TIMELY FILING THE FORM 2555 IS ESSENTIAL FOR CLAIMING THE FOREIGN EARNED INCOME EXCLUSION
One of the more common misconceptions amongst expats is the belief that if your salary falls under the foreign earned income exclusion (FEIE) amount, then there is no requirement to file a U.S. income tax return (Form 1040) or FEIE Form 2555.
In fact, in order to claim the FEIE, timely filing the Form 2555 is essential.
In this blog, we review how to timely elect the FEIE and what can be done if you are late in making the election.
TIMELY FILING THE FORM 2555
The FEIE is claimed by filing the Form 2555 with the IRS. Once you choose to claim an exclusion, the choice remains in effect for that year and all future years unless it is revoked. However, you need to include the form each year with your tax return in order to claim the benefit of that year. To revoke your choice, you must attach a statement to your return for the first year you do not wish to claim the exclusion. If you revoke your choice, you cannot claim the exclusion for the next 5 tax years without the approval of the IRS.
In order for a Form 2555 to be considered timely filed, it must be attached to your timely-filed income tax return. U.S. expats are generally required to file their returns by April 15th of the following year, just like U.S. residents. However, if you live outside the U.S. on April 15th, you are entitled to an automatic extension (without the filing of an extension form) until June 15th.
An automatic extension can also be filed resulting in additional time to file until October 15th. Due dates that fall on a weekend or holiday are pushed to the next business day.
LATE FILING THE FEIE FORM 2555
If you haven’t filed the Form 2555 on a timely-filed return, the form generally must be filed with:
- a return amending a timely-filed return, or
- a late-filed return filed within 1 year from the original due date of the return (determined without regard to any extensions).
You can choose the exclusion on a return filed after the above periods, provided you owe no federal income tax after taking the exclusion into account. If you do owe federal income tax after taking the exclusion into account, you can choose the exclusion on a return filed after the periods described above, provided you file before the IRS discovers that you failed to choose the exclusion.
Importantly, under these latter two scenarios, the magic words “Filed Pursuant to Section 1.911-7(a)(2)(i)(D)” must be written at the top of page 1 of your tax return (Form 1040).
If you owe federal income tax after taking the FEIE into account and the IRS discovers that you failed to choose the exclusion, you can also request a private letter ruling that grants the late exclusion.
COURT REVIEWS LATE FILING OF FEIE FORM 2555
To illustrate a real life example involving the late filing of the Form 2555, we can turn to the 2017 Redfield decision.
The Redfield case involved a taxpayer who served 12 years in the U.S. Marines, including several stints in Afghanistan. Sometime before 2010, Mr. Redfield left the Marines as a disabled veteran suffering from memory loss and post-traumatic stress disorder. He was then offered a civilian position at the Kandahar Air Field in Kandahar Province, Afghanistan. Believing that he had made sufficient progress in his recovery, he began his job in Kandahar in January of 2010. Unfortunately, his physical and mental condition worsened, and he was unable to work for very long in his new position.
On the tax side of things, Mr. Redfield did not file his 2010 tax return for several years. In May of 2014, the IRS sent him a notice of deficiency for the 2010 tax year. Mr. Redfield did not respond, but instead late filed his 2010 return, attaching a Form 2555 and excluding $49,136 of earnings from his work in Afghanistan. Even with the exclusion, he ended up owing residual tax to the IRS, some of which he did not pay until his filing in 2014. The IRS rejected Mr. Redfield’s exclusion claim, and he brought a suit against the IRS in the Tax Court.
Under these facts, the Court could not find any path that would allow Mr. Redfield to utilize the exclusion. The exclusion was not filed within 1 year of its due date, Mr. Redfield did in fact owe some tax, and he was in fact caught by the IRS before he filed his tax return claiming the exclusion. This perfect storm of bad facts prompted the Tax Court to grant the IRS’s motion to summarily dismiss this portion of the taxpayer’s suit, leaving him without the ability to utilize the exclusion.
Interestingly, the Tax Court judges noted that they “acknowledge petitioner’s military service to this country and recognize that he emerged far from unscathed from his tours of duty in Afghanistan. We understand that the procedural requirements for making a timely FEIE election are not exactly intuitive and that the scars petitioner incurred during his military service may have contributed to the tax delinquency at issue.” However, the Court still concluded that, “While these facts may be relevant to the penalty and additions to tax that the IRS determined, they do not alter the requirement of a timely election.”
THE TAKEAWAY FOR U.S. EXPATS
If you are a U.S. expat, we cannot understate the importance of timely filing your U.S. tax return. As the Redfield decision shows, late filing your tax return can have serious consequences, especially if you are claiming an exclusion such as the foreign earned income exclusion.
We’ve helped many clients file their U.S. tax returns in a timely and accurate manner, and have assisted many others with coming into compliance with the IRS. We are available to help discuss your options and guide you through each step of the filing process. Contact us today!