November 21, 1990
Tax Considerations & Advice for
Taxpayers in the Mideast
WASHINGTON - The Internal Revenue Service today provided guidance, in the
form of answers to frequently-asked questions, on tax issues of
concern to military reservists and others affected by recent events
in the Middle East.
Today's announcement includes guidance for reservists on a
provision of the Soldiers' and Sailors' Civil Relief Act of 1940
which offers additional time to pay an outstanding tax assessment.
Because many taxpayers in the Mideast have spouses in the
United States, the IRS has included guidance on obtaining powers of
attorney so that the spouse at home can take care of federal tax
matters requiring joint signature.
Also included are answers to questions about relief from
requirements for the foreign earned income exclusion and the moving
expense deduction available to taxpayers who had to leave areas of
the Middle East unexpectedly.
A complete set of the questions and answers on these and other
issues affecting reservists, regular military personnel, civilians
and those being held hostage by the government of Iraq is attached.
QUESTIONS AND ANSWERS ON FEDERAL TAX ISSUES FOR TAXPAYERS IN THE
MIDEAST AND THEIR FAMILIES
Q1: As a reservist called to active duty in support of Operation
Desert Shield I receive allowances similar to those provided regular
military personnel. Are these exempt from tax?
A1: Among the allowances you may receive tax-free are BAQ (basic
allowance for quarters), BAS (basic allowances for subsistence),
certain family allowances, and uniform allowances for officers and
However, as with the regular military, special pay for foreign
or hazardous duty is subject to tax.
IRS Publication 3, Tax Information for Military Personnel,
contains a complete list of allowances and payments which are
excludable from gross income in computing your taxes. It also lists
payments and bonuses that are taxable to military personnel.
Q2: Because I am a reservist called to active military duty, I am
unable to pay past due federal income taxes that I owe. Can I get
an extension of time to pay an income tax assessment for these back
A2: Reservists called to active duty and regular military personnel may
request a deferment of the collection of past due tax. If granted, no
penalty or interest will be charged on the back taxes for the period
of time the deferment is in effect. Certain conditions must be met to
be eligible for deferment and approval must be granted by the IRS. To
obtain a deferment, you have to be serving in your "initial period of
service" and you have to show that your ability to pay the back taxes
has been "materially impaired."
The "initial period of service" is defined as the period of
active duty following recall to active duty from an inactive reserve
or National Guard unit. For regular military personnel it is the
period following induction or first enlistment in the armed forces
or the first period of reenlistment for a person who has been out of
the service for a year or more. For an officer, the initial period
of service is limited to two years of active service after one of
the above occurrences.
In order to show material impairment you will need to show that
your income dropped as a result of going into military service.
Q3: How would I seek approval from IRS to defer payment of back
income tax if my active reserve duty impairs me financially?
A3: You can call the IRS at 1-800-829-1040 and request that you be
sent a form called "Request for Deferment of Collection of Income
Tax" (form letter 1175). The completed form should be mailed to
the IRS office that previously contacted you by telephone, bill or
in person about the back tax due.
As an alternative, you may send a letter to IRS providing your
name, social security number, monthly income and source of income
before military service, monthly income currently, military rank,
date you entered military service, and date you are eligible for
It would be helpful to attach to your request a copy of your
orders to report for military service. The IRS will evaluate your
request and advise you in writing if deferment of payment is
Q4: How much additional time will I be granted to pay back taxes if
deferment is granted?
A4: If your request for deferment is granted by IRS you will be
able to defer payment of back tax until six months after the end of
your initial period of service.
Q5: I have heard a lot about how reservists called to active duty
can get their interest rate on outstanding debt reduced to six
percent. Will the IRS reduce interest on back taxes to six percent?
A5: Reservists who have been called to active duty generally will
quality for a deferment of payment on their back taxes, without
interest, if ability to pay has been severely impaired. In those
instances where they do not meet this test, the IRS generally will
grant a reduction of interest to the six percent rate on tax
liabilities that arose before they entered active service. This
applies to reservists and regular military personnel during their
period of active service.
Q6: Will the money I save due to a reduction in my interest rate on
outstanding debt need to be reported as taxable income on my tax
A6: The reduction to six percent maximum interest is provided for
by law. For that reason, the portion of interest you are not charged
(the amount in excess of six percent) is not taxable.
Those who itemize deductions on their tax returns may, as a
result of reduced interest payments, end up with smaller interest
deductions, particularly deductible mortgage interest. This would
have the effect of increasing taxable income. Adjustments to
withholding or estimated tax payments should be considered to avoid
having too little tax paid prior to filing.
Q7: Will I still be covered by my employer-provided health plan
when I report for active duty as a reservist?
A7: Employers must offer to reservists and their families an
opportunity for continued health coverage, even though these
individuals will be covered under military health plans. Employers
may choose to voluntarily maintain the health coverage of these
employees while they are on active military duty. If not, group
health plans generally are required to offer reservists, and their
families if covered under the plan, an election to continue coverage
at their own expense.
Q8: I sold my house just before I heard I was going to be called up
to active duty. How long do I have to replace it and still postpone
tax on the gain?
A8: The general rule is that can you postpone paying tax on capital
gains from the sale of principal residence if you buy a new one
within two years before or after you sold the old one. If you are
on extended active duty in the Armed Forces, the time for replacing
your old residence is extended for two more years. That allows you
up to four years after selling an old residence to replace it and
still postpone the gain. Extended active duty is defined as a call
up for more than 90 days or for an indefinite period.
