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Expat Tax Blog

Mar 23

Foreign Earned Income Exclusion Denied – Case Study

by julie

Interpretation of the Foreign Earned Income Exclusion

A tax court recently found that a contractor of Korean Air could not claim the foreign earned income exclusion. The court concluded he was not a bona fide South Korean resident for the purposes of claiming the exclusion.

The pilot in this case, Robert Hudson, flew for a US airline before becoming eligible for retirement and beginning his pension payments. The pension plan allowed him to take another job after retirement. He took the opportunity to continue his flying career with Korean Air since they had a policy allowing him to maintain his seniority.

Job details

  • Hudson was hired via a third party recruiter, by Korean Air, as a contractor (as opposed to being an employee or Korean Air or the recruiter) As part of this offer, he agreed to accept South Korea as his home base.
  • The contract term was five years, matching closely the period of time until the required retirement age. Hudson planned on filling the full term before returning to the US. However, he retired early due to failing a flight physical.

Residency details

  • While working for Korean Air, he lived in Incheon. He registered as an alien in South Korea, living at the Hyatt Hotel which the airline owned, and at the company’s expense. He brought many large suitcases containing his belongings each time he stayed.
  • While flying for the airline, he spend a significant amount of his time in the country. But, he did take off nine days each month, usually in blocks of time, and also had 24 days of vacation each year. During most of the time he had off work he came back to the US to spend time with his spouse in either Arizona or Minnesota where they had homes. On occasion, his wife would fly to meet him at layover locations.

Tax details

  • The fee for Hudson’s services was paid to the contract agency, which was responsible for paying him his salary. Each year, he received a tax statement from the Korean government that noted his “nonresident” status, which was in agreement with Hudson’s view of himself as being a registered alien who is paying taxes to Korea rather than a permanent South Korean resident. Before signing the employment contract, his attorney’s advice was that the contract would make him a Korean Air employee.
  • On Hudson’s tax returns from 2007 to 2010, and with a professional tax preparer’s advice, he used the foreign earned income exclusion to exclude his Korean Air salary from his income. For his taxes in 2011 and in 2012, he used a different tax professional (a CPA in Minnesota) who prepared the returns for him. He also sought advice from an attorney concerning the foreign earned income exclusion. Again, he concluded he was allowed to claim the exclusion.

The IRS did not accept the claim of FEIE under Bona Fide Residency. Their reasoning was that he did not establish a physical presence or live there as a bona fide resident during those tax years. In addition, the IRS found that he owed self-employment taxes. Hudson took the case to Tax Court.

Whole Story at TFX.

Mar 21

IRS: Offshore tax cheating remains on ‘Dirty Dozen’ list of tax scams

by julie

Acording to IRS, avoiding taxes by hiding money or assets in unreported offshore accounts remains on “Dirty Dozen” tax scams for 2018.

Many of these schemes peak during filing season as people prepare their tax returns or seek help with their taxes.

As the IRS intensified efforts on offshore issues in recent years, many taxpayers have voluntary disclosed their participation in these schemes.

There have been more than 56,400 disclosures and the IRS has collected more than $11.1 billion from the Offshore Voluntary Disclosure Program (OVDP) since it opened in 2009. OVDP will end Sept. 28.

Illegal scams can lead to significant penalties as well as interest and possible criminal prosecution.

Hiding Income Offshore

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as bankers and others suspected of helping clients hide their assets overseas.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant fines, as well as the possibility of criminal prosecution.

Original Story at IRS website.

Mar 20

The IRS becomes more web-savvy – new online tools!

by julie

New Online Tools from the IRS

Have you wondered what your balance to the IRS is? Want to check on your IRS payment history? Today the IRS released new features that will allow you to access these and other key datapoints about your tax account.

– 18 month payment history
– Key information from current year tax return
– Balance for each year for which you owe
– Pay or setup online payment agreement
– Access their tax records.

Requires registering through Secure Access

The IRS utilizes this two-factor authentication tool to protect taxpayer information and (hopefully) prevent fraud. If you’ve already registered for the Get Transcript Online feature, you can continue to use your login. If you don’t have one, you can register in minutes at  Secure Access.

Original Story at TFX.


Mar 17

What You Need to Know About Deducting Continuing Education

by julie

When we hear the word “education”, we often think of children. But, education is more broad than that, and learning should never end, no matter your age.  Regardless of whether or not you enjoy learning, an education is not cheap these days, and if your education can be paid for by someone else – you’re in luck. Thankfully, even Uncle Sam will help foot some of the bill.

– American Opportunity Credit – Parents under a certain income limit can claim the American Opportunity tax credit up to $2,500 for each child. This credit does not apply to adults who have already obtained a degree, or who only attend school part time.

– The Lifetime Learning credit – up to a $2,000 maximum, is available for adults in many cases. But, like the American Opportunity tax credit, it phases out for higher earners (currently over $56,000 for singles and $112,000 if filing jointly).

– Tuition and fees deduction allowed taxpayers to reduce their taxable income by up to $4,000. Under the new tax law, the tuition and fees deduction is no longer available. The tuition and fees deduction was actually an extender that expired at the end of 2016.

Luckily, there is another option. It is possible to deduct expenses for your education as a career expense. Sole proprietors can consider the expense to be a business cost and it can be written off using Schedule C.

Under the recent tax bill changes, business deduction for work-related education eliminated for employees. The new tax law eliminates the ability for employees to deduct work-related expenses as an itemized deduction on Schedule A.

No changes made to employer-provided education assistance benefits. The employer-provided education assistance exclusion allows employers to offer up to $5,250 per year in educational assistance as a tax-free benefit.

Whole Story at TFX.

Mar 15

Streamlined Procedure – which years to file?

by julie

Which years to file?

If you are behind on your tax returns & want to become compliant, the first question you likely have is – what years do I need to file?

The Streamlined Program is an olive branch from the IRS, offering delinquent taxpayers the ability to get caught up with amnesty from draconian failure to file penalties and FBAR penalties. The program is very procedural and requires you to file 3 years of tax returns and 6 years of FBARs. Which years are they referring to? Let’s dive in.

The program stipulates that you must file the 3 most recent delinquent tax returns, including extensions. At the time of writing (March 13 2018), those years are 2014, 2015, 2016.

Why not 2015, 2016, 2017? 2017 is not yet overdue. Assuming the program does not change, 2017 will be overdue (for those abroad) on June 15, 2018

Original Story at TFX.