U.S.(American) Income Tax for Expatriates, Permanent Residents and Nonresidents

EXPATS CANNOT HAVE IT BOTH WAYS

2008-04-10T11:23:00.000-07:00

The US Tax Court in March held that an individual that US Citizen that lived in Scotland, but earned his wages working in International Waters could not claim the foreign earned income exclusion under Code Section 911. The taxpayer only fulfilled 1/2 of the test. He lived in a foreign country, but worked in International Waters under under the sovereignty of any nation. You must both live and work in a foreign country to qualify.

Making False Statements to IRS is a Crime

2008-01-23T12:45:00.000-08:00

Former NFL player Dana Stubblefield pleaded guilty to lying to an IRS agent. AP report dated Jan. 18, 2008. Under a plea agreement he may spend up to 6 months in the federal penitentiary. He lied about using steroids.

We generally think of persons getting into criminal difficulties with IRS when they affirmatively make false statements in writings that were signed subject to stated penalties of perjury (maybe appearing back in the instructions). Indeed, Code Sec. 7206 imposes such a rule. However, there are other federal statutes that can turn an oral statement made to a revenue agent in the course of an audit into a trip to the penitentiary.

Code Sec. 7201 is the general “attempt to evade or avoid” section, which can apply to such oral misstatements. U.S. v. Beacon Brass Co, (1952, S Ct) 42 AFTR 654 , 344 US 43 . More threateningly, 18 USCS 1001 can apply. This is the general statute making it a crime to make false statements to federal agents.

Brogan v. U.S., 118 S. Ct. 105 (1998) ruled that a taxpayer that falsely says “no” when asked if he engaged in tax evasion can be criminally liable. Apparently this means that the correct answer is to plead the Fifth Amendment in that case, and otherwise say nothing.

The presence of these statutes, and the way they have been historically applied, makes it very difficult for IRS to carry off the model of being a customer service agency. Taxpayers need to remember that they can be liable for criminal prosecution for even casual conversations with IRS agents in the course of their duties, without any written penalties of perjury statement being violated.

2007 Foreign Earned Income Exclusion Rises to $85,700

2008-01-04T10:01:00.000-08:00

The foreign earned income exclusion for 2007 has been increased to $85,700. That is the good news. Under the new law came into effect in 2006, all of your foreign earned income above the exclusion will be taxed at the effective rate for that level of income as though the excluded amount had also been taxed. That means for each additional dollar above the exclusion the Federal tax rate will be at least 28% or more, though may be offset if you pay any foreign taxes by the foreign tax credit. One solution is to open an IRA by 4/15 if you earned more than the exclusion and deduct as much as the IRA will permit based on your age. Remember you can only open an IRA if you foreign earned income exclusion and foreign housing exclusion or deduction taken together are less than your total foreign earned income (from wages or self employment income) and the amount contributed to the IRA does not exceed the difference.

19M more taxpayers including Expatriates may be subject to AMT in 2007

2007-10-19T11:34:00.000-07:00

The following AMT exemptions will decrease after 12/31/2006:

$62,500 to $45,000 for Married Filing Joint
$42,500 to $33,750 for Single
$31,275 to $22,500 for Married Filing Separate

To avoid surprising and penalties and interest, if you have substantial income you should run a projection of the taxes including AMT calculation before year end to see if this increase will affect you.

IRS BOOTS 2007 HOUSING COST ALLOWANCES FOR THOSE WORKING ABORAD IN HIGH COST AREAS

2007-09-11T08:52:00.000-07:00

Notice 2007-77, 2007-40 IRB
A new Notice effectively increases the maximum housing cost exclusion for U.S. citizens and residents working abroad in specified high-cost locations. The increases are made based on geographic differences in foreign housing costs relative to U.S. housing costs.

Background. A qualified individual may elect to exclude from U.S. gross income his foreign earned income and housing cost amount. (Code Sec. 911(a)) Under Code Sec. 911(c)(1), the maximum excludable housing cost amount is calculated by way of a complex formula.

