If you received a letter indicating that your treaty-based position is invalid, you should call the phone number provided in the letter for specific information about your situation. Here are some potential reasons why your treaty-based position may have been deemed invalid and steps you can take:
- Disclosure Requirement: If you took the position that any item of income is exempt from U.S. tax or eligible for a lower tax rate under a U.S. income tax treaty, you generally must disclose that position on Form 8833 and attach it to your return. If you failed to file Form 8833, this could be a reason for the invalidation. Ensure that you have properly disclosed your treaty-based position as required by Section 6114 of the Internal Revenue Code.
- Tax Residency: If you are a tax resident in both the United States and a foreign country based on each country’s laws, you must use the provisions of an income tax treaty to claim tax residence in only one country. If you claimed tax residence in a country where you are not eligible to claim residence, or the information on your tax return does not appear to support this position, your treaty-based position may be denied. Verify that you meet the residency requirements under the applicable treaty.
- Documentation: Ensure that you have provided all necessary documentation to support your treaty-based position. This includes properly completed Forms W-8BEN, W-8BEN-E, or other relevant forms, and any required supporting documentation.
- Competent Authority Determination: If you are claiming tax treaty benefits pursuant to a Competent Authority determination, ensure that you have attached a copy of the Competent Authority determination letter to your tax return.
- Form 8833: If you are required to file Form 8833 but failed to do so, you may need to file an amended return with the correct form attached. Form 8833 is used to disclose treaty-based return positions that modify or overrule an Internal Revenue Code provision.
- Review and Correct: Review the specific reasons provided in the letter for the invalidation of your treaty-based position. Correct any errors or omissions and provide any additional information or documentation requested by the IRS.
By addressing these potential issues and ensuring compliance with the disclosure and documentation requirements, you can resolve the invalidation of your treaty-based position. If you need further assistance, consider consulting a tax professional who is knowledgeable about international tax treaties and U.S. tax law.
Sources:
Publication 901 (9/2016)
§ 6114. Treaty-based return positions
§ 894. Income affected by treaty
IRM Part 21. Customer Account Services. Chapter 8. International. Section 1. IMF International Adjustments
Instructions for Form 1040-NR (2023)
IRM Part 4. Examining Process. Chapter 10. Examination of Returns. Section 21. U.S. Withholding Agent Examinations - Form 1042
