The Taxman Cometh: When Taking A Foreign Earned Income Exclusion On Your Tax Return Can Hurt Your Ability To Naturalize

by

Cyrus D. Mehta and Gary Endelman





"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
Maintaining continuity of residence is paramount if one wants to
naturalize and become a US citizen. For an in depth discussion,
we refer you to our prior blog "http://blog.cyrusmehta.com/2010/07/naturalizing-in-flat-world.html">
Naturalization In A Flat World
and Gary Endelman’s
recent article, The Enigma of Disruption: What Continuity of
Residence In Naturalization Really Means, 17 Bender’s
Immigration Bulletin 1437, August 1, 2012. Even though a
naturalization applicant meets all the eligibility criteria, an
examiner can still deny an application for failure to maintain
the continuous residence requirement. Tax issues can further trip
up the applicant, especially when one is trying to shield foreign
earned income from US taxation, which this blog will focus
on.


"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
But before we do so, we provide the basic eligibility criteria
for naturalization.

"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
An applicant must meet certain threshold eligibility criteria in
order to become a US citizen. Pursuant to § 316(a) of the
Immigration & Naturalization Act (INA), the applicant must
establish that immediately preceding the filing of the
application, he or she has resided continuously within the US for
at least five years after being lawfully admitted for permanent
residence. If the applicant has been in marital union with a US
citizen spouse for three years, the continuous residence
requirement is three years instead of five years. Moreover, under
INA § 316(a), the applicant must also establish that he or
she has been physically present in the US for periods totaling at
least half of that time and has resided within the State or
district of the Service where the applicant filed the application
for at least three months.



Furthermore, INA § 316(a)(2) also requires the applicant to
establish that he or she has resided continuously within the US
from the date of the application up to the time of citizenship.
INA § 316(a)(3) requires the applicant to establish, inter
alia, that he or she is still a person of good moral character
during the relevant 5 or 3-year period.



INA § 316(b) states that an absence from the US of more than
six months but less than one year during the 5-year period
immediately preceding the filing of the application may break the
continuity of such residence. INA § 316(b) notes that should
such a presumption arise, it may be rebutted if the applicant can
establish that he or she in fact did not abandon his or her
residence during such period.


"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
What precisely is continuous residence? INA § 101(a)(33)
defines residence as follows: “The term
‘residence’ means the place of general abode; the
place of general abode of a person means his principal, actual
dwelling place in fact, without regard to intent.” But
that only tells us what residence means, not continuous
residence. The regulation, on the other hand, at 8 C.F.R.
§316.5(c)(1)(i) tells us what is not continuous residence.
It says that an absence of between six months and one year shall
disrupt the continuity of residence unless the applicant can
establish otherwise to the satisfaction of the Service. Thus,
unless the applicant was outside the US for six months or more
but less than a year, he or she should argue that there was no
disruption of continuous residence. Yet the authors have known of
naturalization examiners improperly clubbing two back to back
lengthy trips although each one was less than 180
days.


"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
If an applicant is out of the US for more than 180 days but less
than one year, it will cause a disruption of continuity of
residence but there is still hope. 8 C.F.R. § 316.5(c)(1)(i)
provides examples of the types of documentation which may
establish that the applicant did not disrupt the continuity of
his or her residence. Specifically, the regulation provides the
following examples that an applicant can submit to rebut an
allegation of disruption of continuity of residence:



(A) The applicant did not terminate his or her employment in the
US;


"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
(B) The applicant’s immediate family remained in the
US;


"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
(C) The applicant retained full access to his or her US abode;
or


"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
(D) The applicant did not obtain employment while
abroad.


"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">


While one is already treading on thin ice while trying to
demonstrate continuous residence, shielding foreign-earned income
from US taxation can create yet another chink in one’s
armor when trying to rebut an allegation of disruption of
continuity of residence. Many accountants may not know this, but
tread with caution if you wish to naturalize and are planning to
shield foreign earned income from US taxation that can protect
you up to $92,900.