The excludable housing cost amount is the excess, if any, of (1) the individual's allowable housing expenses for the year (i.e., the housing expense limitation) over (2) a base amount. For 2007, a taxpayer's allowable housing expenses, assuming he is eligible for entire year, generally can't exceed $25,710; subtracting the base amount of $13,712 yields a generally applicable maximum housing amount exclusion of $11,998.

IRS may issue regs or other guidance providing for the adjustment of the maximum allowable housing expense limitation on the basis of geographic differences in housing costs relative to housing costs in the U.S. (Code Sec. 911(c)(2)(B))

Increases for high-cost areas. Notice 2007-77 makes adjustments for housing costs during 2007 in high-cost foreign areas. Specifically, it contains a table that (1) identifies locations within countries with high housing costs relative to U.S. housing costs, and (2) provides an adjusted annual maximum and daily housing expense limitation for a qualified individual incurring housing expenses in one or more specified high cost localities in 2007 to use (instead of the otherwise applicable annual housing expense limitation of $25,710, or the prorated daily amount) in determining his housing expenses. A qualified individual incurring housing expenses in one or more of the high cost localities identified in the table for the year 2007 may use the adjusted limit provided in the table (in lieu of $25,710 or the prorated daily amount) in determining his housing cost amount on Form 2555, Foreign Earned Income.

Example: A U.S. taxpayer is posted to Paris, France, for all of 2007. His maximum housing cost exclusion is $73,488 ($87,200 full year limit on housing expense in Paris − $13,712 base amount).

Many, but not all, of the maximum housing expense limitations for specified high cost localities are higher for 2007 than they were for 2006. For example, for 2007 the maximum housing expense limitation for Toronto, Canada, is $46,000; it was $41,500 for 2006. On the other hand, for Vienna, Austria, the maximum housing expense limitation remains unchanged at $28,824.

ANTARTIC CONTINENT DOES NOT QUALIFY AS FOREIGN COUNTRY FOR EXPATRIATE FOREIGN EARNED INCOME EXCLUSION

2007-07-18T15:54:00.000-07:00

The U.S. Tax Court just held that a married couple and 150 similarly situationed taxpayers could not exclude form their income amounts earned for services performed in Antarctica because Antarctica (the South Pole) is not a foreign country. Kunze v. Comissioner T.C. Memo 2007-179 (7/5/07).

IRS is Auditing Expats Claiming Foreign Earned Income Exclusion

2007-07-17T14:29:00.000-07:00

We have recently learned the IRS office in Puerto Rico is conducting income tax audits of expatriates who claim the foreign earned income exclusion. To date it appears the tax audits may only be directed against those working on ships, pilots or oil platform workers. ..... but that is not clear. It is difficult for those living on ships, international pilots and those working on oil platforms to claim the foreign earned income exclusion since each 24 hour period spent on the high seas (outside of any country's territorial waters ) are not treated as time spent in a foreign country or as time spent in the U.S. They count for nothing and those working under these conditions must pay the entire tax bill and may not claim an exclusion.

The IRC Section 911 physical presence test requires that out of each 12 month fiscal year period, the taxpayer spends not more than 35 days in the U.S. and the rest of the time in a foreign country. Twenty four hour periods (ending at midnight) each day spent on the high seas counts as neither. The audit questionnaires used by the IRS in these audits are posted at www.taxmeless.com/irsaudits.htm

You should consider using these questionnaires as a guide to determine if you have adequate support if you are claiming the foreign earned income exclusion to win if audited by the IRS.

IRS TO INCREASE AUDITS

2007-06-19T09:59:00.000-07:00

In order to raise more tax money, the Government Accountability Office (GAO) has told the IRS to concentrate on the following types of taxpayers for audits:

Schedule C - self employed individuals
Partnerships and S-Corporations including S corporation shareholders who work in the business and fail to pay themselve reasonable salaries.
Gamblers
Famers who only do it part time
Individuals who claim large amounts of medical deductions, charitable contributions and job-search expenses
Taxpayers who do not correctly report sales of investments.

