14 essential things to know about the US tax change in France

The IRS owes between $100-$300 million in refunds for Americans in France. Find out what you need to know about how the IRS’s mistake might have cost you money (and exclusions for past years and years to come!) and what you can do about it.

1. A recent ruling means the IRS owes significant refunds for Americans in France

In June, the IRS admitted that it had been errant in its collection of some taxes that apply specifically to expats living in France. Essentially, due to a misreading of the tax treaty between the US and France, the IRS had incorrectly considered two taxes (the CSG, or “contribution sociale généralisée,” and the CRDS, or “Contribution au Remboursement de la Dette Sociate”) to be social taxes. However, these taxes were not truly social charges, but they were more similar to regular income taxes. And as such, the amounts paid by expats should have applied to the Foreign Tax Credit; however, they did not. Due to the ruling, the IRS will no longer challenge claims of taxpayers taking these taxes paid as a credit on their US returns.

2. The case originated from an audit

The Ory and Linda Eshel v. Commissioner of Internal Revenue case was heard in the US Tax Court. The Eshels are American citizens who reside in France, and the case started from an audit of their 2008 and 2009 tax returns. In 2014, the case was ruled differently – and the tax court upheld that the CSG and CRDS were social charges. But the court of appeals reversed the decision and sent the case back. This new decision is the culmination of a seven-year legal battle.

3. Americans in France may have overpaid by 8 percent in taxes

The CSG was a 7.5 percent tax on income; the CRDS was 0.5% percent tax on income, meaning that if you’re an American in France, the IRS may have overcharged you by about 8 percent of your income.

4. The IRS owes an estimated $100-$300 million in refunds

The best estimates calculate the amount that the IRS owes in refunds to be somewhere in the region of 100-300 million USD. So, if the IRS owes you money, you don’t want to miss your cut of the refunds for Americans in France.

5. Typically, you can get refunds for the past three years - the new ruling allows claims up to ten years

Due to the ruling, the IRS will allow refunds for the most recent ten years. But time is ticking. The available period for refunds begins the day after the regular due date for filing the return (not including any extensions) for the year in which the foreign taxes were paid or accrued.

6. Filing amended returns to get refunds for Americans in France is a little bit of a different process

To file these amended returns, you’ll want to use Form 1040X and include accompanying Forms 1116, starting with tax year 2009. Write “French CSG/CRDS Taxes” in red at the top of the 1040X.

7. France just switched to a Pay As You Earn (PAYE) system, which adds yet another wrinkle

On January 1st, 2019, France moved to a PAYE system of taxation, which led them to have a “white year” in 2018. The white year was basically a year without any income taxes. So, what’s the problem? In 2018, American expats in France paid no French income taxes, so they had no taxes to submit toward the Foreign Tax Credit, and likely paid more in American taxes due to this shift. This sequence of events fundamentally amounts to double taxation, just spread across a couple of years. So there’s an additional reason to amend your taxes: since expats in France did not get a 2018 Foreign Tax Credit, they are relying more heavily on past Foreign Tax Credit carryovers to reduce the tax burden for this year.

Click here to get expert help and advice from Greenback Expat Tax Services

8. Even if you’re not owed a refund, you may still want to amend

American expats in France whose Foreign Tax Credit failed to eliminate their US tax liability at any point in the prior decade may benefit from amending their returns. Also, anyone who believes upcoming Foreign Tax Credits (plus carryover) won’t fully offset any US tax owed may submit an amendment to increase carryovers for future use.

9. Some self-employed Americans in France will not benefit

Self-employed expats in France may not benefit from filing amended returns, as the CGS and CRDS will not reduce the self-employment taxes that were calculated on the return. 

Take this case study as an example: Michael A. Expat.

Michael is a freelance food critic and blogger, married to a French national residing in (arguably) the gastronomic capital of the world: Paris. They decided to move a year ago in order to help generate more content for his blog. He also has a job waiting tables and therefore files French returns jointly with his spouse. Michael always has a US tax liability because of the US self-employment taxes assessed on the blogging income. He had the choice between paying into the American or French system and went with the lower of the two which happened to be the US. Unfortunately, amendments are not going to help here, as the CSG and CRDS will not reduce the self-employment taxes calculated on the return.

10. Some American expats in France living off passive income will not benefit

Those who live off the income generated from US investment or retirement accounts that have only paid US tax will not benefit from amending. 

Take this case study as an example: Suzie N. Expat.

Suzie is a US citizen who lived in the US and made a large salary that allowed her to build up a sizeable nest egg. She keeps everything in a US brokerage account, which generates a 1099 with dividends annually. One day, her company offered her a once-in-a-lifetime opportunity to move to Paris, which she gladly accepted! Fast-forward eight years: she is still there and so is her US brokerage account. Every year, she pays US tax liabilities on the 1099 income, since she does not report it in France and the FEIE and Foreign Tax Credit have covered the US tax on her wages. Unfortunately, amendments are not going to help here, as the US taxes she has been paying are on US income, which has not been taxed by France.

11. Expats who owed taxes due to the white year may particularly benefit from amending

Those who owed US tax due to the white year may especially benefit from amending. 

Take this case study as an example: Jane Expat.

Jane, a US citizen, moved to France in 2015. She’s always timely when filing her US and French tax returns. In 2015, her income exceeded the Foreign Earned Income and housing exclusions, and she would have owed if not for the Foreign Tax Credit. Jane had CGS and CDRS withheld from her wages; the French income tax was not withheld, paid, or even determined until 2016. Jane filed Foreign Tax Credit Form 1116 for 2015 claiming the taxes that accrued on her 2015 income earned in France, but she was unable to claim the CGS or CDRS prior to the IRS notice.

When Jane did her 2018 tax return in early 2019, she ended up owing the IRS because she did not have enough Foreign Tax Credit carryovers left over from the prior years. She accrued no French income tax in 2018 on her wages because of the “white year.” A reminder: Jane cannot switch her Foreign Tax Credit from claiming the amount accrued during the tax year to the amount paid during the tax year, as she's already claimed what she paid in 2018 (accrued in 2017) on her 2017 return. It would likely be beneficial for Jane to amend her tax returns to claim the CGS or CDRS taxes and increase her Foreign Tax Credit carryovers to offset the 2018 liability.

12. Expats whose income fluctuates may also benefit from amending

Those who have fluctuating income – like that of sales commissions – may benefit from amending. 

Take this case study as an example: Jack Expat.

Jack is a dual-status French-American who has been living in France for a while. He always files his US returns on time. Jack is a salesperson paid on commission, and his annual returns are “feast or famine.” Some years, he makes over the Foreign Earned Income or housing exclusion thresholds and ends up owing the IRS. Other years, he makes well under and only claims the Foreign Tax Credit to carry over his unused credits. Jack may look into amending to add the CGS or CDRS taxes accrued or paid depending on his situation for the tax years he owed in order to get a refund.

13. Filing an amendment is less time-consuming than you might think

The only things you need are your prior years’ US Federal Tax Returns (up to ten), and prior years’ French Tax Returns (up to ten).

14. Waiting to amend can cost you money

The longer you wait, the less money you may be refunded. If you wait until the next tax season, that’s one less year for you to claim a refund. And, if you could use the Foreign Tax Credit carryovers, you could be missing out on potential tax deductions in the future, as well. 

Leave It to the Professionals

Deciding whether or not to resubmit tax returns for the past ten years is a big decision. The experts at Greenback are helping many Americans in France through the process and can make it easy to find out whether or not filing amendments will benefit you financially. Get started with Greenback today!

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This article was produced and sponsored by Greenback Expat Tax Services.