[Afropea]

I received a notice to pay taxes. However, I believe there was a mistake since my foreign earned income exclusion was not applied. The deadline to pay was very short. I called the IRS and wrote to the international email in Paris. The person at the phone was like talking to a computer, she just repeated her rehearsed text and did not understand my problem. And I never heard from Paris. Should I pay and hope to be able to claim back the money? or should I wait and risk having to pay interest and penalties?
Thanks.

 

[BBCWatcher]

It's up to you, really, and how likely you think you can prove you do not owe the tax assessed.

Why was your FEIE not applied? Did you fail to take the FEIE (by filling out IRS Form 2555 or 2555-EZ)?

 

[Bevdeforges]

If the IRS is the one that discovered your liability (i.e. you didn't file) then they won't apply the FEIE in calculating the taxes due. The FEIE is an election that you have to take when filing.

Oh, and the Paris IRS office is shutting down and going back to the US, which may explain why you haven't heard from them. One other approach is to pay the tax and then contact the Taxpayer Advocate. Taxpayer Advocate Service
Cheers,
Bev

 

[BBCWatcher]

There are situations when, if you fail to take the Foreign Earned Income Exclusion, and the IRS assesses tax, you cannot then take the FEIE to avoid that tax. Those situations are described on page 20 ("When You Can Choose the Exclusion") of IRS Publication 54 (2014 edition at least).

To summarize, if you've failed to take the Foreign Earned Income Exclusion in timely fashion (as defined in that publication), and if you owe income tax (whether paid or not) after taking into account the FEIE (for example, on U.S. source income or on non-excluded income), and if the IRS discovers that you failed to choose the exclusion (they have done that, it would appear), you cannot then take the FEIE -- it's too late. That's a lot of ifs, but if I've just described your situation the IRS will be able to sustain its tax assessment.

If I've just described your situation you can ask the IRS for relief -- for example by making an Offer in Compromise if there would be a genuine hardship in paying the tax you owe.

On edit: I should add that the Foreign Tax Credit (IRS Form 1116) is still available on that income even if the above circumstances describe your situation, and assuming you paid some amount of foreign income tax on that income.