A recent study conducted by the Treasury Inspector General for Tax Administration (TIGTA) indicates that a large number of taxpayers living abroad are calculating incorrectly one of the most important elements of their tax return: The foreign earned income exclusion.
This code provision allows taxpayers living abroad to exclude the first $92,900 (2010) earned abroad. However, it is subject to certain requirements being met:
1. First, the taxpayer must establish their abode in the foreign country. This means their economical, familial and personal ties must be stronger with the foreign country than with the USA.
2. Second, they must meet the criteria of either the Bona Fide Residence test, or the physical presence test.
TIGTA audited over 230,000 tax returns for the tax year 2008 and found that over 10% of these returns incorrectly calculated the exclusion – and that some of the taxpayers were not even entitled to the coveted tax break.
TIGTA estimated that these errors resulted in over $450 Million dollars of lost revenue, According to J. Russell George, Treasury Inspector General for Tax Administration. Given these figures it is not surprising that, even in light of the recent budgetary crisis, the IRS is requesting to increase their workforce by at least 5,100 agents in 2012.
The challenge for taxpayers is that the IRS does not make it easy to be compliant with US Taxes. The definitions surrounding eligibility are vague and lack a much needed checklist that taxpayers can rely on; instead, they must seek qualified advice, which is not in-expensive given the qualifications needed to find the most advantageous tax position. There are several firms dedicated to the compliance of taxpayers living abroad, but the self service tools available are limited.
Tax Planner CPA provides some resources, such as the foreign earned income exclusion eligibility test and the Physical Presence Test Calculator – but makes us wonder why the IRS is not providing these resources and establishing a clear framework that allows taxpayers to be compliant without incurring significant expenses with their US CPAs.
The full study can be found here: