It has come to our attention that many expatriate civilian contractors working in combat zones may be heading down a rabbit hole that may be riddled with snakes and IRS agents, if they claim to be bonafide residents, due to a gross misinterpretation of a change made to the Tax Code by the Tax Cut and Jobs Act of 2017As a result they could face a 25% accuracy related penalty COMBINED with loss of the Section 911 FEIE for 5 SUBSEQUENT YEARS. In order to qualify for the foreign earned income exclusion (FEIE), regardless of whether to bonafide residence or physical presence test is met, an American expatriate needs to establish that their “tax home” is in a foreign county.
In response to abuses of Section 911 (the foreign earned income exclusion (FEIE), in 1976 Congress amended the Tax Code by adding Section 911(d)(3) stating that the tax home of someone who’s “abode” was in the U.S.A. could not have a “tax home” in a foreign country. Neither the Code nor the Treasury Regulations defined the term “abode” which, until 2009, was not really an issue. The JCT had clarified that the legislative intent of the new provision was to prevent someone who commuted regularly between the job located in a foreign country and his/her residence in the U.S.A. Regularly means on a frequent, recurring basis. The example given was someone who lived with his family in Michigan but worked in Canada, and commuted regularly (say every weekend) to his “abode” in the U.S.A. Clearly such a person would never meet the physical presence test and was intended to target abuses regarding whether the person was a bonafide resident of Canada. The same was true where the Courts determined that where people had tried to say that they were bonafide residents of Japan because they only returned to their families every two months, where they stayed for a month before returning to work and live in Japan, that their true “abode” was in the United States where they returned regularly throughout the year. Accordingly , Tax Professionals (including CPAs and attorneys) were trained to identify such behavior patterns (especially where they were not taxed as residents by the local jurisdiction) and refused to sign a return that claimed the Bonafide Resident Foreign Tax Home exclusion.