Expats Need Expert Tax Advice


I’m not sure whether advisers who specialize in the tax issues of expatriates will learn a lot from studying the recent Tax Court decision in the case of Elena Lea Morgan Weschenfelder and Frederick Burkhart Weschenfelder. What they can definitely do is use it as advertising.

Given their jobs as intelligence analysts Elena and Federick are probably smarter than most CPAs and EAs, myself certainly included. Nonetheless, hiring someone with some specialized tax knowledge would have been money well spent. The Tax Court sustained deficiencies of nearly $90k and penalties close to $40k. And those are from the years 2004-2006, meaning the interest will be, as we say, “a number”.

In 2004 and 2005 the couple worked for CACI Premier Technology and Sycoleman Corp. “They lived and worked full time on a military base, living in Republican Guard barracks that had been refurbished by their employer. Petitioners were employed as intelligence analysts. Their jobs involved strategic and tactical intelligence, and they worked with the Iraqi interim Government to help identify threats and to coordinate safe passage and gatherings within the country.”

Then they moved to Germany for much of 2006 doing similar sort of work. The decision has details about the exact dates, but, as you will see that turned out not to be that important.

The Late File

An important point that went against them was when returns were filed. The IRS had no record of getting returns and had prepared substitute returns. The couple claimed that they had filed them timely but that they were unable to get proof of mailing.

They sent the returns into the IRS dated as if they were timely filed (with extension) in 2016. The IRS treated that as the filing date, which is why the penalty tab is so high, both late file and accuracy.

Judge Cohen did not buy their story -”She did not testify directly as to when and how the 2004 return was prepared and mailed from Iraq or why conditions there prevented timely filing of the 2005 return in 2006 after petitioners left Iraq or the 2006 return in 2007 when they were back in Texas. We cannot accept their claim that the returns were filed before 2016. For all issues, therefore, we conclude that the 2004, 2005, and 2006 returns were filed in January 2016.”

Exclusion Is An Election

The Foreign Earned Income exclusion is elective and elections have requirements. Although, the IRS had been disputing whether the couple qualified for the exclusion, they decided to drop that approach, so Judge Cohen did not decide it.

Instead they focused on the failure to properly elect the exclusion

The exclusion under section 911 depends on a valid election. The specific provisions of 
section 1.911-7(a)(2)(i)(D), Income Tax Regs., create an exception to the timeliness rules for a valid election and thus relate to the substance of the statute that provides an exclusion from the normal rules of taxation. The failure to place the required statement on the front of the return is not just an error in filling out a complex form. It is a material omission.

Tax Court Memorandum decision 2019-133

There is more to the discussion, but that is the part that is most relevant to today’s lesson. Someone familiar with the rules probably would not have screwed up the election, but even if they had and it caused the loss of the case, it might be their malpractice carrier that would end up on the hook.

And of course, use of a qualified preparer would have helped with the accuracy penalty.

Did The Company Let Them Down?

According to the decision – “ When petitioners commenced their employment in Iraq, the regional manager for their employer directed them to forms used to claim the section 911 foreign earned income exclusion.”

As the outcome indicates, they probably could have used a little more help than that.

Civilians In Iraq?

It really has nothing to do with the tax issues but I was rather intrigued by the notion of having intelligence analysts in a war zone being employees of a corporation. So I inquired of a couple of retired soldier friends of mine. One who preferred not to be identified wrote me.

“Contracting out services started big in the LBJ administration. As we went from the draft with lots of cheap labor to expensive Soldiers more and more of the services have gone contract. Congress is very sensitive to an incorrect reading of Tooth to Tail so we cannot have all of the tail that is necessary. In the case of analysts, some folks are decent analysts but do not meet service standards. Some are folks who have the skills but had to leave due to Up or Out policies.”

The “Tooth to Tail” thing reminds me of how we, quite rightly, specially honor those who are the “tip of the spear”. The thing is the tip of the spear is not of great utility without the whole rest of the spear.

On the record is S.W. O’Connell, a retired Army intelligence officer who now writes novels about spies in the American Revolution. He had an interesting perspective.

“Contractors serving the US military go back at least to the #RevWar. All guns were pulled by contractors as well as all supplies, transport and logistics in general. Surgeons and support were usually civilians too. It’s a long tradition.”

Other Coverage

Theresa Schliep has Tax Court Denies Intelligence Analysts’ Foreign Exclusions behind the Law360 paywall.

Lew Taishoff has Abroad At Home – Eight Years Late

“Judge Mary Ann (“S.E.C. = “She Eschews Cognomens”) Cohen has this one. IRS drops the weight-of-the-attachments test, to focus on the late election, as permitted by Reg. 1.911-7(a)(2)(i). And that reg has survived previous validity challenges.”

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