What Is a 8833 and When Do I Need to File One?
The world of international tax is fraught with peril and at the same time rife with opportunities. Perhaps nowhere is this more prevalent than in the area of tax treaties. The idea behind tax treaties is to either avoid double taxation (having the same tranche of income being taxed in two different countries) or to ensure a lower rate of tax (for instance, that a certain tax rate should apply to a specific kind of income). The United States has tax treaties with more than 50 countries all over the world.
Taking a tax treaty position allows one to argue that a treaty that the U.S. has with a foreign country overrules a provision of the Internal Revenue Code and therefore results in a reduction or elimination of tax on a specific amount of income. This is done with Form 8833, which is filed together with one’s federal tax return. Given that the form is filed with your tax return, the due date is the same as it would be for your tax return, and that is typically April 15. Also, if you have an extension on file for your federal tax return, then you do not need an extension for Form 8833.
A scenario in which one would file a Form 8833 to take a tax treaty position is as follows. Suppose that you have an Australian superannuation account (a type of pension account) and you would like to prevent the earnings in this account from being taxed in the U.S. In this scenario, you would cite the U.S./Australia tax treaty on this form, mentioning the specific articles of the treaty and taking a position to explain why the earnings in the superannuation account are not taxable in the U.S.
Another scenario in which you would take a tax treaty position is if you spent enough days in the U.S. to qualify for the substantial presence test but would like to argue a closer connection to a foreign country, and therefore still file a non-resident tax return in the U.S., thus excluding all of your foreign income from taxation in the U.S. In this scenario, you would also cite a tax treaty between the U.S. and a foreign country, mentioning the specific articles within the treaty and excluding certain income from U.S. taxation.
As you can see, done correctly and with a good understanding of tax law, taking a tax treaty position can be hugely beneficial. However, this approach should only be taken by a tax professional who has experience with tax treaties and preparing this form, as preparing the form incorrectly may result in the IRS denying the tax treaty position and opening one up to tax and penalties.
A simple example of how things can go wrong with this form is the following. Suppose you have income earned in Hong Kong that you would like to exclude from U.S. taxation. You then take a tax treaty position on Form 8833, stating that the income should not be taxed in the U.S. due to the U.S/China tax treaty. You also diligently research your position and cite the specific articles in the tax treaty, thinking that you are in the clear. However, for the purposes of taking a tax treaty position in the U.S., Hong Kong is considered separate from China, and there is no tax treaty between the U.S. and Hong Kong. Regardless of what one’s political views are, in this situation, you would not be able to take a tax treaty position because for the purposes of taking a tax treaty position, the IRS considers Hong Kong to be separate from China, and no tax treaty exists between Hong Kong and the U.S.
Therefore, if you have assets or income that you feel should be excluded from U.S. taxation due to a tax treaty, please do not attempt this yourself. Rather, please get in touch with our team of experts who can guide you through these murky waters and prepare Form 8833 correctly and in a timely manner, thereby minimizing your tax exposure, reducing the tax owed, and helping you stay compliant with U.S. tax law.