Texas companies that send their employees on international assignment shouldn’t let their employees figure out their US federal income taxes by themselves. A case in point is a recent Tax Court Memorandum decision, Gerencser v. Commissioner of Internal Revenue, where the taxpayer not only lost to the IRS but was assessed with penalties as well. A well-written global mobility policy that requires expats to use the company’s designated tax return preparer is best practice, but surprisingly not all companies take this approach. Because a failure by the expat to properly compute taxes could, in fact, subject the employer to liability, it is important that companies review their global mobility policies.
The Gerencser v. Commissioner of Internal Revenue case relates to Mr. Gerencser’s service in 2010 and 2011 when he was a contractor for NATO. While Mr. Gerencser, a US citizen, correctly excluded his foreign earned income under Section 911 of the Internal Revenue Code, he attempted to take a foreign tax credit as well on the same income, even though that double benefit is prohibited under the Code. What’s more, the income was not even taxed by Germany! And if that position alone was not a head scratcher, he also tried to argue that as a German resident he was exempt from US federal income tax under the US – Germany Income Tax Treaty, ignoring the saving clause that reserves to the United States the right to tax its citizens on their worldwide income, regardless of residence. For his trouble, the Tax Court chastised him for not seeking professional tax assistance and then hit him with a penalty because he took a position that was too good to be true, and he should have known better.
This cautionary tale underscores the benefits of having a robust global mobility policy that mandates that all international assignees work with the company’s designated tax return preparer to determine what taxes are owed. In Mr. Gerencser’s case, NATO likely did not have such a policy, as he relied on a friend for advice. Note that failure to pay taxes correctly could backfire on the company as well. In more than one jurisdiction, where an expat fails to pay local taxes or file returns, the local subsidiary could be held liable itself for the unpaid taxes
A well-written global mobility policy should require the employee to do the following four things:
- Attend a pre-assignment meeting with the tax preparer to understand his tax liabilities that will result from the assignment;
- Submit to the tax preparer at the end of the year accurate information regarding his family’s income and investments on a timely basis so the accounting firm can prepare the returns, or can assist the employee with the preparation of the returns;
- File the returns on time; and
- If the employee receives a tax refund, notify the company immediately and pay over to the company any portion of the refund to which the company may be entitled.