Treasury Inspector General for Tax Administration
December 12, 2013
TIGTA - 2013-59
Contact: David Barnes
WASHINGTON -- U.S. taxpayers living and working in foreign countries can claim the Foreign Earned Income Exclusion (FEIE) to reduce Federal income taxes under the law, but improved oversight is needed for these tax returns, according to a new report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).
To alleviate double taxation of taxpayers earning foreign income while residing overseas, Internal Revenue Code Section 911(a) provides for the FEIE and the Foreign Housing Exclusion/Deduction. For Tax Year 2012, the FEIE allowed taxpayers to exclude foreign earned income up to $95,100 on their individual income tax returns.
Based on a statistical sample, TIGTA estimated that U.S. taxpayers living and working in foreign countries who claimed the FEIE reduced their Federal income taxes by $562 million in Tax Year 2009. Taxpayers claiming the Foreign Housing Exclusion/Deduction reduced their Federal income taxes by an additional $174 million for Tax Year 2009.
However, TIGTA found that during Fiscal Years 2009-2011, examiners were not referring tax returns to international examiners for review. Approximately 99 percent of the individual tax returns selected for audit by domestic examiners with attached Forms 2555/2555-EZ, Foreign Earned Income/Foreign Earned Income Inclusion, were not referred to an international specialist to review the international aspects of the tax return. If these tax returns had been referred as required, TIGTA estimated that the IRS could have assessed approximately $2.7 million in additional tax annually, or $13.5 million over five years, resulting from these FEIE referrals.
Moreover, 1,583 examinations were not referred to international specialists because the examinations were not specified in the IRS guidance, even though these tax returns included the Form 2555/2555-EZ reporting foreign earned income and carry the same risk of noncompliance as identified in other examinations of the FEIE. If these tax returns were included in the guidance to be referred to international specialists, it could potentially result in approximately $1.5 million in additional tax assessments, or $7.5 million over five years.
TIGTA recommended that the IRS ensure that: 1) domestic examiners and their managers are aware of the international referral criteria and a cross reference to those criteria is incorporated into the Internal Revenue Manual and 2) the international referral criteria process is evaluated to determine if it should be expanded to include the examinations that are not currently specified in the guidance.
In their response to the report, IRS officials agreed with the recommendations and stated that they plan to take corrective actions.
Read the report.
Note: The difference between the date TIGTA issues an audit report to the Internal Revenue Service and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with Federal confidentiality laws.
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