DOES POPE LEO XIV HAVE A PROBLEM WITH THE IRS?
The world greeted the first American Pope with excitement when white smoke emerged from the chimney of the Sistine Chapel on May 8, 2025, and Chicago-born Cardinal Robert Francis Prevost became Pope Leo XIV. But does Pope Leo, a dual American-Peruvian citizen, now have a problem with the IRS?
The United States is one of just two countries in the world that impose their income tax on their citizens living abroad. This includes those citizens who do not maintain any kind of residence in the United States. Nearly every other country leaves its expats alone.
There are some softening provisions in our tax code for U.S. expats. By statute, Americans abroad can take a credit for income tax paid to their host countries. This means they will owe no tax to the United States as long as their foreign tax rate on all their income equals or exceeds the U.S. federal rate. These Americans can also exclude up to $130,000 of “earned income” abroad, i.e., income derived through work.
Still, there are several things that make the system unfair. For example, things that are deductible under US tax law, such as tax-free municipal bonds, may not be deductible in the host country. It’s also possible that deductions allowed in the host country are not allowed under the Internal Revenue Code. The result is that Americans living abroad get the worst of both tax worlds and cannot plan.
It gets worse. Suppose His Holiness has a personal bank account with the Vatican’s Banco di Santo Spirito worth U.S. $10,000 or greater. In that case, he has to report that account using a Foreign Bank Account Report ("FBAR") form. The penalty for failure to file this report timely is severe, as the U.S. Supreme Court recently affirmed in the Bitner case.
Suppose His Holiness wants to open an account at the Banco di Santo Spirito. Chances are, he could get an exception, but most American citizens would not. The great majority of foreign banks simply refuse to open accounts for American citizens because they don’t want to subject themselves to American reporting requirements under the Foreign Account Tax Compliance Act (“FATCA”).
But did His Holiness not take a vow of poverty when he entered the priesthood? Does that vow not release him from the duty to file a U.S. income tax return? Not necessarily. If he received meals, clothing, or accommodation free of charge, those items are considered to be compensation in kind unless he received them for the convenience of his employer. Taxpayers receiving compensation in kind must calculate the fair market value (FMV) of the items received. If that FMV equals or exceeds U.S. $14,600, the taxpayer must file an income tax return with the IRS.
The Vatican apartment could easily put the Pope over the $14,600 threshold. According to LivingCost.org, Rome is in the top 28% of the most expensive cities in the world. Apartments in Rome are worth a lot, and you know that his is especially nice. Now, if His Holiness can establish that he lives in that apartment for the convenience of his Ultimate Employer, he can perhaps convince the IRS that the value of his apartment does not count as compensation in kind.
Maybe His Holiness can claim sovereign immunity or invoke the act-of-state doctrine. He is both the head of the Church and the Head of State at the Vatican. Receipt of in-kind items of value might be a sovereign act exempt from U.S. income taxation.
Of course, he could renounce his American citizenship and be rid of the IRS, but that comes at a price. The fee for renunciation is $2,350 to cover the costs that the State Department claims are associated with the process. A 2024 announcement that the fee would decrease to $450 has yet to be implemented. A “Liz Taylor” amendment used to permit the IRS to pursue renouncers for six years following renunciation. The presumption was that the motive for the renunciation was to avoid U.S. taxes. That provision has since gone away.
If none of this works, His Holiness will spend serious money for an accountant and a lawyer who understand the subtleties and fine points of FBAR, FATCA, and the other unique problems faced by Americans who live abroad.
Whatever the analysis, there is a way we Americans can avoid this potentially embarrassing diplomatic clash with His Holiness. If we can persuade our President and representatives to pass the FAIRtax, this discussion becomes moot. Under the FAIRtax, our tax code has no extraterritorial reach. Only consumption in the United States is subject to tax. Under the FAIRtax, whatever His Holiness receives in his role as Pope is no longer the business of US tax authorities.
If you have one, I would love to hear your story about other ridiculous consequences of our tax code.
NOTE: No sooner did I draft this article than Fortune Magazine came out with this piece: “Pope Leo XIV may face a six-figure tax bill for his $33,000-a-month paycheck.” https://www.msn.com/en-us/money/taxes/pope-leo-xiv-may-face-a-six-figure-tax-bill-for-his-33-000-a-month-paycheck/ar-AA1EIcFI?ocid=msedgntp&pc=DCTS&cvid=ccab256e9fca4ab7afce96ac46a6db0f&ei=13.
The article notes: “As pope, Leo XIV is entitled to a salary of 30,000 euros, or about $33,000 per month, which puts his annual earnings at about $396,000 per year. Unless given an exception, the first American pontiff may have an estimated tax liability of $135,287, which includes both federal and self-employment tax, based on his salary, Washington-based accountant Hector Castaneda told Fortune.”
Waiving his salary might not work. The IRS has been known to argue that, where a taxpayer had the opportunity to take a payment, the taxpayer cannot “assign” it away to avoid tax and must pay tax on it.
I understand there was an article in the Wall Street Journal on the same topic.
And Toronto Attorney John Richardson, interviewing tax lawyer and international U.S. tax specialist Virginia LaTorre Jeker, picked up on this subject in this podcast: https://mail.google.com/mail/u/0/#inbox/WhctKLbfGnCdgvxRHZhDJqDPdkNfFgQMkFSsSZPMvpKvXswdKwlVxRwSWDgLtbpMHgjmtBb. John is an expert in the taxation of American citizens abroad and a fan of the FAIRtax.
His Holiness’ profile certainly generates discussion on a topic that would otherwise have gone unnoticed.
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