updated 2:11 PM CET, Oct 31, 2023

American couple in France in major win against IRS over tax

In a development that is being seen by American expat groups in France as a major win, the U.S. Internal Revenue Service has admitted in a U.S. Tax Court that it had wrongly collected millions of dollars of tax from France-resident American citizens, ending a years-long legal saga that could see millions of dollars paid to U.S. expats who have lived in and been filing tax returns from France, in the form of refunds.

The matter, which is seen as changing an element of the way Americans resident in France are taxed by the U.S., could lead to thousands of the estimated 100,000 American citizens currently living in France claiming back up to US$100m from the U.S. government, according to London-based U.S. tax attorney Stuart Horwich of Horwich Law.

Horwich assisted Ory and Linda Eshel, the two France-resident U.S. taxpayers who mounted the legal case in question, in bringing their claim to court. 

At issue is a court statement by the IRS, on Friday in a Washington, DC court, that it had finally accepted that U.S. citizens resident in France could deduct against their U.S. taxes certain previously disallowed taxes paid to France.

The taxes in question are the contribution sociale généralisée (CSG) and the contribution pour le remboursement de la dette sociale (CRDS), both of which French taxpayers have had to pay on their French income since the early 1990s.

U.S. citizens residing in France are obliged to pay U.S. tax on their French income, but are able to offset the amount of tax paid to France against their U.S. tax liability, and for a while they were able to use the CSG and CRDS they paid to offset their U.S. tax liability.

This changed in 2008, however, following an announcement – published on the website of the U.S. embassy in France – that certain French "social charges," including the CSG and CRDS, could not be credited against the U.S. tax liabilities of France-resident Americans, according to those familiar with the Eshels' case.

The Eshels decided to filed a legal action against the IRS over their inability to offset their CSG and CRDS payments, after they became caught up in an IRS auditing campaign that had been apparently intended to ensure that French-resident U.S. taxpayers complied with their U.S. tax obligations, according to information about the trial that was released on Monday.

'Long overdue concession' 

In a statement on Monday, Horwich said that the IRS's "concession" on Friday had been "long overdue," since the tax agency had "long known that its position was unjustifiable," even as its officials "dragged their feet at every opportunity while continuing to extract from Americans millions of dollars of taxes that they could not in good faith have believed were due."

He said he had been helped in his efforts on behalf of the Eshels by the Paris-based Accidental Americans Association "and in particular its  [founder and] president, Fabien Lehagre.”

Lehagre said he was "relieved that the IRS has finally admitted its error, and acknowledged at last that "CSG and CRDS are indeed taxes, not social charges."

"The fact that the IRS has 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.

"There are numerous other aberrations in U.S. tax law, foremost among them the fact that people who have no significant connection to the United States are required to pay U.S. taxes: these are the accidental Americans I represent, and this is what we seek to remedy.”

Scope for claiming CSG and
CRDS as foreign tax credits

Horwich, the attorney who represented the Eshels, said there was scope for other France-resident U.S. taxpayers who, like the Eshels, had also followed the erroneous IRS guidance and failed to claim a credit for CSG and CRDS on their U.S. tax returns. He noted that the statute of limitations to claim CSG and CRDS as foreign tax credits "is 10 years, so we anticipate large numbers of refund claims will be filed to recover taxes that the IRS should never have collected.”