September 1, 2010
Treasury Inspector General Finds 10% of Foreign Earned Income Exclusions claimed in 2008 Are Invalid or Erroneous
WASHINGTON - The Internal Revenue Service (IRS) lost an estimated $90 million in revenue for Tax Year 2008 because of erroneously claimed foreign earned income tax exclusions, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).
The foreign earned income tax exclusion allows a taxpayer to exclude up to $91,500 of foreign earned income. A taxpayer qualifies for this exclusion if he or she has foreign income and a home in a foreign country. An eligible taxpayer designates this status by filing Form 2555 (Foreign Earned Income) with the IRS.
TIGTA conducted a performance audit to assess the IRS's ability to ensure the accuracy of these exclusions. TIGTA reviewed 231,277 tax returns from Tax Year 2008 and found that 10 percent (23,334) of taxpayers claiming the exclusion either failed to qualify for the exclusion or inaccurately computed the exclusion. The income erroneously excluded totaled $675 million. The estimated tax avoided totaled $90 million.
"This is very troubling. Over five years, the estimated revenue loss to the IRS could total more than $450 million," said J. Russell George, Treasury Inspector General for Tax Administration. "Improvements must be made to reduce erroneously claimed foreign earned income tax exclusions," he added.
TIGTA made seven recommendations to the IRS in this report, and the IRS agreed with four of the seven recommendations.
To review the report, including the scope and methodology, go to: http:www.treas.gov/tigta/auditreports/2010reports/201040091fr.pdf.