Edsel

Foreign Exclusion - Local Hoax?

19 posts in this topic

Strange phone call from a good, long-time client.  Backdrop:  Japanese, German, and Korean auto manufacturers have plants all over the sunny South - in particular places where they are unlikely to encounter a labor union.  I live in the middle of two Nissan plants - one in Smyrna, TN and another in Decherd, TN.

Both plants have "posted in conspicuous place" some message that the plant property is under foreign sovereignty or some such message.  I don't know whether this is true, or to what extent it is true.  And some of the workers are claiming foreign income exclusion by virtue of working at these plants.  My client tells me they have filed amended returns for 3 prior years and are receiving thousands of dollars in refunds. 

In busy years, with overtime, a skilled worker can easily make over $100,000 per year at either of the two plants I mentioned.  My client tells me a couple people have refunds over $25,000 and this is easily believable.  What is NOT believable is that they qualify for the foreign income exclusion.  I've looked at the IRS definition and simply cannot find any support for this.

Keep in mind that they have these refunds because of amended returns.  The 1040-X cannot be electronically filed, so some IRS employee has to see these returns before entering them and arranging for the refunds.

What say ye?  Is this a local hoax, or is there a legitimate way for them to be claiming refunds??

 

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:D  Good post, Edsel.  Not sure how they would even remotely qualify for the exclusion.  Here are the rules:

If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to an amount of your foreign earnings that is adjusted annually for inflation ($92,900 for 2011, $95,100 for 2012, $97,600 for 2013, $99,200 for 2014 and $100,800 for 2015). In addition, you can exclude or deduct certain foreign housing amounts.

You may also be entitled to exclude from income the value of meals and lodging provided to you by your employer. Refer to Exclusion of Meals and Lodging in Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, and Publication 15-B, Employer's Tax Guide to Fringe Benefits for more information.

Other Rules

Not foreign earned income: Foreign earned income does not include the following amounts:

  • Pay received as a military or civilian employee of the U.S. Government or any of its agencies
  • Pay for services conducted in international waters (not a foreign country)
  • Pay in specific combat zones, as designated by an Executive Order from the President, that is excludable from income
  • Payments received after the end of the tax year following the year in which the services that earned the income were performed
  • The value of meals and lodging that are excluded from income because it was furnished for the convenience of the employer
  • Pension or annuity payments, including social security benefits

 

Isn't the most important stipulation the fact that you live abroad?  In any event, I don't see how they would legally qualify for the exclusion. 

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I'm wondering if these folks are being told they qualify for an exclusion, but the truth is their inflating their itemized deductions.

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Their might be some arcane provision for working at a foreign embassy, as those are considered to be "foreign soil" once on the grounds.  But just putting up a sign; nope.  That's going to show up on one of the "Dirty Dozen" lists soon.

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Thanks for the responses.  Sorta reinforces what I thought and was able to research.  Gonna tell my client I can't go down the road with him on this.  Still don't know why his co-workers are getting refunds.

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Just like the self proclaimed ministers and clergy back in the 80s and 90s....eventually the IRS caught up with them and they all had to pay it back.   Many firemen and cops did it back then, holding services in their living room for their kids.   I went on one audit (return not prepared by me) and the auditor just shook his head and said, "I wish you never fell for this."   My work was done at that point.

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3 hours ago, Edsel said:

Thanks for the responses.  Sorta reinforces what I thought and was able to research.  Gonna tell my client I can't go down the road with him on this.  Still don't know why his co-workers are getting refunds.

Try to see if you can get a blacked out copy of one of the worker amended return.  I believe I wrote before about a former client that told me what another tax preparer was doing for people at his work.  He asked me what I thought about it and if he should do it, I told him no, it's fraud etc....  about two year's later (he did not return as a client) out of the blue he called and thanked me, I said for what I haven't done any work for you in a while, he said no, for telling me not to amend my returns, everyone at his work got busted by the IRS, out of curiosity and I asked him who was this preparer, he gave the person location and name of business, the word Mama was part of the business name. 

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Federal Court Prohibits Nevada Tax Preparer from Preparing Returns Containing Foreign Earned Income Exclusion

A federal court has barred a North Las Vegas, Nevada, woman and her business from preparing federal tax returns that contain or involve foreign earned income and from promoting the exclusion of foreign earned income to others, the Justice Department announced today.

The civil injunction order, to which Sheila Bunting consented, was entered by U.S. District Judge James C. Mahan of the District of Nevada.  The injunction also bars Bunting’s business, 5 Star Tax LLC, from continuing to prepare tax returns that contain or involve foreign earned income, and from promoting the exclusion of foreign earned income to others.

According to the complaint, Bunting inappropriately attempted to exclude foreign earned income from the calculation of her customers’ federal tax liabilities, which understated her customers’ correct tax liabilities or inflated improper refunds.  Typically, U.S. citizens may exempt some foreign earned income from the calculation of gross income if they are present in a foreign country for at least 330 full days out of 12 consecutive months.  This period can be waived when the Secretary of the Treasury determines, after consultation with the Secretary of State, that individuals were required to leave a foreign country due to war, civil unrest or other conditions that preclude the normal conduct of business, among other things.  In implementing this waiver provision, each year the Secretary of the Treasury publishes a list of countries that have been determined eligible for waiver requests.  According to the suit, Bunting disregarded the published list of waiver-eligible countries in filing the exclusion of foreign earned income on behalf of her customers. 

