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Old 12-07-2015, 02:09 AM   #1  
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Default Tax issues to be aware of!

For all of you working overseas there were two major tax issues that occurred this week that we all need to be aware of.

First, congress passed and President Obama signed into law a new highway funding bill. Included in this bill is a provision that orders the IRS to report to the State Department any Americans who owe $50,000 or more in back taxes, interest, fines and penalties. The State Department is supposed to use this information to deny and/or revoke the passports of anyone on the list. At its most basic provision there is zero recourse or appeal process before the passport is revoked. Of course you can appeal and perhaps get your passport back at some later time. But for now, if the IRS says you owe $50,000 or more, kiss your passport goodbye for at least some period of time.

The second issue at hand is that the Supreme Court refused to hear the case of an United flight attendant, who is an American citizen and based in Hong Kong, who attempted to claim the foreign income exclusion for all of her income. The U.S. tax court ruled in 2013 that all income earned while in international airspace did not qualify as foreign earned income and thus was not eligible for the exclusion. The IRS assessed a 20% negligence penalty on her taxes as well. Since the Supreme Court refused to hear the case, the 2013 ruling of the tax court stands and is now essentially the accepted and undisputed law of the land. The article did not mention how much she owed or what the 20% penalty was, but you can see that with the new passport revocation law, her career could quickly be jeopardy. Even most regional U.S. airlines require a passport for flight crews.

Anyway I only posted this for information. If you are working overseas, or considering working overseas, make sure you hire a well qualified tax specialist who has experience in dealing with Americans who work overseas. Failure to do so may risk your entire career.

Sources:
The Supreme Court Denies Certiorari for USC Taxpayer Who Claimed Foreign Earned Income Exclusion Tax-Expatriation

Forbes Welcome
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Old 12-07-2015, 09:10 AM   #2  
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The second issue at hand is that the Supreme Court refused to hear the case of an United flight attendant, who is an American citizen and based in Hong Kong, who attempted to claim the foreign income exclusion for all of her income. The U.S. tax court ruled in 2013 that all income earned while in international airspace did not qualify as foreign earned income and thus was not eligible for the exclusion. The IRS assessed a 20% negligence penalty on her taxes as well. Since the Supreme Court refused to hear the case, the 2013 ruling of the tax court stands and is now essentially the accepted and undisputed law of the land. The article did not mention how much she owed or what the 20% penalty was, but you can see that with the new passport revocation law, her career could quickly be jeopardy. Even most regional U.S. airlines require a passport for flight crews
There is no news here. You can live overseas, but if you are employed in the USA there is no foreign earned income exemption because it is not foreign earned income! I lived and worked overseas and had the foreign earned income exemption. Then I took a job for a USA company for 6 months while still maintaining my residence overseas, and did not establish any residence in the USA. I was not able to take the foreign earned income exemption for that calendar year. Any $30 tax software program will keep you from making that mistake. The foreign earned income exemption is still in place for people who are bonafide residents of a foreign country and are employed in that country for an entire tax year. There is no mystery here. Just follow the rules. Turbotax basic or H&R Block basic software or will keep you out of trouble.
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Old 12-07-2015, 09:58 AM   #3  
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There is no news here. You can live overseas, but if you are employed in the USA there is no foreign earned income exemption because it is not foreign earned income! I lived and worked overseas and had the foreign earned income exemption. Then I took a job for a USA company for 6 months while still maintaining my residence overseas, and did not establish any residence in the USA. I was not able to take the foreign earned income exemption for that calendar year. Any $30 tax software program will keep you from making that mistake. The foreign earned income exemption is still in place for people who are bonafide residents of a foreign country and are employed in that country for an entire tax year. There is no mystery here. Just follow the rules. Turbotax basic or H&R Block basic software or will keep you out of trouble.
I am not claiming to be fully knowledgable about tax issues. But I do know there have been others on here who have claimed that the IRS has attempted to collect taxes from pilots (and flight attendants and sailors too) who spend much of their time in international airspace or waters, even if they are working for a foreign company. Not quite sure how or if the IRS is capable of tracking all of your international travel other than when you entered and departed the United States or how they can prove when or if you were in international airspace. But supposedly they have made attempts in the past to collect on that income.

Anyway, I am most definitely not a tax expert and will certainly not try and steer anyone in any direction other than to seek the help and advice of a tax professional. I simply posted the two articles for informational purposes because they are recent developments and do have potential implications for those of us who are employed by foreign carriers.

