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IRS lists countries whose adverse conditions create 2014 foreign income/housing waiver

Rev Proc 2015-25, 2015-14 IRB

In a revenue procedure, IRS has provided a list of countries for 2013 for which, due to adverse conditions during the year, it has waived the residency and presence tests that apply for purposes of the foreign earned income and foreign housing cost exclusions.

Background. Code Sec. 911(a) and Code Sec. 911(c)(4) allow a “qualified individual,” as defined in Code Sec. 911(d), to exempt from taxation the individual’s foreign earned income and the housing cost amount.

A qualified individual is an individual whose tax home is in a foreign country and who is either:

1. a U.S. citizen (or, in certain situations, U.S. resident alien) who satisfies IRS that he has been a bona fide resident of one or more foreign countries for an uninterrupted period that includes an entire tax year (bona fide foreign residence test), or
2. a U.S. citizen or resident who, during a period of 12 consecutive months, is present in one or more foreign countries for at least 330 full days (foreign physical presence test). (Code Sec. 911(d)(1))

Under certain circumstances, the time requirements of the foreign residence test and the foreign presence test may be waived. If these requirements are waived, the taxpayer is treated as having met the foreign residence requirement for the period during which he was a bona fide resident of the foreign country, or he will be treated as having met the foreign presence requirement for the period during which he was present in the foreign country. He will be so treated even though the relevant time requirement has not been met.

Three conditions must be met for the waiver to apply:

1. The individual actually must have been a bona fide resident of, or present in, a foreign country for a period of time.
2. Before he meets the time requirements for the foreign residence test or the foreign presence test, he must leave the foreign country during a period in which IRS determines, after consultation with the State Department, that individuals had to leave the foreign country because of war, civil unrest or similar adverse conditions in that country which prevented the normal conduct of business by those individuals.
3. He must establish to IRS’s satisfaction that he could reasonably have been expected to meet the time requirements but for the war, civil unrest or similar adverse conditions. (Code Sec. 911(d)(4))

Waiver of requirements for 2014. For 2014, IRS, in consultation with the Secretary of State, has determined that war, civil unrest, or similar adverse conditions precluded the normal conduct of business in the following countries beginning on the specified date:

…Libya—Jul. 26, 2014.
…Yemen—Sept. 24, 2014.

Accordingly, for purposes of Code Sec. 911(d)(1), an individual who left one of these countries on or after the above date during 2014 will be treated as a qualified individual with respect to the period during which that individual was present in, or was a bona fide resident of, such foreign country, if the individual establishes a reasonable expectation of meeting the requirements of Code Sec. 911(d) but for those conditions.

To qualify for relief under Code Sec. 911(d)(4), an individual must have established residency, or have been physically present, in the foreign country on or before the date that IRS determines that individuals were required to leave the foreign country.

Individuals who establish residency, or are first physically present, in the foreign country on or after the date that IRS prescribes will not be treated as qualified individuals under Code Sec. 911(d)(4). For example, individuals who are first physically present or establish residency in Libya after Jul. 26, 2014 are not eligible to qualify for the exception provided in Code Sec. 911(d)(4) for tax year 2014.

References: For waivers of the time requirements for foreign residency or presence, see FTC 2d/FIN ¶  O-1273; United States Tax Reporter ¶  9114.03; TaxDesk ¶  191,511; TG ¶  30170.