Foreign Income Exclusion Discussion

The following discussion and thoughts relate to individuals qualifying for the foreign income exclusion.

The Major Issue = Abode Versus Tax Home

Under IRC 911 an individual's "tax home" is considered to be located at your regular place of work (i.e., in the foreign country). But the major issue we deal with for rotating workers is establishing one's abode as being where one's tax home is located. The following discussion explains.

Background and Law

"Abode" has been variously defined as one's home, habitation, residence, domicile, or place of dwelling. Black's Law Dictionary 7 (5th Edition. 1979). While an exact definition of "abode" depends upon the context in which the word is used, it clearly does not mean one's principal place of business. Thus, "abode" has a domestic rather than a vocational meaning, and stands in contrast to "tax home" as defined for purposes of IRC 162(a)(2).

The critical issue in cases that the IRS has delved into is whether the taxpayer maintained an abode in the United States or in the foreign country. An abode has been defined as one's home, habitation, residence, domicile, or place of dwelling. The ultimate determination of abode rests upon where the taxpayer retains stronger significant economic, familial, and personal ties — to the United States or to the foreign country.

In order to determine where a taxpayer's abode is located, it is necessary to examine and compare the taxpayer's ties (i.e., his familial, economic, and personal ties) to the foreign country with his domestic ties to the United States. Also, it is important to understand that temporary presences in the United States, such as rotating back and forth, does not mean that the taxpayer's abode is in the United States during such presence. See IRC 911(d)(1)(A). Furthermore, the taxpayer's maintenance of a dwelling in the United States, whether or not the dwelling is used by his spouse and dependents, does not mean that his abode is in the United States.

This may all sound like semantics, but it indicates that the issue for workers that rotate back and forth is the determination of whether the taxpayer's abode is in the foreign country where they work which is similar to tax home or whether the taxpayer has maintained stronger ties in the USA than they have in the foreign country. If ever an IRS audit, which are exteremely rare, there will be a comparison of the taxpayer's ties to the USA to his ties to the foreign country. Even though a taxpayer has ties to a foreign country, the IRS may attempt to argue that the taxpayer's abode is within the USA.

Specific Recommendations

The following is a list of specific recommendations that help create ties into the foreign country. Realize that these are all recommendations — not requirements. The more recommendations you put in place, the stronger your qualification if IRS would ever question. The more important ones are listed first:

Other Considerations

In Summary

We have been very successful in applying international oil and gas workers for the foreign income exclusion. All the recommendations are important and are to be considered. Some points carry more weight than others, some points you can control and some are beyond your control. It is our responsibility to make you aware of what IRS is looking for. It is your responsibility to adapt as many recommendations as possible.

If you are unsure of any of the above points or how to implement them, we will gladly provide guidance and assist you. Don't hesitate to contact us. This is a very misunderstood area of the tax code that most tax attorneys and CPAs are missing the ball on. We don't believe in overpaying Uncle Sam one penny and we are sure you all share the same philosophy.   |   701-483-3800   |   1-800-279-6052