Last edited by NEDude; 12-07-2015 at 10:12 AM.
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Old 12-07-2015, 10:22 AM   #4  
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There is no news here. You can live overseas, but if you are employed in the USA there is no foreign earned income exemption because it is not foreign earned income! I lived and worked overseas and had the foreign earned income exemption. Then I took a job for a USA company for 6 months while still maintaining my residence overseas, and did not establish any residence in the USA. I was not able to take the foreign earned income exemption for that calendar year. Any $30 tax software program will keep you from making that mistake. The foreign earned income exemption is still in place for people who are bonafide residents of a foreign country and are employed in that country for an entire tax year. There is no mystery here. Just follow the rules. Turbotax basic or H&R Block basic software or will keep you out of trouble.
Sorry for the second reply. But just as a point of clarification it does appear from the article that the issue is not one of whether you are a bonafide resident of a foreign country, but rather where your income is earned. The tax court ruled that income earned in international airspace (or waters) is not eligible for the foreign earned income exclusion regardless of where you live or what company you work for.
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Old 12-07-2015, 08:03 PM   #5  
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There are two different tests. People do try to trick the system and get caught. It then puts the spotlight on everyone. I know passport holders who do not file U.S. taxes and use a second, or foreign passport, as their id. I keep telling them they will get caught but they are convinced they won't.

In addition, I know people that say they work for a foreign company and use the exclusion. They then say to the foreign tax department that they are in the U.S. thus double dipping. Imagine that!

Northwest pilots were caught years ago using, I believe, a Tokyo P.O. box as an address. Yes, this is still going on!

They, the IRS, are after the scammers not those that are completely honest.

A UAL F/A trying, it seems, to use a loophole or is trying a fast one, Is Lucky she's not going to jail Mrs. Snipes!

Funny, if you tell people from other countries, ie; Canada, Australia and England, that it's coming to their country they say NEVER! Guess what, it is! Governments are up turning rocks to find all sorts of bugs hiding.

You would be shocked at what some get away with and have for years.

Happy Holidays
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Old 12-07-2015, 09:26 PM   #6  
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There are two different tests. People do try to trick the system and get caught. It then puts the spotlight on everyone. I know passport holders who do not file U.S. taxes and use a second, or foreign passport, as their id. I keep telling them they will get caught but they are convinced they won't.

In addition, I know people that say they work for a foreign company and use the exclusion. They then say to the foreign tax department that they are in the U.S. thus double dipping. Imagine that!

Northwest pilots were caught years ago using, I believe, a Tokyo P.O. box as an address. Yes, this is still going on!

They, the IRS, are after the scammers not those that are completely honest.

A UAL F/A trying, it seems, to use a loophole or is trying a fast one, Is Lucky she's not going to jail Mrs. Snipes!

Funny, if you tell people from other countries, ie; Canada, Australia and England, that it's coming to their country they say NEVER! Guess what, it is! Governments are up turning rocks to find all sorts of bugs hiding.

You would be shocked at what some get away with and have for years.

Happy Holidays
The difference between the U.S. and other countries is that the U.S. is one of only two countries in the world that practices citizenship based taxation. The only other country is Eritrea in Africa. That means the U.S. taxes all of its citizens, regardless of place of residence, on their worldwide income. Yes there are some exclusions such as the Foreign Earned Income exclusion, and tax treaties that reduce some (but most definitely not all) double taxation. But the fact is if you are a U.S. citizen you are required to file a tax return to the IRS every year, regardless of where you live or where you earn your money.

Every other developed nation practices what is known as residence based taxation, meaning they only tax their established residents on their global income. Citizens who reside in other countries are not responsible to file income tax returns, or pay taxes to, their home country if they do not reside there. That is why places like Monaco and the UAE are so attractive to so many people. If the citizens of most countries take up residence in those places, all of their income becomes tax free. But the key is they have to be official and practical residents of those countries. Tennis star Boris Becker got caught cheating the German tax authorities by claiming he resided in Monaco, meaning he did not have to pay German taxes. But the German authorities were able to prove he spent more than 180 days per year at his residence in Munich, thus making him officially resident in Germany and responsible to pay German taxes.

So many of the methods the United States is using to go after tax cheats who hide money overseas (FATCA, FBAR, etc) are not really applicable to citizens of other countries because the way they practice taxation is different.

As a side note, the United States has criticised Eritrea's 2% citizenship based taxation system in its human rights reports. Meanwhile the United States hypocritically practices the same system with a significantly higher tax rate.
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Old 12-07-2015, 11:48 PM   #7  
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I am not claiming to be fully knowledgable about tax issues. But I do know there have been others on here who have claimed that the IRS has attempted to collect taxes from pilots (and flight attendants and sailors too) who spend much of their time in international airspace or waters, even if they are working for a foreign company. Not quite sure how or if the IRS is capable of tracking all of your international travel other than when you entered and departed the United States or how they can prove when or if you were in international airspace. But supposedly they have made attempts in the past to collect on that income.

