Due to a recent court case, the IRS recently changed its position regarding the requirements for certain foreign government employees’ wages to be exempt from U.S. federal income tax. This tax exemption may generally apply to foreign embassy employees working in the United States under A-2 visas.
Under Section 893 of the Internal Revenue Code, an embassy employee’s wages are exempt from U.S. federal income tax if the employee meets all of the following requirements:
- The employee is not a citizen of the United States;
- The employee performs similar services to those performed by U.S. government employees abroad; and
- The employee’s government grants an equivalent exemption to U.S. government employees performing similar services in that foreign country.
The law provides that the U.S. Secretary of State will certify to the Secretary of the Treasury which foreign countries grant an equivalent exemption and the character of the services performed.
Until recently, the IRS had taken the position that foreign embassy employees could not qualify for the tax exemption until their country received the above certification from the U.S. State Department. Earlier this year, the IRS lost a case related to this issue: Abdel-Fattah v. Commissioner of Internal Revenue. In that case, the Tax Court ruled that the State Department certification was not a prerequisite for the tax exemption, and that a foreign government employee’s wages are not subject to U.S. federal income tax if the employee meets the three requirements listed above.
In response to the Tax Court’s decision, the IRS recently released Action on Decision 2010-004, stating that it will no longer take the position that State Department certification is a prerequisite for the tax exemption. However, the IRS now requires that each embassy employee has the burden of proof in establishing that the above conditions are satisfied if he or she wishes to qualify for the tax exemption. How an embassy employee is to determine whether an equivalent tax exemption is provided in his or her foreign country to U.S. government employees appears to be problematic.
Please contact Kristen Colston at email@example.com if you need further information.
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