The GAO has identified these taxpayers as the most likely to misreport taxable income on their tax returns.

INTERNATIONAL PER DIEM RATES CHANGE FOR TAX PURPOSES

2007-04-04T15:33:00.000-07:00

Many foreign per diem rates change effective April 1: The U.S. State Department determines the maximum per diem rates for travel outside the Continental United States (OCONUS), including Alaska, Hawaii, Puerto Rico, the Northern Mariana Islands, and other U.S. possessions. The rates are updated on a monthly basis. Effective April 1, 2007, the maximum per diem rate (includes meals and lodging) has been revised for several localities in Alaska, Australia, Belgium, Burkina, China, Comoros, Ecuador, El Salvador, Finland, France, French Guiana, Germany, Greece, Greenland, The Holy See, Ireland, Italy, Kenya, Kuwait, Luxembourg, Malaysia, Mexico, Monaco, Namibia, Netherlands, Norway, Papua New Guinea, Portugal, Reunion, Romania, Russia, San Marino, Saudi Arabia, Senegal, Seychelles, Slovakia, Slovenia, Spain, and Sudan. See the U.S. Department of Defense Web site for current OCONUS per diem rates.

AUTOMATIC EXTENSION TO JUNE 15, 2007 FOR EXPATS

2007-04-04T15:13:00.000-07:00

Expatriats living and/or working abroad on 4/17/07 (this is the due date for your 2006 tax return) receive an automatic extension from the IRS to file their 2006 Federal return until 6/15/07. However, you must pay any tax that is owed into the IRS by April 17, 2007 to avoid a small 1/2% per month late payment penalty if you chose to pay later. This rule applies for some states and not for others. You need to confirm with the state in which you are filing a return if it has adopted this rule.

You can further extend your federal return to 10/15/07 if you file an extension by June 15th using IRS form no 4868. Remember it is best to file these forms certified mail return receipt or by an approved overnight delivery service method. The IRS does lose and misplace paperwork it receives, but leaves you with the burden of proof to show you filed the missing form.

2005 IRS Audit Statistics for Small Business Tax Return Filers

2007-03-20T09:19:00.000-07:00

For 2005, the IRS Data Book includes the following audit statistics which might be of interest to schedule C filers, corporations and partnerships.

In calendar year 2005:

9,533,236 Schedule C's were filed, 3.12% of these were audited
2,230,024 C-Corp returns w/assets under $10 mil were filed, 0.8% audited
56,877 C-Corp returns w/assets over $10 mil were filed, 18.6% audited
2,720,290 partnership returns were filed, 0.4% audited
3,715,249 S-Corp returns were filed, 0.4% audited

SEAMEN ON YACHT QUALIFY FOR FOREIGN EARNED INCOME EXCLUSION

2007-02-26T12:14:00.000-08:00

Myron and Thelma Struck, TC Memo 2007-42 The Tax Court has concluded that taxpayers employed on a yacht that was operated primarily in foreign territorial waters met the foreign physical presence requirement and could claim the foreign earned income exclusion under Code Sec. 911.
Background. A U.S. citizen who has a tax home in a foreign country and meets either the bona fide foreign residence test or the foreign physical presence test can elect to exclude foreign earned income from his gross income. (Code Sec. 911(a)(1)) The exclusion can't exceed his foreign earned income for the year, as computed on a daily basis at an annual rate of $80,000, indexed for inflation for post-2005 years ($82,400 for 2006; $85,700 for 2007). (Code Sec. 911(b))
A taxpayer meets the foreign residence test if he is a bona fide resident of one or more foreign countries for an uninterrupted period including an entire tax year. A taxpayer meets the foreign presence test if, in any period of 12 consecutive months, he is present in one or more foreign countries during at least 330 full days. (Code Sec. 911(d)(1)) A foreign country includes airspace, lands, and territorial waters under the sovereignty of a country, territory, or possession other than the U.S. Because international waters are not under the sovereignty of any one country, time spent in international waters generally does not apply toward the 330 foreign day requirement.
A taxpayer who has an abode in the U.S. is not treated as having a tax home in a foreign country. (Code Sec. 911(d)(3))

