Understanding the foreign earned income exclusion and its application is crucial because it involves more than just filling out a form; it requires a deep knowledge of eligibility criteria, including the bona fide residence and physical presence tests.

Below, you’ll find a few of the top questions from a recent webinar on the topic and their accompanying answers. If you choose to attend the on-demand version of this webinar, you can access the full recording and the entire list of Q&As.   

Q: Is the foreign earned income exclusion amount in U.S. dollars?

A: Yes, the foreign earned income exclusion is calculated in U.S. dollars and is adjusted annually for inflation.

Q: Is rental income considered for the foreign earned income exclusion?

A: No, foreign rental income cannot be excluded under the foreign earned income exclusion as it is considered passive income, not earned income.

Q: Do you need to pay taxes in a foreign country to meet the bona fide residence test?

A: Not necessarily. No single factor is controlling. All factors must be considered to determine if the taxpayer qualifies.

Q: What if someone owns a home in the U.S. but rents it out?

A: One of the requirements for the foreign earned income exclusion is that the taxpayer’s tax home is in a foreign country. Owning a home in the U.S. does not automatically establish an abode in the U.S., especially if it is rented out.

To learn more about tackling Form 2555 and the foreign earned income exclusion, you can watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.

The IRS recently made notable changes to Form 14457, Voluntary Disclosure Practice Preclearance Request and Application, and its instructions that reflect a stricter approach to enforcement with regard to taxpayers who participate in its voluntary disclosure practice (VDP). The revised instructions released in June and September include more stringent requirements regarding documentation, a mandatory admission that the taxpayer acted willfully, the required disclosure of digital assets and other changes.

The VDP offers taxpayers with previously undisclosed income a way to cooperate with the IRS to resolve their tax issues. If the disclosure is timely and accurate, the IRS will take it under consideration when deciding whether to recommend criminal prosecution. But, the disclosure does not guarantee immunity from prosecution. Because the VDP is not authorized by statute, taxpayers must follow the administrative requirements laid out by the IRS in the instructions for Form 14457 to participate.

Document submission

The updated Form 14457 requires the taxpayer to check a box attesting that they have prepared and hold all required documents to provide to the examiner upon initial contact. The form includes a note stating that failure to check the attestation boxes will result in the immediate denial of a taxpayer’s VDP and that no appeals will be granted.

Previously, Form 14457 included no attestation regarding the required documents. The instructions for that version said taxpayers granted preliminary acceptance into VDP should wait for an IRS examiner to contact them with an initial letter, usually followed by a telephone call. It then listed the documents that may be requested by the examiner.

The documents that are now required include:

• Delinquent or amended tax and information returns
• Statute extensions for all applicable income tax and FBAR years
• Accounting books, records, workpapers and supporting documents
• Bank statements and related account opening documents
• Advice provided by a professional
• Any materials the taxpayer received from a promoter, enabler or facilitator of tax noncompliance
• Full payment of tax, interest and penalties

While the instructions list full payment of tax, interest and penalties as required documents, taxpayers still have the option of claiming an inability to immediately pay all outstanding federal tax liabilities by checking a box on the form. If the IRS agrees the taxpayer can’t immediately pay in full, the taxpayer must work out other financial arrangements with the agency.

Willful actions

The revised Form 14457 also added a check-the-box attestation that the taxpayer’s willful actions led to their noncompliance and that they understand that admitting to their willfulness is a requirement for VDP consideration. The previous version of Form 14457 did not require taxpayers to attest to the willfulness of their actions, but the instructions said taxpayers should use VDP when they have engaged in willful noncompliance.

Digital assets

The provisions addressing digital assets on Form 14457 have been updated and expanded. For example, the disclosure special features checklist in Section 2 of Part I now includes a checkbox for digital asset issues.

Additionally, a schedule of digital assets has replaced the schedule of virtual currency that was in the previous version of the form. The schedule now requests information on a taxpayer’s digital assets that includes:

• Centralized digital asset exchange name
• Transactions recorded on a public blockchain
• Digital asset transactions conducted within an exchange or peer-to-peer transaction
• The dates on which specified digital asset transactions took place
• Information on the buyer of digital assets for transactions conducted within an exchange or peer-to-peer transaction

Other changes to the form

The voluntary disclosure included in the revised Form 14457 now seeks an estimate of both annual unreported income and/or overstated deductions for the disclosure period. Previously, the form only required an estimate of annual unreported income.

When the form is disclosing fraud involving both a corporate officer and the corporation and the corporation is voluntarily making the disclosure, it is now made on a single Form 14457. Previously, when fraud involved both a corporate officer and the corporation, a separate Form 14457 was required for the corporation.

