The Traveler Tax Home “Abandonment” Issue
Written prior to tax reform 2017. Watch for future articles.
In last month’s installment, we explored a relatively new rule some agencies impose after a traveler has worked 2 years of assignments, requiring them to return home for 45 days. In some cases, the traveler must work at home during the 45 day period before returning to travel. As we mentioned, there are variations of the rule, but in all of them, a substantial visit to the home is required after two years of service.
Where did this come from?
For some, this may be a boring trip through the history of tax legislation, but for those of us who like to know “why” as well as “what,” understanding the rationale of regulation is very insightful.
Before 1992, back when I traveled (I’m dating myself obviously), there was no “one year rule” that limited an assignment in one geographical area before the per diems / reimbursements became taxable. Before 1992, one could not be away from home longer than a year regardless of location. A “rebuttable presumption” that any work away from home longer than a year was either permanent or caused the taxpayer to be treated as an itinerant (no tax home). The one-year presumption could be overcome (rebut the presumption) if the taxpayer could provide evidence that they would return home permanently before the end of 2 years. Any series of assignments away from home for more than 2 years, regardless of location, would cause the taxpayer to be treated as having a permanent/indefinite job or classified as an itinerant. Under these old rules, a traveler could actually stay in the same area 2 years before per diems / reimbursements were taxed
All of this changed with the passage of the Energy Policy Act of 1992.
The 1-2 year rule defining work away from home was changed to the current rule defining temporary, work away from home to work which did not last more than one year in one geographical area once the taxpayer works in the same geographical region for more than a year their tax home shifts to the current place of work. The change of focus from away from home regardless of location to away from home in one area recognized the increasing mobilization of America’s workforce.
Fast forward to 2013 – if you recall..
… the definition of a traveler tax home is one of an economical home (not a permanent residence- those are two different concepts). In other words, it is where one works, not where they live. If a person has 1 permanent job, the area of that job is their tax residence whether they drive 1 mile or 100 miles to get there. A traveler does not have a primary job site unless they stay in the same area for over a year or have repetitive assignments in the same area. When one does not have a primary area where they earn their income, the tax home can default to the traveler’s permanent residence provided two of three of the following tests are satisfied.
1) Has significant income at home
2) Has substantial expenses maintaining a residence which are duplicated while on assignment
3) Has not abandoned their historical area of work and residence
This brings us back to the 45-day rule that some agencies are implementing. There is a belief among many tax practitioners that the IRS views the “abandonment rule” within the structure of the old tax home rules. Specifically, if a taxpayer is away from home for more than two years, they have abandoned their residence and fail criteria #3 as noted above. This is separate from the current one year rule limiting temporary assignments to 12 months in one geographical area.
When an agency uses this 45-day rule, it is attempting to graft due diligence to ensure that the traveler has not abandoned their tax residence. This is important as an agency must exercise reasonable due diligence to screen and monitor its employees’ tax home status. Otherwise, the IRS would assess severe penalties on an agency for paying tax-free reimbursements for lodging, travel, and meals without a justifiable basis.
While this is an understandable effort at compliance, it leaves travelers who return home frequently in a bit of a quandary. Our firm believes that regular returns home during the year totaling 30 days in a 12 month calendar period is better than a 45-day return after a two-year absence. Unfortunately, some agencies take an inflexible approach to this rule and create a conflict with travelers who have returned home regularly during the two years of service.
For travelers facing this dilemma, the best approach is to provide the agency a list of days spent at home and hope that this will be acceptable.
Would you like to learn more?
Check out the TOP 10 Questions for Travel Nurses on Taxes.