Foreign earned income exclusion: Pandemic-related relief

Editor: Uzell T. Freeman-Williams, CPA

Some individuals working outside the United States who filed 2019 or 2020 income tax returns and reasonably expected to meet the eligibility requirements for the foreign earned income exclusion, but failed due to not meeting the physical presence test or the bona fide residence test, may have been entitled to the foreign income exclusion if they failed to satisfy either of the tests due to the COVID-19 emergency. Individuals working outside the United States who did not claim the exclusion in 2019 or 2020 should consider reviewing their specific circumstances to see if they qualify for the COVID-19-related emergency relief that was offered and could claim the exclusion by filing an amended return.

The COVID-19 pandemic prompted Treasury and the IRS to issue Rev. Proc. 2020-27 to provide a waiver of the requirements governing how long an individual must have resided in a foreign county to qualify for the Sec. 911 foreign earned income exclusion. The waiver applies to any individual who reasonably expected to have lived abroad long enough to qualify for the foreign earned income exclusion during 2019 or 2020 but failed to do so because of the COVID-19 pandemic.

The waiver provided in Rev. Proc. 2020-27 covers individuals required to depart the following areas due to the COVID-19 pandemic:

• The People’s Republic of China, excluding the Special Administrative Regions of Hong Kong and Macau (China), on or after Dec. 1, 2019, but on or before July 15, 2020; or
• Globally, on or after Feb. 1, 2020, but on or before July 15, 2020.

The foreign earned income exclusion

By way of background, the Sec. 911 foreign earned income exclusion is a considerable benefit for those taxpayers working abroad who meet certain requirements for having a tax home outside of the United States. For 2020, the exclusion was $107,600 of foreign earned income. The two options available to qualify for the exclusion are the bona fide residence test and the physical presence test.

These tests are defined in Sec. 911(d)(1) as follows:

• Bona fide residence test: A person who meets this test is “a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year”; and
• Physical presence test: A person who meets this test is “a citizen or resident of the United States … who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.”

The emergency relief

With the COVID-19 emergency shutting down business globally, Treasury provided the waiver described above based on a determination that the pandemic was “an adverse condition that precluded the normal conduct of business.” To qualify for the waiver, an individual “must establish that but for those conditions the individual could reasonably have been expected to meet the eligibility requirements” for the foreign earned income exclusion.

As noted above, the period beginning in December 2019 is limited to certain parts of China and, beginning in February 2020, applies to any foreign country. The period covered for the relief in the revenue procedure ended on July 15, 2020.

To qualify for relief, an individual must have established residency or have been physically present in the foreign country on or before the applicable date specified. Therefore, an individual who was first physically present or established residency in China after Dec. 1, 2019, or another foreign country after Feb. 1, 2020, would not be eligible to use this revenue procedure.

Individuals who were present in the foreign country before the specified start dates, who seek to qualify for the exclusion because they could reasonably have been expected to have been present in a foreign country for 330 days but for the COVID-19 pandemic, and who have met the other requirements for qualification, may use any 12-month period to meet the qualified individual requirement.

Example

The revenue procedure provides an example:

[A]n individual who was present in the United Kingdom on January 1 through March 1, 2020, establishes that he or she reasonably expected to work in the United Kingdom for the entire calendar year, but departed the United Kingdom on March 2, 2020, due to the COVID-19 Emergency, and returns to the United Kingdom on August 25, 2020, for the remainder of the calendar year, would be a qualified individual for 2020 with respect to the period between January 1 through March 1, 2020, and August 25 through December 31, 2020, assuming the individual has met the other requirements of qualification under section 911.

Waiver disclosure requirement

Taxpayers claiming this waiver for tax year 2019 or 2020 should write “Revenue Procedure 2020-27” across the top margin of Form 2555, Foreign Earned Income, and attach it to their amended income tax return. In addition, the taxpayer should reaffirm, per Rev. Proc. 2020-27, that he or she “could reasonably have been expected to have been present in a foreign country for 330 days but for the COVID-19 Emergency and have met the other requirements” to qualify for the foreign earned income exclusion.