"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
There are two different ways in which one can file for earned
foreign income exclusion through filing "http://www.irs.gov/pub/irs-pdf/i2555.pdf">IRS Form 2555. One
way is by claiming to be a bona fide resident of a foreign
country for an entire tax year or by declaring physical presence
there for a minimum of 330 days over 12 consecutive months. The
filing of Form 2555 may be viewed as further evidence of failing
to satisfy the continuous residence for naturalization. One
potential point for advocacy is that the filing of an IRS 2555
based on spending 330 days outside the US is more benign than
claiming you were a bona fide resident of a foreign country.* The
former is a mechanical application of the earned income
exclusion, and if the applicant can independently establish
eligibility for naturalization despite being out for 330 days, we
do not see why an IRS 2555 filed on the 330 days exemption should
adversely impact the applicant. "color: #1f497d;">Even the USCIS Adjudicator Field
Manual in Chapter 74 clearly makes a distinction between the bona
fide resident exemption and the physical presence exemption, and
supports our argument.


"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
Of course, the cautious immigration lawyer may suggest to the
client to simply pay foreign tax and deduct rather than protect
one’s foreign income up to $92,900. This may work where
you need to pay a foreign tax that is comparable to the US tax
rate, but in some countries like Hong Kong or Dubai, the tax rate
is much lower or next to nothing. Or you can be working for a UN
or international organization where you are totally exempt from
taxes. Under such circumstances, the $92,900 deduction would
benefit the applicant and may outweigh the marginal risk in the
event of an abandonment claim or naturalization denial.


"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
But this may not be the end of the argument in favor of shielding
foreign earned income based on the 330 days out of the US
exemption. Look at “Home on the Range: Establishing
Continuous Residence and Physical Presence for Naturalization
Purposes” by Julie G. Muniz and Lyndsey Yoshino,
Immigration Practice Pointers 2012-2013 Ed. (AILA) where they
point out that one of the requirements for IRS 2555 is to have a
tax home in a foreign country. This is in addition to meeting
either bona fide residence test or physical presence test. This
is what Muniz and Yoshino say:


"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
“Even if an LPR can meet the physical presence
test… the “tax home” requirement could be fatal
to continuous residence. If an LPR has a tax home in the United
States, she is precluded from claiming the foreign earned income
credit. However, if she claims the credit, she is implicitly
indicating that she has interrupted her continuous residence, as
it could appear inconsistent to both allege a foreign tax home
and claim continuity of residence.”


"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
Under "http://www.irs.gov/publications/p463/ch01.html#en_US_2011_publink100033750">
IRS definition
s,

"font-family: 'Times New Roman', serif; font-size: 12pt; line-height: 115%;"
lang="EN">your tax home is generally your regular place of
business or post of duty, regardless of where you maintain your
family home. Your tax home is the place where you are permanently
or indefinitely engaged to work as an employee or self-employed
individual. If your abode is in the US, then it is not possible
to claim a tax home overseas.


"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
Although the Muniz & Yoshino article makes a good point about
cautioning against claiming a tax home overseas, it can be argued
that maintaining a “tax home” in a foreign country
ought not to be conflated each time with the* establishment of* a
bona fide residence in that country. If that is the case, any tax
home in a foreign country, as the AILA article claims, is
inconsistent with maintaining continuous residence in the US.*For
instance, even if one is out for more than 180 days but less than
one year, due to a work assignment overseas, the applicant would
have in any event broken continuity of residence regardless of
the overseas tax home, but can still rebut the presumption under
8 CFR §316.5(c)(1)(i)(A)–(D). The tax home overseas
should not in itself be an aggravating factor. What indeed could
be more perilous is when one takes a foreign earned income
exclusion based on foreign residence rather than physical
presence, as also indicated in the Adjudicator’s Field
Manual at 74 (g)(9)(B):



"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
If the legal permanent resident declared himself or herself to be
a bona fide resident of a foreign country on IRS Form 2555, that
means the alien declared to the IRS that he or she went abroad
for an indefinite or extended period. He or she intended to
establish permanent quarters outside of the United States and he
or she openly declared residence in a foreign country. [See IRS
Publication 54, Chapter 4.] The applicant applying for
naturalization after openly declaring residence in a foreign
country on an official United States Government form will most
likely be unable to fulfill the residence requirement for
naturalization (see 8 CFR 316(c)(2)).



