> However, there are limits on the credit that may be claimed
>> and, except for a few simple situations, you must file Form
>> 1116 to calculate the amount of credit. If you merely
>> claimed a credit for the amount of UK taxes paid, you likely
>> claimed too much.
>>
>> In effect, you get a credit equal to the US tax on the
>> double taxed income or the foreign tax, whichever is lower,
>> If UK rates applied to your cousin's income are higher than
>> his US tax rate he cannot take the full amount as credit.
> Well, this is essentially what he did. He filled out Form
> 1116. The UK taxes were higher than the US, so he we use
> that to offset the US tax, reducing it to nothing. He was
> not expecting a refund, just that he paid nothing.
>
> Unfortunately, the IRS have sent him a notice that he owe
> the full amount (without the foreign deduction). Either the
> form 1116 was filled out incorrect or there are some other
> requirements we are missing. The documentation is not clear.
> I guess he can send back an appeal listing the publication
> and page number on why he should not pay the tax?
The question remains... did he actually pay those taxes or were they withheld from pay for later use to pay the tax bill? He may not be taxable according to the UK-US tax convention. Some conventions specify that if you earn less than X in a contracting state other than your residence, the contracting state will not tax that amount. If that is the case, it would not matter how many times you complete Form 1116 as you are not taxable in that contracting state. They are not entitled to tax your income. You have to get the money withheld back. In your case, I suspect that your nephew is entitled to get the Foreign Tax Credit as he isn't taxable in the UK. He has to file a UK tax return to get the money back. The money he paid was paid in error.
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