Facts. Myron Struck was employed as a yacht captain and his wife, Thelma, was employed as a chef and stewardess on a yacht that was operated primarily in foreign territorial waters. Except for approximately 2 weeks when on vacation in the U.S., the Strucks lived on the yacht. In addition to unimproved property, they owned a townhouse in California, which was rented out and managed by real estate professionals. They apparently claimed a state property tax homeowner's exemption (allowed to a owner-occupied principal residence) on the townhouse. They also maintained bank accounts, registered and garaged two vehicles at a relative's property, and maintained their driver's licenses in California.
For the years at issue, 2001 and 2002, the Strucks each claimed the foreign earned income exclusion, including with their returns a Form 2555-EZ, Foreign Earned Income Exclusion. On the Forms 2555-EZ, they listed the address of a relative in California for their “foreign address” and indicated an applicable period of Jan. 1 to Nov. 30, 2001, and Jan. 1 to May 15, 2002.
Concluding that the Strucks did not have a foreign tax home for 2001 and 2002, IRS disallowed the exclusions. During the audit, the Strucks amended their Forms 2555-EZ, listing a Costa Rica foreign address and new applicable periods of Nov. 30, 2000 to Nov. 30, 2001, and May 16, 2001 to May 15, 2002.

Taxpayers qualify for the exclusion. The Tax Court concluded that the Strucks met the foreign physical presence requirement for both years in issue. They were physically present in foreign countries—including foreign waters that counted as part of foreign countries—for 330 days for 2001 (using an applicable period of Jan. 7, 2001 to Jan. 6, 2002) and for 333 days for 2002 (using an applicable period of May 16, 2001 to May 15, 2002). The Court based its conclusion on Myron's testimony, which it found credible, and other evidence, including a review by the U.S. Navy of the log in which Myron entered the yacht's longitude and latitude coordinates every 4 hours while at sea.

During 2001 and until May 5, 2002, the Strucks' business consisted principally of traveling in international and foreign waters to foreign countries on the yacht. They had neither a regular or principal place of business, nor a specific abode in a real and substantial sense during this time. However, while the Court concluded that the Strucks were itinerants, it also found that they had a foreign tax home during the 300-plus days they were physically present in a foreign country during the applicable periods and that they therefor they had a foreign tax home for purposes of the claimed foreign earned income exclusion.

RIA observation: The Court noted—without further comment—that IRS didn't argue that as itinerants the taxpayers had no foreign tax home for purposes of the Code Sec. 911 foreign earned income exclusion. For purposes of Code Sec. 162(a)(2), an itinerant taxpayer is treated as having no tax home and so denied an “away from home” business travel expense deduction.
Noting that neither Code Sec. 911 nor its regs define “abode,” the Court concluded that the Strucks, who had limited ties to the U.S. and whose townhouse was leased to others and unavailable to them, did not have an abode in the U.S. during the applicable periods.

It also found that IRS had erred when it treated each day that involved a partial day of travel in international waters as a nonforeign day in calculating the Strucks' foreign physical presence. Reg. § 1.911-2(d)(2) and Reg. § 1.911-2(d)(3) clearly provide that a partial day of travel in international waters in traveling from one foreign country to another foreign country is to be treated as a full foreign day.

IRS again boosts housing cost allowances for those working abroad in some high-cost areas

2007-02-26T08:11:00.000-08:00

Notice 2007-25, 2007-12 IRB
A new Notice effectively increases the maximum housing cost exclusion for U.S. citizens and residents working abroad in specified high-cost locations. It not only increases the higher maximums authorized by an earlier notice but also adds new high cost locations to the pre-existing list of such locations.

Background. A qualified individual may elect to exclude from U.S. gross income his foreign earned income and housing cost amount. (Code Sec. 911(a)) Under Code Sec. 911(c)(1), as amended by the Tax Increase Prevention and Reconciliation Act (TIPRA, P.L. 109-222), the maximum excludable housing cost amount is calculated by way of a complex formula.

The excludable housing cost amount is the excess, if any, of (1) the individual's allowable housing expenses for the year over (2) a base amount. For 2006, a taxpayer's allowable housing expenses, assuming he is eligible for entire year, generally is $24,720; subtracting his base amount of $13,184 yields a generally applicable maximum housing amount exclusion of $11,536 (see Federal Taxes Weekly Alert 06/15/2006 and 10/12/2006 for details).

Increases for high-cost areas. In Notice 2006-87, 2006-43 IRB 766, IRS made adjustments for high-cost foreign areas (see Federal Taxes Weekly Alert 10/12/2006). Specifically, it contains a table that (1) identifies locations within countries with high housing costs relative to U.S. housing costs, and (2) provides an adjusted limitation on allowable housing expenses for a qualified individual incurring housing expenses in one or more specified high cost localities in 2006 to use (instead of the otherwise applicable limitation of $24,720) in determining his housing expenses. A qualified individual incurring housing expenses in one or more of the high cost localities identified in the table for the year 2006 may use the adjusted limit provided in the table (in lieu of $24,720) in determining his housing cost amount on Form 2555, Foreign Earned Income.

Additional increases. Notice 2007-25 increases the limitation on housing expenses for a few foreign locations. For example, the full year limitation on housing expenses is $28,824 for Vienna, Austria, and $75,720 for Moscow, Russia, (versus $27,200 and $27,500, respectively, in Notice 2006-87). Notice 2007-25 also carries modified housing expense limits for some foreign locations not carried in Notice 2006-87, such as Beijing and Shanghai, China, Mumbai and New Delhi, India, and Zurich, Switzerland.

In Notice 2007-25, IRS says it intends to provide guidance for housing expenses for 2007 as soon as possible, but warns that this year's adjusted limitations on housing expenses for some high-cost foreign locations may be lower than the 2006 limitations in Notice 2006-87.

IRS to Waive Estimated Tax Penalty for US Citizens or Residents Living or Working Abroad

2007-02-21T09:22:00.000-08:00

IRS to Waive Estimated Tax Penalty for U.S. Citizens or Residents Living and Working Abroad

IR-2007-32, Feb. 13, 2007
WASHINGTON — The Internal Revenue Service and U.S. Treasury today announced that they have released guidance on the estimated tax penalty for citizens or residents of the United States living and working abroad.
The Tax Increase Prevention and Reconciliation Act of 2005, Pub. L. No. 109-222, 120 Stat. 345 (TIPRA), enacted in May 2006, changed the maximum amount of foreign earned income and housing costs that may be excluded from gross income under section 911 of the Internal Revenue Code.

TIPRA increased the maximum amount of foreign earned income that may be excluded from gross income to $82,400. The law also limited the amount of housing costs that may be excluded or deducted under section 911. TIPRA further provides that the tax applicable to income not covered by the foreign income exclusion will now be calculated as though the exclusion had not been elected. These changes are effective for taxable years beginning after December 31, 2005.
Because these changes are retroactive to the beginning of the taxable year, persons relying on the law as it existed prior to the enactment of TIPRA may have underpaid their estimated tax liabilities for 2006 and may be liable for an addition to tax under section 6654(a). The IRS will waive additions to tax under section 6654(a) to the extent that the underpayment is attributable to the changes enacted under TIPRA.

This waiver is only available to qualified individuals who file a Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, with their timely filed Form 1040, U.S. Individual Income Tax Return, or Form 1040X, Amended U.S. Individual Income Tax Return.

Proof of Mailing - Leaving with Deskclerk Not Sufficient

2007-02-12T14:46:00.000-08:00

A recent Tax Court decision holds that leaving a Fed Express envelope with a hotel desk clerk with the understanding that the package would go out that day with Federal Express and hand marking the date on the package is not sufficient to prove that the tax materials were timely mailed. No one knows what happened, but the Federal Express package was officially marked by Federal Express in its printed code the next day (a day too late to avoid problems). The Tax Court stated that the Official Federal Express date was for filing purposes the only valid date that could be accepted. It is important that you make certain if filing by UPS, DHL or Fed Express that it has been dated in print by Federal Express the date you intended it to be sent. You cannot rely on others and you must be certain Federal Express does not date it the next day in error.

