EXPATS CANNOT HAVE IT BOTH WAYS

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

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

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

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

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

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

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

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

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

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.