residents are only required to file in the USVI.

When the taxpayer filed their returns with the USVI in 2003 and 2004, they claimed to be a bona fide resident. After doing so, the USVI sent their tax return information to the IRS. The IRS assessed the documents it was provided and notified the taxpayer about their duty to have filed US taxes, but only in 2009. The IRS advised the taxpayer they were deficient in their filings.

The taxpayer sought summary judgment, stating the IRS had missed the three-year limitation period. They also took the position that their filing of taxes with the USVI should have satisfied their US tax obligations. The IRS argued that since they should have filed taxes in the United States, the limitation period had not yet started. The Tax Court’s original decision agreed with the taxpayer. However, the decision was reversed by the Eighth Circuit in 2020.

The matter was appealed and heard again by the Eighth Circuit.

IRS alleged taxpayer was not a bona fide resident of US Virgin Islands

The court began its analysis by agreeing that the IRS generally has only three years after a return is filed to assess taxes. However, the tax return must first be “filed.” When a taxpayer fails to file taxes, there is no time limit in which the IRS must pursue an assessment.

In this case, the taxpayer only filed tax returns in the USVI, claiming they were a bona fide resident. While the USVI sent some of their documentation along to the IRS, no actual return was filed. When the IRS performed its assessment of the taxpayer, it took the position that the taxpayer was not a bona fide resident of the USVI and therefore had to file taxes in the United States. The IRS relied on the Internal Revenue Code, which states a USVI non-resident must file their return with both governments.

Dispute over meaning of “filing” under the Internal Revenue Code

The taxpayer stated that the documents sent to the IRS by the USVI qualify as “filing” under the Internal Revenue Code. In the initial determination of this matter, the Tax Court agreed with this submission and noted that the first two pages of the taxpayer’s returns were received by the Philadelphia office of the IRS.

In the most recent appeal, the Eighth Circuit stated that neither the Internal Revenue Code nor the IRS regulations define the words “file” or “filed”. However, case law has stated that filing should include the delivery of appropriate forms to the IRS. A 1944 decision of the U.S. Supreme Court states that returns are filed if “delivered, in the appropriate form, to the specific individual or individuals identified in the Code of Regulations.”

The court also referenced a 2015 decision of the U.S. Tax Court in which the IRS audited a taxpayer over three years after a return was filed. However, since the taxpayer had knowingly omitted certain income from their filing, the court determined they had not met the filing requirements necessary to trigger the limitation period.

Due to these reasons, the court held that the tax information sent to the IRS by the USVI did not trigger the beginning of the statute of limitations. The court said it was “undisputed” that the taxpayer did not intend to actually file their taxes with the IRS. The court also held that the IRS’s receiving, processing, and auditing of documents failed to start the clock. Instead, only the actual filing of a return can do so.

Contact Feigenbaum Law for Assistance with Cross-Border Tax Issues

International taxation involving people who live in two different countries or tax jurisdictions such as the United States and the United States Virgin Islands can be complicated. The experienced team at Feigenbaum Law offers a wide range of tax law services, including corporate and personal tax planning and compliance and representation in tax litigation. To learn how we can help you with your US or Canadian tax issues, contact us online or call us toll-free at 1-877-275-4792.

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