It's not a claim. I know three pilots personally who have had that specific audit from the IRS.

Any pilot who files for the foreign earned income exclusion would be well advised to keep thorough records of all their flights (including any flight path maps) to be able to record, to the minute, their percentage of time in/over international waters. The IRS will want proof and they place the burden on you, the taxpayer, to prove your exact percentage of work time in international airspace. When you include ground duties, etc the actual percentage can be quite small.

As a result of those ongoing audits I actively bid to fly trips that kept me over land most of the time and kept all the flight path maps to prove it.


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Old 12-08-2015, 06:59 AM   #8  
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It's not a claim. I know three pilots personally who have had that specific audit from the IRS.

Any pilot who files for the foreign earned income exclusion would be well advised to keep thorough records of all their flights (including any flight path maps) to be able to record, to the minute, their percentage of time in/over international waters. The IRS will want proof and they place the burden on you, the taxpayer, to prove your exact percentage of work time in international airspace. When you include ground duties, etc the actual percentage can be quite small.

As a result of those ongoing audits I actively bid to fly trips that kept me over land most of the time and kept all the flight path maps to prove it.


Typhoonpilot
Expats are an easy target. Politicians from both parties can make us out to be the bad guys, and for the most part they do not have to answer to us. Many of the laws tax laws targeting expats have very low overhead cost to the US government for implementation but according to CBO analysis have the potential for significant windfall. So these laws are often supported on a bi-partisan basis which means the chance for repealing them is extremely small. Also expats are the only group who has seen an increase in IRS audits in the past few years, so not only are politicians focusing on expats, the IRS is as well.

So again the point is made, if you work overseas, or are considering it, make sure you are 100% tax compliant (or if you have a second passport, use that for your overseas work so if the IRS takes your U.S. passport you can at least still work).
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Old 12-08-2015, 06:04 PM   #9  
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It's not a claim. I know three pilots personally who have had that specific audit from the IRS.

Any pilot who files for the foreign earned income exclusion would be well advised to keep thorough records of all their flights (including any flight path maps) to be able to record, to the minute, their percentage of time in/over international waters. The IRS will want proof and they place the burden on you, the taxpayer, to prove your exact percentage of work time in international airspace. When you include ground duties, etc the actual percentage can be quite small.

As a result of those ongoing audits I actively bid to fly trips that kept me over land most of the time and kept all the flight path maps to prove it.


Typhoonpilot
I worked with about 30 american pilots at 2 different foreign airlines from 2008-2012. As far as I know, only a couple of us DIDN'T get audited. Several of us, including me, have been audited twice.

We had to provide copies of our logbooks, and calculate the overwater time for each leg. Luckily, there were only a few legs, and they were always the same amount.

Most of us also got hit with a claim that we were contractors and not employees, and owed self-employment tax. As far as I know, all of us won this as well. I am fighting this one for the second time. I should win as well this time

A few had their "bonifide residence" claim challenged, and they had to provide proof of apartment lease, drivers license, etc, to prove they passed that test.

Apparently the IRS doesn't like expat pilots. Here is the painful part. They don't audit you right away. They wait 3 years. Then, they apply a penalty starting 3 years ago, and charge 40% interest per year on the tax and penalty. Your bill gets really big, really quick.
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Old 12-08-2015, 10:34 PM   #10  
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I worked with about 30 american pilots at 2 different foreign airlines from 2008-2012. As far as I know, only a couple of us DIDN'T get audited. Several of us, including me, have been audited twice.

We had to provide copies of our logbooks, and calculate the overwater time for each leg. Luckily, there were only a few legs, and they were always the same amount.

Most of us also got hit with a claim that we were contractors and not employees, and owed self-employment tax. As far as I know, all of us won this as well. I am fighting this one for the second time. I should win as well this time

A few had their "bonifide residence" claim challenged, and they had to provide proof of apartment lease, drivers license, etc, to prove they passed that test.

Apparently the IRS doesn't like expat pilots. Here is the painful part. They don't audit you right away. They wait 3 years. Then, they apply a penalty starting 3 years ago, and charge 40% interest per year on the tax and penalty. Your bill gets really big, really quick.
Just curious, how does the auditing process work when you are resident overseas? Do they come to you, do you have to travel someplace to meet with them, or is it all done by email/snailmail?
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