E-file system to flag errors in claims of foreign earned income

The Internal Revenue Service will incorporate features into the next version of its electronic tax filing system to prevent taxpayers from erroneously excluding foreign earned income, an oversight that cost the U.S. government $90 million in 2008, according to an audit by the Treasury Inspector General for Tax Administration.

A review found 10 percent of the 231,277 tax returns that claimed exclusions for income earned while living abroad found (a total of $675 million) included errors that totaled $90 million. Mistakes included overstating the amount of income that qualified for the exclusion and individuals not meeting requirements for exemptions. "Over five years, the estimated revenue loss could total more than $450 million," the IG reported.

In 2010, U.S. taxpayers living abroad can exclude up to $91,500 of foreign earned income.

The IG recommended the IRS establish additional reviews to identify false claims, assess whether criteria can be used to identify erroneous claims during tax-return processing, and implement automated controls for both paper and electronically filed returns that have incorrect computations for foreign earned income to be forwarded to the agency's error resolution system. That application resides in the Modernized e-File system, which corrects input submission errors.

The IRS agreed to submit a Unified Work Request to include the latter recommendation in the next release of its Modernized e-File system. While the forms for claiming foreign earned income and the exclusion are not processed by the agency's Modernized e-File system, both are scheduled to be processed by the system's next release, which has a target deployment date of January 2012.