In celebration of National Women’s Small Business Owners Month, we are proud to showcase the inspiring stories of women tax firm owners who are the heart and soul of the National Association of Tax Professionals (NATP) community. These women not only manage thriving businesses but also uplift their clients and communities through their dedication, expertise and passion for helping others succeed. Join us as we highlight their journeys, from navigating complex tax issues to offering personalized financial guidance, and how they are making a difference in the lives of small business owners across the country.

1. Amy Brosnan, After The Tax Return, LLC, Florida

After the Tax Return is a tax business that works with state and federal audits as well as resolution for taxpayers. We help taxpayers catch up on filings, help clients get payment arrangements set up and work with clients to remove penalties. While our firm does taxes, we specialize in helping taxpayers with their interactions with the IRS, especially after they have filed their tax returns.

2. Caitlin Chancellor, Chancellor CPA, Mississippi

A local CPA firm specializing in accounting, tax, and advisory services for entrepreneurs in the PineBelt.

3. Kathy Cormier, Cormier and Rabb CPAs PA, Florida

Serving individuals and small businesses in the Tampa Bay area and beyond, our team, comprised of experienced tax accountants and certified public accountants (CPAs), is committed to delivering exceptional client services in tax return preparation, tax planning, accounting and consulting.

4. Samantha Santaniello, R.S.K. Tax & Consulting LLC, New York

With a combined experience of 25 years dedicated to supporting business owners and real estate investors, Samantha and Kathy bring a unique perspective to the table. Both proud alumni of Fordham University, we initially pursued separate paths until a pivotal moment changed our course. After our mother’s passing eight years ago, we decided to heed her long-standing wish for us to venture into entrepreneurship together. As a family-owned business, we understand the trials and triumphs that come with running a small business. Our personal experiences have shaped our approach, driving us to not only provide financial guidance but also serve as mentors and advocates for our clients’ success.

5. Amy Rose Herrick, Amy Rose Herrick, ChFC, Virginia

Amy is a comprehensive independent financial consultant, No. 1 best-selling author, tax professional, educator, licensed insurance agent for personal lines and much more. 33+ years in the financial industry as a self-employed professional.

6. Zakiya Ballard, ABC Financial Group, Georgia

Zakiyah is a U.S. Army veteran, trailblazing entrepreneur and key leader at ABC Financial Group, where she combines her passion for finance with her dedication to empowering clients. As the managing partner, Zakiyah has built a reputation for providing expert accounting and tax services, while fostering long-term relationships with clients. Known for her strategic insights and hands-on approach, she helps individuals and businesses navigate complex financial challenges. Her leadership, resilience, and commitment to community success make her a true inspiration and a driving force behind ABC Financial Group’s growth.

7. Lorra Brown, LBE Consulting, Texas

LBE Consulting offers expert tax and business consulting services tailored to empower small business owners, especially women-owned enterprises. We focus on providing personalized financial guidance, from bookkeeping to strategic tax planning, ensuring our clients understand their financials to make informed business decisions. Our mission is to educate, uplift and lead entrepreneurs toward financial success.

8. Barbara Mendez, APEX Tax & Small Business Advisors, Indiana

We are not your ordinary, stuffy accounting firm, quite the contrary! Our founder, Barbara Mendez, insisted we find a way to stand out in the crowd and make clients feel welcomed, less stressed about coming in to do taxes and make it an experience that felt more like sitting down and having coffee with a friend. We are a local, female-owned firm striving to help our clients become and remain educated about their taxes, compliant with tax and bookkeeping regulations to keep them in good standing with the IRS, as well as their state and local taxing authorities. We were born out of necessity in our area for a firm that not only prepared tax returns for individuals but also for small business owners who needed additional assistance from LLC setup and beyond-including helping them with software, bookkeeping best practices and helping them network with other small business owners just like them.

9. Esther Marrero, EGM Business and Home Solutions, Florida

At EGM Business and Home Solutions, we handle businesses so that business owners don’t have to. Whether they want to start a new business and don’t know where to begin or are looking for professional accounting and bookkeeping services, we assist with their day to day business so they don’t have to. We assist with household budget and help individuals with ITIN’s and translation of documents.

10. Susie Smith, SAS Tax & Accounting, LLC, Alabama

With 19 years of experience as the owner of SAS Tax & Accounting, LLC, Susie has built a firm dedicated to supporting small businesses. Her passion lies in helping small businesses thrive, treating each client as family and fostering a friendly, welcoming environment. Specializing in tax and bookkeeping services, SAS Tax & Accounting strives to simplify complex tax concepts for my clients, ensuring they understand and feel confident in their financial decisions. Susie’s commitment to small businesses goes beyond numbers; it’s about building lasting relationships and providing personalized support to help them succeed.

11. Tiffany Kohl, Boss Lady Tax and Books LLC, Florida

Tiffany operates a small tax and accounting firm offering tax preparation, bookkeeping, payroll, notary and other business services.