Operation Just Cause... ...for as long as it takes
By Jim Garamone WASHINGTON -- U.S. service members assigned to NATO are
employees of the United States and cannot use the foreign earned
income exclusion to escape taxes on their military pay.
The Internal Revenue Service announced its decision in a letter
to DoD July 23.
Foreign earned income includes pay received for services
performed as an employee in a foreign country, but does not
include amounts paid by the United States to its employees, said
Air Force Lt. Col. Tom Emswiler, executive director of the Armed
Forces Tax Council in the Pentagon.
There had been some confusion in the IRS about this matter --
IRS specialists erroneously told some military members working
at NATO activities that they could use the foreign earned income
exclusion.
The confusion comes from a Tax Court decision in the 1995 case
of Adair vs. the Commissioner of Internal Revenue. William
Adair was a U.S. Army civilian employee who transferred
to NATO. The court allowed Adair to use the foreign earned
income exclusion. "Even though the United States paid his
salary, the Tax Court said Adair's transfer to NATO caused him
to become an employee of NATO and no longer one of the United
States.
Emswiler said certain unique facts apply to Adair's case that do
not apply to U.S. uniformed personnel. Adair transferred under a
special program that allows a U.S. civilian employee to become
an employee of an international organization. Under the terms of
his employment, Adair swore an oath of complete loyalty to NATO
and NATO could fire him. If he were fired, he would be out of a
job. None of these things is true for uniformed service members.
Still, since 1995 some uniformed personnel have claimed the
foreign earned income exclusion. In a cursory look at its
records, the IRS found 30 returns that erroneously used this
provision. "I expect there to be more," Emswiler said. He said
the confusion has not been limited to NATO headquarters in
Belgium, but in Naples, Turkey or any base where U.S. service
members serve with NATO.
The ruling only affects military pay. Service members can still
exclude pay earned from a second job, for example. It also does
not affect provisions for excluding pay for service in a combat
or hazardous duty zone.
Uniformed members assigned to NATO sites who relied on the Adair
case to support the exclusion of their military pay from taxes
should talk to a legal assistance attorney about filing an
amended tax return, Emswiler said. IRS officials are considering
waiving interest and penalties in these cases and hope to reach
a decision in the next two weeks.
Affected members may want to wait until the revenue service
makes this decision before mailing their amended returns,
Emswiler suggested. Legal assistance attorneys wil
Sent in by Veterans News and Information Services
American Forces Press Service
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