Wednesday, January 10th 2024

American Expats in France Win Battle Over IRS

Written by

Rafael Bracho

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American Expats in France Win Battle Over IRS

In a rare win for US citizens over the IRS, American expats in France have claimed victory in a 7-year-long, David-vs-Goliath legal battle. The US government will stop contesting a tax deduction which American expats in France have been adamant that they deserve for the last decade. This 7-year-long legal battle resulted from an audit of Ory and Linda Eshel’s 2008 and 2009 tax returns. This couple took the IRS to court, which has had profound effects on tax law, as well as hundreds of thousands of American expats in France.

In a courtroom last week, the IRS finally succumbed to admitting that they should have allowed US expats in France to deduct Generalized Social Contribution taxes. This French levy has been imposed on earned income since the early 1990s.

Known as the CSG and the CRDS, it has long been contested whether or not they are categorized as taxes at all. The IRS has argued that they were “social charges” not taxes, however, the recent ruling last week stated that indeed they do constitute a form of taxes in France—which could then be deducted from their overall taxes owed in the United States.

In a status report released on June 13th, the IRS stated that it “no longer asserts that petitioners are precluded from claiming the foreign tax credits at issue in this case.” Now they have admitted that their “improper interpretation” of the bilateral treaty between the United States and France has resulted in the US “wrongly collecting millions of dollars” from American expats in France.

In effect, for the last decade, American expats in France have been made to pay the same taxes twice. Now, this could have great consequences for the IRS. Ultimately, American expats in France can claim refunds with a total estimated to be somewhere near $100 million dollars. Some American expats in France could seek refunds dating back ten years.

American expats in France can deduct what they pay in local French taxes, though they cannot deduct social charges. In 2014, a tax court initially ruled that CSG were non-deductible social charges, however the decision was reversed by a court of appeals in 2016, and sent back to Tax Court for a second review.

Not only are American expats in France eligible for refunds, but also so-called “Accidental Americans”—or people who have little to no connection to the United States, but for some reason, they have US citizenship either because they were born on US soil, or because they have an American parent—could also seek damages if they have been double charged over the Generalized Social Contribution taxes.

These “Accidental Americans” are often forced to pay taxes in the United States because US tax eligibility is based on citizenship, not residency. Though, a report released in May found that France and the United States should renegotiate the FATCA tax treaty in order to protect these Accidental Americans.

Fabien Lehagre, President of the Association of Accidental Americans said in a statement, “I am relieved that the IRS has finally admitted its error. . . CSG and CRDS are indeed taxes, not social charges. . . The fact that the IRS long refused to recognize them as such caused significant harm to Americans in France, including Accidental Americans. . . I hope that this historic shift will be followed by a more general recognition of the issues.”

Lehagre went on to say that, “There are numerous other aberrations in US tax law, foremost among them the fact that people who have no significant connection to the United States are required to pay US taxes: these are the Accidental Americans I represent, and this is what we seek to remedy.”

Whether or not Accidental Americans in France and abroad will ever get their financial independence from the US will be a much harder fought battle. However, it seems that a small victory was won last week for Accidental Americans and all other American expats in France.

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