The injunction requires Bunting to provide a list of customers that identifies by name, social security number, address, e-mail address, telephone number and tax periods, all persons for whom she has prepared federal tax returns or claims for refund since Jan. 1, 2012, that reference foreign earned income

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The problem with amended returns going through is that even though a person looks at the return, they do not verify information on the return but rather assume for the moment that you are telling the truth.  So if in filling out the Foreign Income exclusion they indicate that they were out of the country for 330 days during the year, the return will be processed as though they qualify.  However, if they are "audited ," even by computer, and it turns out they never had a passport, and never left the country, they will have to repay those refunds, plus interest, and most likely penalties for unsubstantiated tax positions.  I wouldn't touch this with a ten foot pole.

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Wow, this is rotten, I'm sure it's part of the way the company keeps workers' wages down, by lying to them that they're tax-free.  But who the hell is preparing all these returns for them? 

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Maybe I'm wrong on this one but would the foreign worker get a W2?

The very few of them that I've done, they got a letter stating their foreign wages, not a full W2.

Seems if you have been given a W2 and are making this claim, the IRS will give it a closer look eventually.

But maybe I'm completely wrong.

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Roberts, I'm thinking there would be a W-2 (if indeed any of this is legitimate, and it's not).

My last exposure to this was with a number of USCitizens living on Kwajalein Island (Marshall Islands).  They were exempt from income tax but not from Social Security or Medicare.  At the time, they could earn up to $75,000 with no income tax withheld, but SS and Med were withheld at the normal rate.

 

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Are not the citizens of the Marshall Islands enrolled in the Social Security Administration's plan?

I've never had a client with foreign earned income get a W2 because SS and Meda are only applied IF they don't pay taxes into the foreign system. You only get the Foreign Earned Income Exclusion credit if you've paid income taxes in that foreign country. Why would a W2 be required to show income tax withheld in a foreign country? US Government employees would still get one as I understand it but they don't pay foreign taxes a lot of times.

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@Roberts, it was my understanding that the only requirement for foreign income exclusion was that you had to meet the physical presence test OR the bona fide resident test.  I don't remember any requirement to pay income taxes to that country.  If you work for a US company that has offices overseas, such as an oil company or financial company, and you spend the required amount of time in a foreign country, the US company might issue you a W2 but you could still qualify for the exclusion.  At least that is my understanding - here in rural Virginia, that isn't something I see much of.

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I could be wrong but I believe the purpose of the exclusion is to avoid double taxation. You are required to pay in the US but if you meet the requirements (which are also the requirements for owing taxes in the foreign country), you'll get a partial waiver / exclusion.

Back in the tech bubble I didn't do taxes yet but had several investment clients who moved overseas to work at foreign tech firms. They didn't receive W2s but letters showing their income. They avoided a major portion of the US taxes - they paid VERY handsomely in Ireland, UK and Australia. The IRS rule says you must meet the residency test and move your tax home to the foreign country. That means you are now subject to taxation in the foreign country. Again I could be wrong but I think that's all on purpose.

Also for the SS payment - they didn't pay it. The couple who moved to Australia was forced to pay into an annuity program they have and they still have money sitting in that account and can get it when they hit Australian retirement age.

 

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Sorry, Roberts, but you are wrong.  You don't have to pay taxes to the foreign country to get the exclusion.  You are thinking of the foreign tax credit.  Your clients would get the exclusion on the first $103,000 (depending on the year), and then could take the credit for taxes paid if their pay was more than the exclusion amount.

You don't need to meet the bona-fide residency test, you just have to be overseas for 330 days in a 12 month period that may or may not correspond with the calendar year.  I have a client that works for the UN overseas.  The US is the ONLY country that taxes UN income, so she pays no taxes where she works, but does pay US tax on the amount over the exclusion.  another client is a bona-fide resident of the UK.  He pays UK tax, takes the exclusion and gets the FTC for the dividends he is also paid.

Your Australian couple now has a foreign trust.  Have you been filing the 3520 & 3520-A?

For the question above; it is a SCAM!!  I wonder if the 'poster' is in the break room or something - put up by an employee, not the company.

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On 6/9/2017 at 1:11 PM, Edsel said:

...Both plants have "posted in conspicuous place" some message that the plant property is under foreign sovereignty or some such message....

So the unasked question here:

"He goes to work one day, and a "wildcat" strike breaks out.  He is locked in the plant for 331 days.  Is he entitled to the exclusion?"

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On 6/16/2017 at 10:57 PM, joanmcq said:

Your Australian couple now has a foreign trust.  Have you been filing the 3520 & 3520-A?

Not necessarily; depends on the details of the annuity and how much (or little) control they have.  If it's the Ozzie version of social security, they don't have a foreign trust.  If they an a US-style annuity (that they were required to pay into), they may have a foreign financial asset.  Or they may have a foreign trust.  The devil is in the details - which need to be obtained, pronto.

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23 hours ago, Catherine said:

Not necessarily; depends on the details of the annuity and how much (or little) control they have.  If it's the Ozzie version of social security, they don't have a foreign trust.

This is the correct answer.

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