I am going through this exact scenario about flight time over international water right now. Another pilot from my legacy US airline went through it last year. We both flew for an asian carrier for a couple of years. He won his battle.

We get a letter from the IRS stating that 100 percent of our foreign income exclusion was denied because we were flying over water. It was 2-3 years prior so they tacked on penalties and 40% interest per year.
They claim it was "just to get our attention.

I had never heard of this, but the info they gave me says that any flight over international waters, outside of 3 miles from land, is US earned income, even on a foreign flagged carrier. I had to copy my logbooks and calculate time spent over international water.

Luckily only a very small amount (2% and 7%) of the two years was over water. I made enough that I should not owe any additional tax.

IRS Pr&$%cks.