updated 8:46 PM CEST, Jun 30, 2020

Potentially significant error in 2018 IRS tax guide for 'certain married taxpayers filing separately' in Expatland

An IRS tax guide published in January of this year and intended for "U.S. citizens and resident aliens who work abroad or who have income earned in foreign countries" contained a major error that has only now come to light, and which "may have caused certain married taxpayers filing separately to fail to file" a tax return that in fact they should have, acting National Taxpayer Advocate Bridget T. Roberts said on Friday. 

In addition to detailing the error, Roberts indicated that the IRS probably should have done more to inform taxpayers about the situation than it has up until now, and that it should "as soon as possible" set about informing taxpayers of the situation, and waiving any penalties that had been issued to individuals who had been misled by the erroneous tax guide.

"At the very least, the IRS should revise [the tax guide] as soon as possible and issue a press release informing taxpayers about the correction, including detailed instructions for requesting reasonable cause penalty abatement," Roberts said, in an "NTA [National Taxpayer Advocate] Blog"  posted on the TaxpayerAdvocate.IRS.gov website.

At issue is an IRS document known as Publication 54, "Tax Guide for U.S. Citizens and Resident Aliens Abroad", which covered tax reporting requirements for the 2018 tax year. According to Roberts, this document had "incorrectly stated" that "married taxpayers filing separately must file a return only if the individual filer’s gross income" during that tax year equaled or exceeded US$12,000, the amount of the standard deduction. 

This was, however, in fact not the case.

For the tax year 2017 – the year before the tax year addressed in the tax guide in question – the "filing threshold" for such married taxpayers filing separate returns from their spouses was the personal exemption amount at that point, which was US$4,050.

But then, Roberts noted in her blog, in December 2017, the Tax Cuts and Jobs Act of 2017 suspended completely the personal exemption for tax years 2018 through 2025, "effectively reducing it to zero".

As a result, she went on, "taxpayers using this filing status face a filing requirement regardless of whether they worked or earned [any income at all] in [tax years] 2018-2025.

"In light of Congressional intent underlying the TCJA, the IRS provided relief to married taxpayers filing separately by setting the filing requirement at US$5.

"Both the IRS website and the 2018 Instructions to Form 1040  indicate that a married filing separately taxpayer must file a tax return if the individual’s gross income is at least US$5."

'Error may have been due to gov't shutdown'

The error in the tax guide published in January, Roberts noted, might have been a result of "the longest federal government shutdown in U.S. history, which condensed review times for IRS publications."

Nevertheless, she went on, citing a U.S. State Department estimate for the maximum number of Americans believed to live outside of the U.S. currently, "an estimated nine million U.S. taxpayers living abroad may have relied on Publication 54 to navigate extremely complex U.S. tax laws and regulations, including the filing requirements.

"[And] noncompliance may result in harsh consequences, including hefty penalties."

Roberts said that the Taxpayer Advocate Service, which is a branch of the U.S. Internal Revenue Service, had only learned of the error "after an annual meeting with organizations representing the interests of U.S. taxpayers abroad, and immediately worked with the IRS to address the mistake". She didn't say when this meeting took place.

"On September 6, the IRS disclosed the error in the publication on IRS.gov.

"To date, however, the IRS has not issued a public press release, revised the publication, or issued an announcement to acknowledge the problem and clarify the filing requirement," Roberts continued.

"What’s more, it has not provided automatic penalty relief to affected taxpayers. While married U.S. taxpayers abroad filing separate returns with zero income may not have penalty exposure, many others with tax due will be assessed the failure to file penalty.

"There may also be non-tax ramifications to lawful permanent resident (LPR) taxpayers. They are required to show good moral character, including timely filing required tax returns, to keep their LPR status.

"Just as the IRS waived estimated tax penalties for more than 400,000 eligible taxpayers whose tax withholding and estimated tax payments did not meet the legal requirements in TY 2018 as a result of confusion associated with the TCJA, the IRS should automatically waive penalties for married filing separately taxpayers who did not file or did not file timely in reliance on Publication 54.

"By doing so, the IRS will avoid harming taxpayers who relied on IRS guidance in a good-faith attempt to comply with the law, and it will act in accordance with two core provisions in the Taxpayer Bill of Rights – the right to be informed and the right to a fair and just tax system." 

Roberts's blog ends with a statement that points out that the views of the acting National Taxpayer Advocate represent an "independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget".

A response to the acting National Taxpayer Advocate's blog wasn't immediately available from the IRS. However, an updated  Publication 54 has now been issued, and may be viewed by clicking here.