Attorney-at-Law

INTERNATIONAL INCIDENT

In Uncategorized on 10/01/2012 at 19:00

My colleague Jean Mammen, EA, has written a book on the US tax posture of foreign embassy and international organization employees, entitled “1040 or 1040NR? International Organization and Foreign Embassy Employees”. I haven’t read it, so I can’t criticize it, but those who represent taxpayer-employees in that area might wish to do so.

See my blogposts ”Not An Employee for Tax Purposes?”, 5/24/11 and “Another Argument”, 6/7/12.

Now Judge Morrison reviews the problems of a rather naïve young employee, fresh out of the Peace Corps and into the International Monetary Fund at the staff assistant level. The case is Amy Yu-Wen Chien, T. C. Memo. 2012-277, filed 10/1/12.

Amy went from college (during which time her papa prepared whatever tax returns she needed) to the Peace Corps (no taxable income) to a temp agency (filled out her returns using IRS online instructions) to the International Monetary Fund as a staff assistant (clearly not top-level managerial).

Judge Morrison: “Shortly after joining the IMF, Chien met with J. Carter Magill, an employee of the IMF who was conversant in taxation. The meeting lasted five minutes. Magill explained to Chien that she had to make an estimated-tax payment every quarter. Shortly after the meeting, Magill emailed Chien a spreadsheet that calculated her next estimated-tax payment. Because an estimated-tax payment is based on the taxpayer’s tax liability for the year, see sec. 6654(b)(1), (d)(1)(A) and (B), (f)(1), the spreadsheet was based on Magill’s calculation of Chien’s tax liability for 2005. The amount of liability, as calculated on the spreadsheet, included the income tax imposed by section 1, see sec. 6654(f)(1), and the selfemployment tax imposed by section 1401, see sec. 6654(f)(2), with Chien’s 2005 IMF wages included in self-employment income. Had Chien understood that her estimated-tax payment was based on her liability for the income tax imposed by section 1 and the self-employment tax imposed by section 1401, she would presumably have inferred from the spreadsheet that she would be liable for the selfemployment tax. However, Chien had no such understanding of the estimated-tax regime. So she made no such inference from the spreadsheet. Other than the spreadsheet, Chien did not receive any other information from the IMF informing her that she was considered self-employed or that she was liable for the selfemployment tax.” T. C. Memo. 2012-277, at pp. 3-4.

If Alex Pope was right, and “a little learning is a dangerous thing”, then Amy had less and that was more dangerous, because she never filed a 1040-SE, paid the SE tax or took the one-half adjustment for SE tax on her 1040, for any of the three years she worked for IMF.

At least she knew she owed some income tax, unlike another employee of an international organization who forgot to pay tax on nearly $80K of salary from the World Bank.

IRS gave a lecture on-site for IMF employees, but attendance wasn’t mandatory, and Amy arrived at the very end. She claims the handout she got, which seems to have been limited to the PowerPoint slides, was unenlightening. She thought she’d be in compliance if she followed the 1040 instructions.

Judge Morrison gives Amy a bye on the substantial understatement penalties. She followed the 1040 instructions, and what guidance she got was less than effective.

Takeaway–International organizations need to provide better intake orientations for their employees. If you’re a US citizen, you owe both income tax and self-employment tax, because the US can’t collect from your exempt employer. Give the new hire a copy of a 1040, a 1040-ES, and something more than a five minute off-the-cuff from your resident tax guru who probably just spouts numbers and letters like the rest of us, and drops an email that only a tax professional would understand.  And if IRS sends somebody around, tell your employees they cut this class at their peril.

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