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I filed a 2011 form 2555-EZ, claiming to be a bona fide resident of Macedonia (FYROM) where I lived and worked for most of the year. However, I spent about 3 mo. in the US and received income from U. Colorado for 5 mo. I had a rented apartment in Colorado that was sublet to another person and did not receive mail there. I always intended and intend to return to Macedonia for an indefinite stay. I also had income from an employer in Canada, where I lived the previous year. I am wondering if my case will likely go to appeal and if I should give up my rented apartment in Colorado, or if there is any other action I should take to support my claim of bona fide residence abroad.
Optional Information: State/Country relating to question: United States Already Tried: -just filing a foreign income exclusion form
Hello,
If you claimed that you were a bona fide resident of Macedonia but in fact lived in the U.S. during the year then I do not believe you would have qualified for the foreign earned income exclusion, Form 2555(EZ).
One of the requirements to qualify for the exclusion under the bona fide residence test is that you "have been a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year"
To qualify for bona fide residence, you must reside in a foreign country for an uninterrupted period that includes an entire tax year. An entire tax year is from January 1 through December 31 for taxpayers who file their income tax returns on a calendar year basis. During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business.
To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country.
The fact that you had rented an apartment in Colorado is also a major disqualification to your claim for bona fide residence.
Sorry to be the one giving you this information but it sounds like you might be under audit already (hence the appeals query?)
What is wrong with the claim that my 3months in the U.S. constituted a "temporary trip", if I can prove, as I easily can, that I
intended to return to Macedonia?
You established residence in the U.S. when you rented an apartment and received income.
The mere fact that you were present in the U.S. and received income (for a period of 5 mo.) would disqualify you for the bona fide residence test.
Sorry to be the bearer of this news to you given the facts you have provided, I cannot see how you could qualify for the foreign earned income exlcusion.
I presume you rented the apartment and got cable, water, power, etc in your name, as well as got a car and motor insurance. If you did get all of these things or at least one of them then I cannot see how you did not establish residency.
If you worked in the U.S. for a few days then I could see a chance to still qualify, but not for 3-5 months. Not a chance. Sorry.
Sorry to be blunt but I given the facts I think this is cut and dried.
Please let me know if you have any further questions.
Here is a link to the IRS website that discusses the Foreign Earned Income Exclusion and the Bona Fide Residence Test - http://www.irs.gov/businesses/small/international/article/0,,id=96960,00.html
The apartment was one that I had rented since 1994. When I took the job in Canada in 2010, without an adequate relocation allowance, I chose to sublet my apartment rather than move everything, and continued to do so. The utilities etc. remained in my name.
I have no evidence of audit, but a letter may have been sent to Macedonia. Here is the example I was thinking of from the IRS web page: You are the Lisbon representative of a U.S. employer. You arrived with your family in Lisbon on November 1, 2006. Your assignment is indefinite, and you intend to live there with your family until your company sends you to a new post. You immediately established residence there. On April 1, 2007, you arrived in the United States to meet with your employer, leaving your family in Lisbon. You returned to Lisbon on May 1, and continue living there. On January 1, 2008, you completed an uninterrupted period of residence for a full tax year (2007), and you may qualify as a bona fide resident of a foreign country. So less than 3 months but longer than a few days.
A related question: I am making payments on an Offer in Compromise for ~5 back tax years. Do I have to worry that this will default?
Yes I was looking at this as well but I still can't get comfortable that you would qualify for the bona fide residence test.
Did you maintain a household and residence in Macedonia?
Main question: Assuming your judgment is right, is there anything I should do now? To answer your question: I have had a series of apartments, leaving my belongings with friends, but not paying rent when I am away.
Okay- that provides further evidence against qualifying...sorry. I would consider amending the 2011 return and not claim the exlcusion.
Re the Offer in Compromise - this should not affect that so long as you keep up with your payments.
you should also consider the physical presence test - see here - http://www.irs.gov/businesses/small/international/article/0,,id=96968,00.html
Generally, to meet the physical presence test, you must be physically present in a foreign country or countries for at least 330 full days during the 12-month period. You can count days you spent abroad for any reason. You do not have to be in a foreign country only for employment purposes. You can be on vacation time.
You do not meet the physical presence test if illness, family problems, a vacation, or your employer's orders cause you to be present for less than the required amount of time. Also, if you are present in a foreign country in violation of U.S. law, you will not be treated as physically present in a foreign country while you were in violation of the law. Income that you earn from source within such a country for services performed during a period of violation does not qualify as foreign earned income.
However, the minimum time requirement can be waived if you must leave a foreign country because of war, civil unrest, or similar adverse conditions in that country. You must be able to show that you reasonably could have expected to meet the minimum time requirements if not for the adverse conditions, and that you had a tax home in the foreign country and were a bona fide resident of, or physically present in, the foreign country on or before the beginning date of the waiver.
If you meet the criteria for the physical present test then I would say keep your return as is. If the bona fide residence test is challenged you will be able to fall back on the physical presence test.
I have to step offline for a while but will be back in a while.
If you have further questions please post them and I will respond on my return.
Best regards,
A requirement for the offer in compromise is that I pay all current taxes on time. So I don't want it to default the moment that the IRS decides that my return was invalid (but I have the right to appeal). Regarding physical presence, that is what I used the previous year when I was in Canada, but I didn't have 330 days within any period of one year in Macedonia. And there were no wars or the like. I also need desperately to eat something. I will have to find out later how to resume.
One last question before I leave for awhile: If there's no problem with the offer in compromise, do I have anything to lose by waiting for a final decision from the IRS before amending or doing anything else?
do I have anything to lose by waiting for a final decision from the IRS before amending or doing anything else? - no I don't think you have anything to lose other than paying the penalties for underpayment (if in fact it is determined that you did not qualify for the exlcusion). If the IRS deems that you knowingly filed an inaccurate and fraudulent return then you could potentially be charged with tax evasion and face criminal and or civil penalties.
I was completely honest about the details; the problem could only have been in my interpretation of the rules. (I would argue that my presence in the US last summer was indeed temporary and for a business purpose - I didn't have legal advice when I filed the return.) How long could I stretch out the appeals?
I'm not sure you're still online. I need to call it a night, but will look for your answer when I am online again. I expect that my question about the appeal process will be my last question.
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How long could I stretch out the appeals? - I don't think that you could stretch it out too long. If the IRS audits then they will ask for proof for your claim of foreign earned income exclusion. It is up to the IRS to provide proof that you do not qualify so it could take some time. I would say perhaps a year.
No worries on the questions, let me know what you need help with.
Experience: US Taxation specialist.
Hello Greg,
Just following up, please let me know if something is unclear or if you have further questions on this topic. If I have answered your question please either provide a rating or accept my answer. Thanks.
The IRS processed my return, and found a "math error" in that I used the regular tax tables to compute my tax (after subtracting foreign income) instead of the special form that one is supposed to use when one claims foreign income exclusion and also has US income. I didn't understand that my *tax bracket* is effectively determined by my total income, not just the US portion. This made a large difference, which I paid immediately. But might I still be audited?
But might I still be audited? - Sure you can still be audited for other reasons, but it won't be strictly because of a math error.
Can you give me any idea of the window of time in which an audit usually occurs, i.e. after what period of time can I be pretty confident that nothing further will happen?
Hi Greg,
Generally the IRS can only go back three years to select your return for audit. If you have understated your income by 25% or fraudulently prepared and filed your return the IRS can audit your return up to six years from the date of filing.
I hope this helps. Let me know if you have any further questions.