"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%; mso-fareast-font-family: 'Times New Roman';">
If the legal permanent resident declared himself or herself to be
physically present in a foreign country on IRS Form 2555, it only
means that the applicant met the IRS’s physical presence
test to have a proportion of his or her income excluded form
United States taxes. The applicant has not declared residence in
a foreign country. [See IRS Publication 54, Chapter 4.]
Eligibility for naturalization purposes may be affected if the
applicant fails to establish that he or she meets the physical
presence requirements or fails to establish that the absence of
more than six months but less than one a year did not result in
abandonment of LPR status. If the applicant applying for
naturalization has sufficient physical presence in the United
States for naturalization purposes or can establish that his or
her LPR status was not abandoned, then the applicant can still be
eligible for naturalization (see Part 3 of the Form
N-400).


"font-family: "Times New Roman","serif"; font-size: 12pt; line-height: 115%;">
Think of IRS 2555 as a warning sign whose presence on your tax
return will trigger a red flag when applying for naturalization
during the period when the applicant needs to maintain continuous
residence. This does not mean that it will always be fatal if one
tries to shield foreign income from US taxation. Any tax election
should only be made by permanent resident aliens after
consultation with competent immigration counsel. All those who
hold “green card” status should make certain that
they understand what their tax obligations are and should refer
to the IRS
publication
concerning the tax treatment for US citizens and
resident aliens abroad. Always look for the presence of those
factors with the potential to demonstrate that the applicant has
never disrupted continuous residence. Our blog points out how
you can defend yourself if you have based the Form 2555 filing on
physical presence overseas rather than a foreign residence. Do
not be discouraged if you find this hard to understand. So did
Albert Einstein who famously remarked that “This is too
difficult for a mathematician. It takes a
philosopher.”


This post originally appeared on "http://blog.cyrusmehta.com/">The Insightful Immigration Blog
on October 1, 2012.





About The Authors






Cyrus D.Mehta, a graduate of Cambridge University and Columbia Law School, is the Managing Member of Cyrus D. Mehta & Associates, PLLC in New York City. He is the current Chair of AILA's Ethics Committee and former Chair of AILA's Pro Bono Committee. He is also the former Chair of the Board of Trustees of the American Immigration Council (2004-06) and Chair of the Committee on Immigration and Nationality Law (2000-03) of the New York City Bar Association. He is a frequent speaker and writer on various immigration-related issues, including on administrative remedies and ethics, and is also an adjunct associate professor of Law at Brooklyn Law School, where he teaches a course entitled "Immigration and Work." Mr. Mehta received the AILA 2011 Michael Maggio Memorial Award for his outstanding efforts in providing pro bono representation in the immigration field.


Gary Endelman is a Senior Counsel at FosterQuan, Houston, TX. His practice includes I-9 compliance and audits, E-Verify compliance, immigration issues related to mergers and acquisitions, employment-based nonimmigrant visas, B-1 OCS, permanent residence petitions for ability, outstanding researchers, PERM labor certification; naturalization, derivation and transmission of U.S. citizenship. Mr. Endelman graduated with a B.A. in History from the University of Virginia, a Ph.D. in United States History from the University of Delaware, and a J.D. from the University of Houston. From 1985 to 1995, he worked at one of the largest immigration firms in the country. From 1995 to 2011, he worked as the in-house immigration counsel for BP America Inc., a multinational energy company ranked as one of the top 5 largest companies in the world. Mr. Endelman is board certified in Immigration and Nationality Law by the State Bar of Texas, Board of Legal Specialization and Chair of the Examinations Committee in Immigration and Nationality Law for the Texas Board of Legal Specialization. He is a frequent national speaker and writer on immigration related topics including several columns and blogs on immigration law. He served as a senior editor of the national conference handbook published by AILA for ten years. In July 2005, Mr. Endelman testified before the United States Senate Judiciary Committee on comprehensive immigration reform. Please contact Gary Endelman at gendelman@fosterquan.com. The views expressed by Mr. Endelman in this article are his personally and not those of FosterQuan















The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.