IRS Accepts CSG & CRDS as Income Tax Paid (Foreign Tax Credit)
This is an important issue impacting many of our French clients, so we want to give a bit more insight to what the situation is, and the IRS’ position (and recent update) on light of the changing rules.
CSG/CRDS IRS Foreign Tax Credit
Technically CSG (Generalised Social Contribution) and CRDS (Contribution to the Repayment of Social Debt) are not considered income tax, but are instead considered a type of “social tax.”
To keep things complicated, it is important to note that CSG/CRDS is not per se social security, since payment does not result directly to receiving a social security benefit.
It is also not a per se income tax.
What Types of Income is Charged CSG/CRDS Tax
- Investment Income
- Rental Income
- Capital Gain Income
IRS’ General Position on CSG/CRDS Tax
Up until the IRS’s recent acquiescence in Eshels, the IRS took the position that CSG/CRDS was not entitled to a foreign tax credit (since it was not earned income) and it was not otherwise covered under the totalization agreement.
Common Situation for CSG/CRDS Tax
A Client from France resides in the U.S. but is earning money overseas in France, and taxes are being withheld. Generally, the individual would be entitled to a foreign tax credit on income tax.
But, the IRS was claiming it was a social tax, so no Foreign Tax Credit could be applied. Moreover, since the CSG/CRDS was not included in the totalization agreement (noting, the totalization agreement pre-dates this new type of tax), any claim under the totalization agreement was precluded as well.
Case Update: Eshels
Eshels is a recent case that has been going on for sometime and involves Foreign Tax Credits for CSG/CRDS tax.
The Eshels claimed a Foreign Tax Credit for CSG/CRDS. The IRS disagreed, and then disallowed the Eshels Foreign Tax Credit.
The Eshels took the IRS to court; they lost, and then appealed.
Updated: The IRS takes the position that CSG/CRDS is not a social tax. Therefore, the Eshels are not precluded from claiming the foreign tax credit as an income tax.
Can You Claim CSG/CRDS Foreign Tax Credit?
As provided by the IRS:
French Contribution Sociale Generalisee (CSG) and Contribution au Remboursement de la Dette Sociate (CRDS)
In 2019, the United States and the French Republic memorialized through diplomatic communications an understanding that the French Contribution Sociale Generalisee (CSG) and Contribution au Remboursement de la Dette Sociate (CRDS) taxes are not social taxes covered by the Agreement on Social Security between the two countries.
Accordingly, the IRS will not challenge foreign tax credits for CSG and CRDS payments on the basis that the Agreement on Social Security applies to those taxes.
The IRS’s change in policy means individual taxpayers, who paid or accrued these taxes but did not claim them, can file amended returns to claim a foreign tax credit.
Generally individual taxpayers have ten (10) years to file a claim for refund of U.S. income taxes paid if they find they paid or accrued more creditable foreign taxes than what they previously claimed. The 10-year period begins the day after the regular due date for filing the return (without extensions) for the year in which the foreign taxes were paid or accrued. This means that amended returns may be filed, using Form 1040-X to include accompanying Form 1116, going back to tax year 2009.
Individual taxpayers should write “French CSG/CRDS Taxes” in red at the top of Forms 1040-X, file them with accompanying Forms 1116 in accordance with the instructions for these forms. U.S. employers may not file for refunds claiming a foreign tax credit for CSG/CRDS withheld or otherwise paid on behalf of their employees.
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Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.