IRS News Release  
February 16, 1989

U.S. Government Workers Living Overseas
Are Not Allowed to Claim the
Foreign Earned Income Exclusion

The Internal Revenue Service today reminded overseas civilian and military federal workers that employees of the U. S. government are not permitted under the law to claim the $70,000 foreign earned income exclusion. Over 1,000 audit reports have been sent so far as a result of a recent IRS review of these cases.

Many Americans living and working abroad qualify for a foreign earned income exclusion of up to $70,000. While the Internal Revenue Code does not permit U. S. government employees to claim the exclusion, individuals who supply services to the U. S. government as independent contractors may qualify if they meet various tests under the law.

The IRS announced last year that it was examining the tax returns of employees paid out of non-appropriated funds (NAF). These individuals, the IRS said, are clearly government employees for purposes of the tax law and do not qualify for the exclusion.

The IRS has initiated a review of Federal agencies' classification of overseas workers as either employees or independent contractors. In addition, the IRS is investigating individuals who have been properly classified as U. S. government employees, but have attempted to claim the exclusion anyway.

The IRS emphasized that whether an employment or an independent contractor relationship exists is determined by the facts present in each individual case. Under common law rules, any individual who performs services that are subject to the will and control of an employer -- as to what must be done and how it must be done -- is an employee. It does not matter that the employer allows the employee considerable discretion and freedom of action so long as the employer has the right to control both the method and the result of the services.

IRS Publication 539, Employment Taxes, provides further guidance in determining whether an employment or independent contractor relationship exists. Overseas taxpayers may write to the IRS at the following address to obtain a copy of this free publication:

Internal Revenue Service
Forms Distribution Center
P. O. Box 25866
Richmond, VA 23289

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