IRS lost $90M by erroneous claims of foreign earned income exclusion

Recently released report by the Treasury Inspector General for Tax Administration (TIGTA) found after examining 231,277 tax returns from tax year 2008 that 23,334 taxpayers claiming the exclusion either failed to qualify for the exclusion or inaccurately computed the exclusion.

U.S. citizen or resident alien’s worldwide income is generally subject to U.S. income tax, regardless of where they live. However, if they meet certain conditions they are eligible to claim foreign earned income exclusion and can exclude up to $91,500 of foreign earned income. IRS observed that in 2008 taxpayers excluded $19.2 billion in foreign earned income on their tax returns. Out of this, the erroneous claims totaled $675 million and the estimated tax that was avoided totaled $90 million.

According to TIGTA Inspector General J. Russell George, “Over five years, the estimated revenue loss to the IRS could total more than $450 million. Improvements must be made to reduce erroneously claimed foreign earned income tax exclusions.” It is likely IRS will focus on this area in near future due to substantial revenue loss.

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