What Is a Treaty-Based Return Position?

The United States maintains tax treaties with many foreign countries to clarify taxing rights and prevent the double taxation of income. When a taxpayer uses a treaty provision to alter a rule in the U.S. Internal Revenue Code (IRC), they are taking a treaty-based return position. This position asserts that the treaty’s rule should apply instead of standard U.S. tax law, which can result in a lower tax liability.

A treaty-based return position is a formal stance that can change how income is taxed, its source, or whether a person is considered a U.S. resident for tax purposes. Because these positions modify domestic tax law, the government requires taxpayers to provide notice when one is taken. This disclosure allows the Internal Revenue Service (IRS) to monitor how tax treaties are being applied and ensure compliance with international agreements.

When Disclosure is Required

The requirement for disclosing a treaty-based return position is established under IRC Section 6114. This rule mandates that if a taxpayer takes a position that a U.S. treaty overrules or modifies an internal revenue law, leading to a tax reduction, that position must be disclosed. The determination of whether a position needs reporting hinges on a comparison: the tax liability with the treaty benefit versus the liability without it.

A disclosure rule also applies to certain individuals under IRC Section 7701, which defines who is a “resident alien” for tax purposes. An individual who is a resident of both the U.S. and another country (a dual-resident taxpayer) can use a treaty’s tie-breaker rule to be treated as a resident of the foreign country. If a dual-resident taxpayer makes this choice and their income for the year exceeds $100,000, they must disclose this position.

The regulations provide several exceptions where disclosure is waived. Reporting is not required if a treaty reduces the rate of withholding tax on U.S. source income like dividends, interest, or royalties. Disclosure is also waived for positions that a treaty modifies the taxation of income from pensions, annuities, and social security. Taking a position under treaty articles covering income earned by students, trainees, teachers, and researchers also does not require disclosure.

Another exception applies when the total amount of payments or income items affected by the treaty position for the tax year does not exceed $10,000. If a partnership or trust has already disclosed a treaty-based position on its informational return, the individual partners or beneficiaries are excused from making a separate disclosure for that same position.

Information Needed for Form 8833

Disclosure of a treaty-based return position is made on Form 8833, Treaty-Based Return Position Disclosure. Before completing this form, a taxpayer must gather specific information to accurately report their position to the IRS. The form requires a clear explanation of the facts and the legal basis for the position taken.

The taxpayer must identify the foreign country with which the U.S. has the treaty they are relying on. Following this, the taxpayer must pinpoint the specific article or articles within that treaty that provide the basis for their position.

The form requires a summary of the facts and a clear explanation of the treaty-based return position. This narrative should explain how the treaty article applies to the taxpayer’s specific situation. It must also identify the specific provision of the Internal Revenue Code that is being overridden or modified by the treaty.

The taxpayer must list the nature and amount of the income or other item for which the treaty benefit is claimed. For example, if a treaty exempts certain income from U.S. tax, the type and amount of that exempt income must be stated. A separate Form 8833 is required for each distinct treaty-based position taken.

How to File Your Disclosure

Form 8833 is not filed on its own; it must be attached to the taxpayer’s annual income tax return for the year the position is taken. This ensures that the disclosure is reviewed in the context of the taxpayer’s overall financial and tax situation for the year.

For individual taxpayers, Form 8833 is attached to Form 1040-NR, U.S. Nonresident Alien Income Tax Return, or a standard Form 1040. For foreign corporations, the disclosure is attached to their U.S. income tax return, Form 1120-F. The disclosure must accompany the primary tax filing for the period.

When filing a paper return, Form 8833 is physically attached to the completed tax return before it is mailed. For those who file electronically, tax preparation software should allow for the form to be included as part of the electronic submission package.

If a treaty position results in no U.S. tax liability and no other requirement to file a return, a return must still be filed for the sole purpose of submitting the Form 8833 disclosure. The tax return would include basic identifying information such as name, address, and taxpayer identification number, along with the attached Form 8833.

Penalties for Failure to Disclose

Failing to file a required Form 8833 can lead to financial penalties under IRC Section 6712. The penalty for not disclosing a treaty-based return position is $1,000 for individuals for each failure. For C corporations, the penalty is $10,000 for each failure to disclose.

This penalty can be applied for each separate position that was not properly disclosed. For instance, if a taxpayer fails to disclose two different treaty-based positions in the same year, the IRS could impose the penalty for each failure. This means a single tax return could result in multiple penalties.

The penalty under Section 6712 is in addition to any other penalties that may be imposed by law. This means a taxpayer could be liable for the failure-to-disclose penalty as well as other penalties, such as those for substantial understatement of tax, if applicable.

The IRS has the authority to waive the penalty if the taxpayer can demonstrate that the failure to disclose was due to reasonable cause and not willful neglect. To request a waiver, the taxpayer must provide a written statement setting forth all the facts that show a lack of willful neglect. This statement must be made under penalties of perjury.