IRS Says I need to fill out Form 1116, but I'm not so sure

[rrobin0609 387]

Trying to make a long story short.

 

My husband moved from the UK at the beginning of October 2018, we got married later that month.

 

At the beginning of March we filed our taxes and were excited about the sizable refund we were expecting to receive (I'd be able to pay off my car with it). We used the 2555-ez as he was born in the UK and moved to the US at the beginning of October (qualifying for the Bona Fide Residence test). We did elect to say we wanted him to be treated as a RA for the tax year using the information below, but I guess that may have meant we should have not used the 2555-ez...?

 

 

In the middle of May, we reached out to our congressional office since we had not received our refund and wanted help contacting the IRS about it since their website said it should be received within 6 weeks. In the middle of June, I got an IRS update saying that there was a math error since I had used the foreign income exclusion form to exclude my husband's income. They were saying I needed to include it and thus I owed rather than getting a refund. I resent my tax forms to the congressional office since the Taxpayer Advocate Service asked. The IRS allegedly stated there was a coding error and they would fix this for us (I do have an email from the congressional office stating there was an error).

 

Just now I got a response from the congressional office saying "Taxpayer Advocate Service completed your review yesterday and stated that the IRS has determined that you took the incorrect tax deduction regarding your spouse’s earned income.  He apparently was not in the country long enough to qualify for the deduction. If you would like to amend this to include his earnings in his country of origin, which you can do to receive credit, you will need to submit form 1116, which I have included as an attachment, along with instructions.  If you chose not to amend, then you currently have a balance due to the IRS of $XXX, which includes penalties and interest. I have requested that they send the information in a formal letter, which I will forward on to you. Once I receive that information, I will be in touch."

 

So, I thought I did everything right in the beginning based off of information I saw on here and what other couples who had their now spouses move around the same time. But maybe not? I'm just looking for some clarification on what I should do now. Should I go ahead and fill out form 1116 and do an amendment? Or should I try and "amend" with the 2555-ez and hope it actually works out this time? I'm really quite against paying what I do not believe I owe, so some form of amending is the only way I see I can go.

Edited August 15, 2019 by rrobin0609

[Wuozopo 4,293]

Two issues are muddled together in your question.

 

You can use form 2555ez to exclude foreign income -OR- use form 1116 to get credit for foreign taxes paid. Using both would be double dipping. So first you have to sort out why they think your taxes as filed are incorrect.

 

Look at your form 1040 page 2.

Does Line 1 have BOTH the US spouse earnings and the UK spouse foreign earnings added together on this line?

 

Edited August 15, 2019 by Wuozopo

[rrobin0609 387]

Yes, line one has both our incomes added together. His was converted to USD prior to adding.

Edited August 15, 2019 by rrobin0609

[Wuozopo 4,293]

2 hours ago, rrobin0609 said:

Yes, line one has both our incomes added together. His was converted to USD prior to adding.

I thought you may not have reported the income, but tried to take the exclusion. Then I don't know what is wrong with your tax return without seeing it and the associated 2555ez. There are too many variables to ask you. 

 

4 hours ago, rrobin0609 said:

He apparently was not in the country long enough to qualify for the deduction. 

He was in the UK since birth? Is that accurate?  His time in the US is not the topic. His time in the UK as a legal person entitled to live and work there is the topic. 

 

I, like him, arrived in the US October 1 on a K1. I had many decades of legal presence in the UK (since birth) and just under 9 months of UK earnings that tax year, which I reported and took an exclusion using Form 2555ez. If you made math errors or form errors, I don't know.  Your description sounds accurate but your figures may have mistakes.

 

A side note: The IRS can make mistakes too. My wife argued 30 minutes on the phone with a rep who refused to acknowledge the IRS made a $10k error in their figures they sent saying Grandad owed. FINALLY she got a supervisor who took one minute to say, "Oh I see the $10,000 error in our figures. Please ignore the letter. We will send it back through for processing".

 

Your other option is figure out how much was deducted for UK taxes from your 2018 income. Claim all the UK income on line 1as you did. Throw out the 2555 exclusion line.

Fill out Form 1116 to figure your foreign tax credit.

The credit ends up on Schedule 3 line 48 with other possible credits. The total of Schedule 3 ends up on the Form 1040 line 12b. It effectively takes what you paid UK straight off the tax you have calculated for the US. 

Edited August 15, 2019 by Wuozopo

[rrobin0609 387]

16 minutes ago, Wuozopo said:

He was in the UK since birth? Is that accurate?  His time in the US is not the topic. His time in the UK as a legal person entitled to live and work there is the topic. 

He was born in Wolverhampton. We had plenty fun arguing with USCIS about how his British BC was not English enough for them though (we got an RFIE a few months ago saying we sent an English version of a foreign BC and they wanted a non-English version, which doesn't exist)

 

17 minutes ago, Wuozopo said:

A side note: The IRS can make mistakes too. My wife argued 30 minutes on the phone with a rep who refused to acknowledge the IRS made a $10k error in their figures they sent saying Grandad owed. FINALLY she got a supervisor who took one minute to say, "Oh I see the $10,000 error in our figures. Please ignore the letter. We will send it back through for processing".

I did use turbo tax to do my taxes. I ran the numbers both ways, excluding his income with the 2555-ez and including in just to see what would happen. The numbers were exactly what I'm hearing from the IRS. So they probably did make a mistake somewhere along the lines and then the Taxpayer Advocate Service decided to side with the IRS instead of owning up to it, which isn't great but I guess that's just how it goes.

 

I just wanted to run it by people here and make sure that I didn't mess something up back in March. If I were to truly owe what they say I do then fine, but everything I've seen so far shows me that we should be able to exclude his income and be getting a refund. I have tried to call them several times. Last time I was on hold for 30 minutes and then got an automated message saying there were technical difficulties and it hung up. I work within 20 minutes of their Kansas City office, so I may just need to take a hour or two off work one day and go hash it out with them in person now that I'm sure the fault is on them.

 

Thank you so much for your expertise, @Wuozopo

[Wuozopo 4,293]

16 minutes ago, rrobin0609 said:

did use turbo tax to do my taxes. I ran the numbers both ways, excluding his income with the 2555-ez and including in just to see what would happen.

We also use TurboTax, the cd version installed on the desktop computer. It is a little tricky on the foreign income part because it's written primarily to an American who may have worked abroad. Like it asks what Visa you had to the U.K....WELL none, you didn't require a visa to work in the U.K. Some people think that's talking about their K1 visa. Sometimes you need to make up answers to get TurboTax to move on. A lot of their questions aren't on the IRS forms, but are meant to steer you to the right place. 

 

I didn't know TurboTax even had the Form 2555ez. I thought it only supported Form 2555, but I didn't actually look at my 2018 for it. 

[rrobin0609 387]

15 hours ago, Wuozopo said:

We also use TurboTax, the cd version installed on the desktop computer. It is a little tricky on the foreign income part because it's written primarily to an American who may have worked abroad. Like it asks what Visa you had to the U.K....WELL none, you didn't require a visa to work in the U.K

Yeah, it was really confusing which is why when I did it, I was pretty sure I was right. But now I'm second guessing myself.

 

I think I know what I need to do now. Thank you, again!