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decide what to disclose and how
Unless your client is willing to be a test case, to disclose it.
From Mark Heroux, J.D.
one recommendation is to attempt in good
faith to meet the disclosure rules, including Foreign Income & Taxpayers
IRS pronouncements that arguably should
have first gone through the APA process. Foreign earned income
exclusion: Pandemic-related
relief
required to comply with the APA for research credit claim but lose it on a Some individuals working outside the
the disclosure requirements of Notice righteous procedural position should a United States who filed 2019 or 2020
2016-66. The court ordered the IRS to court rule in a future case that the IRS income tax returns and reasonably
return the documents obtained from the did not have to follow the APA prior to expected to meet the eligibility require-
disclosure. However, it did not grant the issuing the FAA. ments for the foreign earned income
plaintiffs’ request to prohibit the IRS What does this mean in terms of exclusion, but failed due to not meeting
from using the information obtained in disclosures required by Notice 2016-66? the physical presence test or the bona
response to the notice if it was obtained It means that taxpayers residing in the fide residence test, may have been en-
lawfully by other means. Sixth Circuit (Michigan, Ohio, Ken- titled to the foreign income exclusion
tucky, and Tennessee) do not have to if they failed to satisfy either of the
What to do? disclose their microcaptive transactions. tests due to the COVID-19 emergency.
What is a practitioner to do? Unless All other taxpayers must continue to Individuals working outside the United
your client is willing to be a test case, disclose microcaptive activity that meets States who did not claim the exclusion
one recommendation is to attempt in the criteria of Notice 2016-66. in 2019 or 2020 should consider review-
good faith to meet the disclosure rules, What does this mean in terms ing their specific circumstances to see if
including IRS pronouncements that of disclosures required by Schedules they qualify for the COVID-19-related
arguably should have first gone through UTP, K-2, and K-3? As with the FAA, emergency relief that was offered and
the APA process. practitioners are encouraged to consider could claim the exclusion by filing an
What does this mean in light of the overdisclosing or making a good-faith amended return.
research credit refund claim reporting effort to disclose as fully as they might The COVID-19 pandemic prompt-
requirements of FAA 20214101F? It think an IRS agent would want them ed Treasury and the IRS to issue Rev.
means providing all the documentation to disclose. Proc. 2020-27 to provide a waiver of the
that shows uncertainty, a process of requirements governing how long an
experimentation to remove uncertainty, Bottom line individual must have resided in a for-
and a new or improved business product Practitioners must ask themselves: Do I eign country to qualify for the Sec. 911
or process (business component) that want to take the risk of not sufficiently foreign earned income exclusion. The
results from the process of experimenta- disclosing? The IRS’s attempts to gather waiver applies to any individual who
tion. Arguably, this means providing more information to more efficiently reasonably expected to have lived abroad
every document generated in any regulate have been recently ruled to long enough to qualify for the foreign
process that might include qualified have exceeded the agency’s authority. earned income exclusion during 2019 or
research. At a minimum, a practitioner These taxpayer victories are Pyrrhic. Yes, 2020 but failed to do so because of the
should strongly consider attaching a in Mann Construction the IRS will have COVID-19 pandemic.
detailed research credit study with sup- to abate a penalty. But the courts did The waiver provided in Rev. Proc.
porting documentation. not impose any damages on the IRS; 2020-27 covers individuals required to
If a taxpayer wants to challenge the Service had to return the documents depart the following areas due to the
the FAA on APA failure grounds, be to the taxpayers. The IRS can still use COVID-19 pandemic:
mindful of the refund statute of limita- the records in Examination, Appeals, ■ The People’s Republic of China,
tion and think about submitting all and at trial. excluding the Special Administrative
the supporting documentation before Practitioners must have detailed con- Regions of Hong Kong and Macau
the refund statute of limitation expires. versations with their clients about the (China), on or after Dec. 1, 2019, but
It would be a shame to have a great disclosure rules and have their clients on or before July 15, 2020; or

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