Year End Tax Planning for 2006

2006-12-28T10:50:00.000-08:00

Click on the title above to go to our 2006 year end tax planning tips for expatriates as well as for those living in the USA.

New Tax Act Includes Many Changes

2006-12-14T16:25:00.000-08:00

The recently passed 2006 Tax Relief and Health Care Act is a wide-ranging measure that preserves a variety of popular tax breaks for families and businesses, extends energy provisions encouraging alternative and renewable energy sources, and includes trade, oil drilling, and Medicare provisions. Here is a look at the key tax provisions in the new law that directly affect individual taxpayers.

Extension and modification of certain tax relief provisions:

The new law extends through 2007, and in certain circumstances modifies, provisions which under prior law either expired at the end of 2005 or would have expired at the end of 2006. These include:

Tuition deduction. The tax deduction for qualified higher education expenses is extended through 2007. The deduction allows taxpayers to deduct up to $4,000 (depending on their income) of higher education expenses in lieu of claiming the Hope or Lifetime Learning tax credits. The deduction is taken “above-the-line,” meaning that it may be claimed by all individual taxpayers regardless of whether they itemize their deductions.

State and local general sales taxes. The tax break allowing individual taxpayers to elect to take an itemized deduction for state and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes is extended through 2007. Taxpayers have two options for determining deductible sales tax: (i) actual sales tax paid if receipts are maintained for IRS verification or (ii) approximate sales tax paid as estimated in tables provided by the Secretary of the Treasury plus sales tax on certain additional items (such as a boat or car) that may be added to the table amount.

Combat pay treated as earned income for purpose of the earned income tax credit. The rule allowing excluded combat pay to count as income for purposes of calculating the earned income tax credit is extended through 2007.

Deduction for certain expenses of elementary and secondary school teachers. The tax break permitting elementary and secondary school teachers and certain other school professionals to deduct up to $250 of out-of-pocket costs incurred to purchase books, supplies and other classroom equipment is extended through 2007. The deduction is available to all individual taxpayers regardless of whether they itemize their deductions.

Availability of medical savings accounts. New contributions to Archer medical savings accounts (“Archer MSAs”) may be made through 2007 (instead of through 2005, as under prior law). New contributions may be made after 2007 only by or for individuals who previously had Archer MSAs, and employees who are employed by a participating employer. Individuals may make tax-deductible contributions to an Archer MSA to pay for health care expenses. The distributions are tax-free if used to pay for eligible medical expenses.

Extension of certain expiring energy provisions and other energy provisions. The new law provides an extension through 2008 of a number of energy provisions that would have expired at the end of 2007 under prior law. For individuals, the most important of these provisions is a one-year extension of the 30% tax credit for the purchase of residential solar water heating, solar electric equipment and fuel cell property through Dec. 31, 2008.

Health savings account provisions. The new law includes many changes for health savings accounts (HSAs), including: allowing one-time rollovers from health flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs) into HSAs (after the enactment date and before 2012); repeal of the annual plan deductible limit on HSA contributions (after 2006); expanded contributions limit for part year coverage (after 2006); and allowing one-time rollovers from IRAs into HSAs (after 2006).

Other tax relief provisions:

The new law also contains a package of other tax provisions designed to provide additional tax relief and certainty to taxpayers. These include:

Incentive stock option AMT provisions. For tax years beginning after the enactment date, a new law change allows individuals to take advantage of a refundable credit with respect to certain long-term unused alternative minimum tax (AMT) credits existing before Jan. 1, 2013. The annual credit amount, subject to a phase-out, is the greater of (i) the lesser of $5,000 or the amount of the long-term unused AMT credit, or (ii) 20% of the amount of the long-term unused AMT credit. This provision is designed to help taxpayers who wound up with AMT problems because of their exercise of incentive stock options.