If you are on extended active duty outside the United States,
the replacement period described above is suspended to one year
after the last day you are stationed outside the country. However,
the total replacement period is limited to eight years after you
sold your old residence.
Q9: Because my wife is being called up to active military reserve
duty I will not be able to get her signature very easily on tax
returns or other documents. Will the IRS accept my signature only?
A9: On a joint income tax return the signature of both husband and
wife are needed. In order to avoid having to mail tax documents to
your spouse to obtain a signature, the IRS encourages taxpayers in
this situation to obtain a power of attorney. This empowers someone
else to sign the income tax return on behalf of a taxpayer who is
unable to do so because of absence or disability.
A properly completed IRS Form 2848, "Power of Attorney and
Declaration of Representative," should be used for this purpose.
However, IRS will accept a properly completed general power of
attorney that specifically authorizes a person to prepare, execute
and file income tax returns. A copy of the power of attorney should
be attached to any return or document for which you are signing for
Q10: My husband is being detained by the government of Iraq and I
received a notice from IRS about our 1988 taxes. Can I postpone
this matter with the IRS?
A10: The IRS will suspend examination and collection actions for
individuals, including civilians, detained by Iraq for the period of
their detention. In addition, any penalties charged during the
period of detention will generally be waived upon the showing of
reasonable cause. Relatives, friends or employers of these
individuals are encouraged to call a special IRS toll-free number,
1-800-829-4351, as soon as possible, so that IRS can take steps to
suspend any collection or examination activities.
Q11: What can families of individuals being detained by the Iraqi
government do about the problem of getting needed signatures and
filing tax returns.
A11: Individuals who are detained by the Iraqi government probably
will be unable to file returns until their release, unless they had
previously granted someone power of attorney to perform that duty on
However, those who are detained in a foreign country against
their will are allowed additional time to file their federal income
tax returns. The due date for filing is extended until the
fifteenth day of the third month following their release. This
extension is for all detained taxpayers, including military
personnel, U.S. Government employees and others.
For married persons filing a joint income tax return, both
spouses qualify for this extension even if only one is detained.
For married persons filing separately, only the detained spouse
qualifies for the extension.
Because this extension is not applied for, IRS should be
contacted by relatives or friends of detainees at 1-800-829-4351 so
that IRS can know who may need to file after the normal deadline.
Q12: I had to leave Kuwait suddenly because of the Iraqi invasion.
Can I claim the foreign earned income exclusion even though I didn't
meet the tests for bona fide residence or physical presence?
A12: Individuals who are not employees of the U.S. government may
claim on their tax return an exclusion of up to $70,000 of foreign
earned income if they meet certain requirements. Your tax home must
be in a foreign country and you must either be a bona fide resident
of a foreign country for an entire tax year, or be physically
present for at least 330 days during any period of 12 consecutive
Due to adverse conditions in Iraq, Kuwait, Libya, and Yemen,
the bona fide residence and physical presence tests have been waived
for those countries. That means if you otherwise would have
qualified for the foreign earned income exclusion by virtue of
establishing a tax home in one of those countries, you can still
claim the credit even though you had to leave before meeting either
the bona fide residence or physical presence tests.
Q13: I took a job in the Middle East last March. Can I still claim
my moving expenses as a tax deduction even though I had to leave
unexpectedly before meeting the time requirement for employment
A13: Yes, if you can show that you could reasonable have been
expected to meet the requirement for the minimum period of
employment, but that the Middle East crisis made it impossible for
you to stay on the job long enough to meet this test.
Normally, to satisfy the minimum period of employment, you have
to be employed full time for at least 39 weeks during the first 12
months after arriving in the general area of your new job location.
You do not have to work consecutive weeks or work for the same
employer to satisfy this requirement. Self-employed individuals
have to meet the 39 week test for the first 12 months, and have to
work full-time for a total of 78 weeks during the first 24 months
after arriving in the area of the new job.
In addition, there are requirements involving distance from
your old job location, generally no problem when you move overseas,
and the moving expenses have to be incurred within one year from the
date you first report to work at the new location.
Q14: My husband is in Saudi Arabia and up until this year had always
prepared out tax returns. Now that he's not home, where can we get
A14: Free help is available from IRS-trained tax assistors by
calling 1-800-829-1040, toll-free. Also, you can call
1-800-829-3676 to order any of the nearly 150 free tax instruction
publications or 1-800-829-4477 to listen to a series of recorded tax
During the January through April 15 tax filing season,
Volunteer Income Tax Assistance (VITA) is available throughout the
country to help persons with relatively simple tax returns. At that
time, you can call 1-800-829-1040 to find the VITA site nearest you.
Taxpayers living abroad can get information about overseas tax
assistance locations by calling their nearest U.S. embassy or
consulate. In addition, VITA help is offered at numerous U.S.
military bases and other overseas locations. Contact your JAG
officer or the IRS for more information.
The IRS has an overseas office in Riyadh, Saudi Arabia, as well
as in Bonn, Caracas, London, Mexico City, Nassau, Ottawa, Paris,
Rome, Sao Paulo, Singapore, Sydney and Tokyo. Overseas military and
civilian taxpayers also can get information and answers to their tax
questions by calling the IRS International tax assistance office in
Washington, D.C. at (202) 287-4301.
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