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November 22, 2006


As reported in a statement issued by IRS Commissioner Mark W. Everson, IRS has continued its strong audit enforcement efforts for Fiscal Year 2006. Principally because of a strong rise in collections, enforcement revenues—the monies from collection, examination, and document matching activities—has increased 3% to a record $48.7 billion.

Individual enforcement. For the 2006 fiscal year that ended Sept. 30, total individual returns audited increased by over 6% to 1,293,681 from 1,215,000 in 2005. This is the highest number since '98. While correspondence or letter exams increased, there was an even bigger increase of nearly 23% from the previous year in the traditional, sit-down field audits.

As an important part of its enforcement effort, IRS has targeted high-income taxpayers. Audits of individuals with income of $1,000,000 and higher increased to 17,015 from 12,835, a nearly 33% increase. This translates into about 1 in every 16 of these taxpayers being audited last year. In addition, audits of individuals with incomes over $100,000 exceeded 257,000, an 18% increase from 2005. This is the highest figure in more than a decade.

Business enforcement. IRS has placed more emphasis in the area of flow-through returns involving S corporations and partnerships. Efforts to review S corporations and partnerships increased while other IRS activity involving small business and large corporations remained relatively stable. Audits of S corporation returns increased to 13,984 from 10,417, a 34% increase; this is the highest level since 2000. Audits of partnerships increased to 9,777 from 8,489, a 15% increase; this is the highest level since '98.

Audits of small businesses organized as corporations remained about the same: 17,871 audits were completed in 2006, up slightly from 17,858 in 2005. Audits of larger corporations—those with assets over $10 million—declined by 2.2%, to 10,591 from 10,829 in 2005.

November 17, 2006

Don D. Nelson, is one of the world's acknowledged U.S. Expatriate Tax Experts with over 31 years experience in providing services to clients everywhere in the world. This Blog will be updated regularly with the latest developments in expatriate and US international tax laws which will affect US Citizens living and working abroad.

Visit his website to for answers to most of your questions about US expatriate and foreign taxation at or email Don at

October 2, 2006

Taxation of Civilian Workers in Combat Zones

Some confusion regarding taxation of civilian workers in combat zones [IRS Headliner Volume 178, 08/31/2006]: The IRS has become aware of some misunderstanding of the income exclusion rules for non-military personnel. Under IRC §112, certain compensation received for active service in a combat zone by members of the Armed Forces is excludable from gross income, and, therefore not subject to federal income tax withholding. However, this exclusion only applies to compensation paid by the U.S. Armed Forces to members of the Armed Forces. Under current law, neither federal civilian employees nor civilian defense contractors deployed with U.S. forces qualify for the exclusion while working in a combat zone or qualified hazardous duty area. (Note that members of the merchant marines are not considered members of the U.S. Armed Forces under IRC §7701(a)(15), and do not qualify for the exclusion either.) Contract workers in combat zones may still qualify for other income exclusions. For example, a U.S. citizen or resident alien living abroad, while taxed on their worldwide income, may qualify to exclude up to $82,400 of their foreign earnings from income, as well as qualify for the foreign housing exclusion and the foreign housing deduction. In addition, if certain requirements are met, contract workers may be able to exclude the value of meals and lodging provided by their employer from income.

September 22, 2006

Guantanamo Bay Civilians Now Elgible for Foreign Earned Income Exclusion

Notice 2006-84, 2006-41 IRB
IRS has issued a notice which provides that the U.S. Naval Base at Guantanamo Bay is not located within a restricted country and that qualified individuals who are performing services at the U.S. Naval Base there are eligible for the income and housing exclusion under Code Sec. 911 .

September 4, 2006

Terminating US Residency Permanently Requires Yet Another Form

Past U.S. residents or residents are reminded that individuals who have expatriated or terminated their U.S. residency status must file Form 8854, Initial and Annual Expatriation Information Statement. Form 8854 must also be filed to comply with the annual information reporting requirements of Internal Revenue Code section 6039G, if the person is subject to tax under Section 877 of the Code. A $10,000 penalty may be imposed for failure to file Form 8854 when required.

IRS is sending notices to expatriates who have not complied with the Form 8854 requirements, including the imposition of the $10,000 penalty where appropriate. Failure to file or not include all the required information or the inclusion of incorrect information could lead to a penalty. contains information about the Expatriation Tax including changes made to expatriation tax rules due to the American Jobs Creation Act of 2004

August 30, 2006

Employer Provided Housing is Taxable to Expat Employees

The taxpayers were liable for taxes on the value of the lodging provided by a government contractor. Hargrove et al. v. Commissioner, T.C. Memo 2006-159 (8/8/2006).

During at least some of the time during the 1999 – 2002 tax years, several couples worked for TRW Overseas Inc. at the Joint Defense Space Research Facility/Joint Defense Space Communication Station (defense facility) in Pine Gap, Australia. TRW was a U.S. government contractor that provided services at the facility.

The work for TRW required accepting assigned housing in Alice Springs, Australia, which was approximately 22 miles from the defense facility and was outside of its physical boundaries. The housing was scattered throughout Alice Springs and was on publicly accessible roads that were adjacent to homes available to the general public. While living in Alice Springs, the taxpayers did not pay any rent or utility expenses and did not conduct any TRW or defense facility work from the homes.

The IRS determined that the couples were liable for deficiencies for one or more years for the 1999 – 2002 tax years as the result of excluding the value of their housing from income and that some of them owed corresponding accuracy-related penalties. The taxpayers filed Tax Court petitions in which they argued that Code Section 119 gave them the right to exclude the value of their employment-related housing from their income and that Code Section 912 provided an exclusion for certain living allowances. The taxpayers also asked the Tax Court to review the accuracy-related penalties’ propriety.

The Tax Court held that the couples were liable for the taxes assessed. According to the Tax Court, the couples could not exclude the value of the housing that TRW provided from their taxable income because – although accepting the lodging was a condition of employment and it was furnished for TRW’s convenience – the lodging was not on TRW’s business premises. It said Dole v. Commissioner, 43 T.C. 697 (1965), established that the phrase “on the business premises” means either living quarters that are an integral part of the business property or premises on which an employer conducts some of its business activities. The Alice Springs housing was not integral to TRW’s business, and the couples’ occupancy of that housing did not serve any important TRW business function. The court also concluded that the income exclusion under Code Section 912 did not apply to the living allowances because that provision is limited to civilian officers and employees of the U.S. government.

Finally, the court upheld the accuracy-related penalties because the couples did not show any reasonable cause for the underpayment or that they acted in good faith regarding it. More specifically, they did not provide adequate justification for the disallowed exclusions under Code Sections 911 and 912.

March 8, 2006

Form 926 Required for Transfers to Foreign Corps.

U.S. persons, domestic corporations and domestic estates or trusts who exchange or transfer property to a foreign corporation must file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation,to report the transaction.

Required U.S. entities should make sure they file timely to avoid any potential failure to file penalties. They also must file Form 5471 in most situations with their annual income tax return.