Self-created musical works. The tax break that was enacted on a temporary basis in 2005 providing capital gains treatment for self-created musical works when these works are sold by the artist is made permanent.

Sale of residences by intelligence officers. The new law gives non-military intelligence officers stationed abroad the same liberalized home sale exclusion rules available to active military personnel. This change applies to sales of homes after the enactment date of the new law and before Jan. 1, 2011.

Premiums for mortgage insurance. A new itemized deduction for the cost of premiums for mortgage insurance on a qualified personal residence is established. The deduction is phased-out ratably by 10% for each $1,000 by which the taxpayer's adjusted gross income exceeds $100,000. The new deduction applies for 2007 only.
Loans to qualified continuing care facilities. The new law makes permanent a provision contained in the Tax Increase Prevention and Reconciliation Act of 2005 that reforms the tax treatment of loans to qualified continuing care facilities.
Frivolous submissions:

The new law increases the penalty for frivolous tax return submissions from $500 to $5,000 and expands the penalty to all taxpayers and all types of federal taxes. This increased penalty also applies to frivolous submissions for lien and levy collection due process, installment agreements, offers-in-compromise, and taxpayer assistance orders.

Please keep in mind that this article has only described the highlights of the new law. If you would like more details on any aspect of this legislation, please call or email us.

IRS Releases Maximum Housing Allowance or Deduction Amounts

2006-12-04T07:07:00.001-08:00

For 2006, the Congress changed the expat law by establishing a maximum housing allowance or deduction amount for qualified expatriates that can be deduction if the 2006 foreign earned income exceeds $82,400. The maximum deduction is $11,536, except for cities or areas that the IRS has determined the maximum should be greater due to higher housing costs. IRS Notice 2006-87 released in late October now provides a multi page table of the cities where the IRS will allow a greater deduction. The city in that table with the highest permissable housing expense for an entire year is Hong Kong with $114,300 listed for it. The entire table is available at www.taxmeless.com/

2006 IRS AUDIT STATISTICS - ARE YOU IN DANGER?

2006-11-22T07:43:00.000-08:00

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.

2006-11-17T14:43:00.000-08:00

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 http://www.taxmeless.com or email Don at donnelsonattycpa@yahoo.com

Taxation of Civilian Workers in Combat Zones

2006-10-02T10:20:00.000-07:00

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.

Guantanamo Bay Civilians Now Elgible for Foreign Earned Income Exclusion

2006-09-22T14:12:00.000-07:00

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 .

Terminating US Residency Permanently Requires Yet Another Form

2006-09-04T07:47:00.000-07:00

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.

WWW.IRS.gov contains information about the Expatriation Tax including changes made to expatriation tax rules due to the American Jobs Creation Act of 2004

Employer Provided Housing is Taxable to Expat Employees

2006-08-30T17:30:00.000-07:00

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.

Foreign Bank Account Reporting Form Due 6/30/06

2006-06-26T16:33:00.000-07:00

Form TDF 90-22.1 is due on June 30th of each year and cannot be extended. It must be filed in you had $10,000 or more in total in one or more foreign financial account, bank account or other monetary account (this includes credit balances in credit cards). It is filed separately from your tax return. On that form you report the bank name, country of location, account number, and range of highest balances during the past tax year (2005).

You must also report the name, address and tax ID numbers of joint owners and the name and address of the actually owner of an account you sign on, but do not claim any personal interest in.

In 2004 Congress enacted severe penalties for filing this form late or not filing it at all ($10,000). Though there are provisions to waive the penalty for reasonable cause, that part of the law is less than clear and the IRS has not indicated how they plan to enforce that penalty. Failure to file also includes criminal penalties. At this time it is not known if the penalty will be imposed for late filed TDF 90-22.1 forms for 2005. In the event they decide to try collect these penalties, it is wise to file the form on time on or before 6/30/06. The form can be downloaded at www.irs.gov