If you worked overseas for a defense contractor, you may have qualified for the Foreign Earned Income Exclusion (FEIE) even if you were told differently.

Thousands of employees might have paid too much in U.S. taxes for decades because of receiving poor or misleading tax advice. Some unscrupulous employers may have forced their employees to sign agreements surrendering their right to keep their personal income tax records confidential.

Northrop Grumman, AECOM, General Dynamics, and Raytheon are all defendants in a lawsuit filed by a group of employees who allege they were unfairly not allowed to use the FEIE on their taxes.

The FEIE can mean big savings for U.S. employees who work abroad. According to the IRS, “If you are a U.S. citizen or a resident alien of the United States and you live abroad, you are taxed on your worldwide income. However, you may qualify to exclude from income up to an amount of your foreign earnings that is adjusted annually for inflation ($92,900 for 2011, $95,100 for 2012, $97,600 for 2013, $99,200 for 2014 and $100,800 for 2015).”

Foreign Earned Income Exclusion Background

Plaintiffs make a number of allegations against these large defense contractors, but in order to understand the nature of the case, a short history lesson is required.

Pine Gap is a highly secretive intergovernmental installation in Australia that collects intelligence and warns of missile launches. Back in 1966, the U.S. wanted to protect American citizens who worked at Pine Gap from having to pay Australia’s income taxes. As a result, the U.S. and Australia signed a treaty known as the “Agreement Between the Government of the Commonwealth of Australia and the Government of the United States of America relating to the Establishment of a Joint Defence Space Research Facility.” This treaty prevented American citizens who were living and working in Australia from being considered residents of Australia for tax purposes.

The 1966 document stated that American citizens should not claim the FEIE if they were to avoid paying Australia’s taxes.

In 1983, the U.S. federal government signed a new treaty called the “Convention Between the Government of the United States of America and the Government of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income.” This 1983 treaty says that wages of employees of private defense contractors working in Australia are only taxable in the U.S. As such, the employees who worked at Pine Gap in Australia should have been allowed to claim the FEIE, alleges the lawsuit.

Employees now allege that instead of encouraging them to claim the FEIE, the companies allegedly threatened to terminate the employment of anyone who claimed it.

Many Pine Gap employees reportedly were forced to sign closing agreements that prevented them from claiming the FEIE. Complicating matters further, an IRS employee allegedly illegally shared the personal income tax information of many employees with Pine Gap officials.

Pine Gap employees said they often were presented with surprise paperwork they had to sign the night before they left for Australia or immediately after arriving in Australia. They said they were forced to sign documents that made it appear they agreed not to claim the FEIE and to allow the IRS to share their personal income tax history with Pine Gap officials. If they didn’t sign, they were afraid of being fired.

In addition to the four businesses named in the lawsuit, other companies currently under investigation for not allowing employees to take advantage of the Foreign Earned Income Exclusion include:

• Boeing
• E&M Technologies
• HP
• IBM
• Leidos
• SAIC
• Stellar Solutions

The Foreign Earned Income Exclusion Lawsuit is Case No. 3:19-cv-00491-B in the U.S. District Court for the Northern District of Texas, Dallas Division.

This article is not legal advice. It is presented
for informational purposes only.