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Why The I.R.S. Is Now Looking At American Contractors Working With The Military In Overseas Locations…?

By Michael B. Nelson, Esq. - Email Editor

Date : January 5, 2010

Historically, the United States Government agencies have relied substantially upon American companies to provide support for the U.S. troops overseas. On December 1, 2009, U.S. President Barack Obama announced a troop surge of 30,000 to be deployed to Afghanistan in 2010. This means that there will be almost 100,000 U.S. troops in Afghanistan next year and supporting contractors in Afghanistan will increase to more than 80, 000. Currently, the Department Of Defense, DOD, is the largest American agency contracting with support contractors for their services in foreign locations.

1. Is DOD is gathering and analyzing the right data on the use of contractors?
2. What steps is DOD taking to improve contract management and oversight?
3. To what extent are contractors included in military doctrines and strategies?
4. How can Contractors free up uniformed personnel to perform combat missions?
5. Can Contractors be hired when a particular need arises and be let go when their services are no longer needed?
6. Are Contractors cheaper in the long run than maintaining a permanent in-house capability?

In 2007, the Commission on Army Acquisition and Program Management in Expeditionary Operations (the Gansler Report) found that Contracting Officer Representatives usually have no prior experience with contractors and receive negligible training on how to manage contractors. Therefore, Congress is now concerned that departments like DOD are not utilizing the most benefits possible from contractor services. DOD is requiring more centralized management systems and enforcement of contracting support for the ongoing military operations. However, this increase control over supporting contractors the U.S. Treasury is questioning the relationship between the U.S. agencies and their support contractors. To date, these contractors are contractually defined and viewed as Independent Contractors which allows them to embrace the FSEI exclusion.

Although it may seem absurd, the U.S. Treasury is actively investigating these government contracts to determine whether an unintended outcome of American contactors can be asserted classifying contractors as employees of the Federal Government. If so, this redetermination opens Pandora’s box for claims of government benefits, pensions, health care, compensation, life insurance, and all other badges of government employee status to contractors who number more than 500,000 individuals world-wide.

As I mentioned in my last article, it is possible for U.S. citizens working and living overseas to report initially, but then exclude more than $100,000 per person per year on earned income from overseas locations. Now, in consideration of the above, the U.S. Treasury believes that it is paramount for these agencies of the United States Government to properly determine if a contractor providing services overseas is a common-law employee of the U.S. Government. If there is a determination made to classify the contractor as an employee, then the claims made by a contractor to exclude up to $100,000 from U.S. tax will have to be reversed out by filing Amended Tax Returns and being burdened with a huge tax liability, interest and penalty for as many years the Treasury open up. The Treasury relies on the Federal Acquisition Regulation (FAR) wherein section 2.101 states that a “’personal services contract’ means a contract that, by its express terms or as administered, makes the contractor personnel appear to be, in effect, Government employees.” In my review, this confusing but authoritative document presents the test of whether each contractor will be viewed as an employee of the Government... This is murky and dangerous for those not familiar with government contracts, negotiating governmental contacts and the international taxation of American in overseas locations. Now, past, current and future Government contracts with supporting contractors may be flawed and cost you dearly in the loss of the annual $100,000 tax exclusion. I encourage any supporting contractor to immediately have a knowledgeable tax attorney help assure that you’re positioned for success against the so-to-be U.S. Treasury claims against you. Don’t forget the State taxation. California, for example, vigorously argues that even if you have moved away from California years ago, you are still deemed to be domiciled and taxed in California. Also, the U.S. Treasury communicates its findings to all 50 states and any claim the U.S. Governments successfully claims against you will be subsequently made by the State. Planning is the key in securing these ever present contracts, especially in matters of taxation.

Feel free to email us at info@trustmakers.com or call to discuss your options.

Taking Action If you have a company, foundation or trust outside the US borders and want to know if you have correctly set it up for structural and/or tax purposes our advisors are now handling these cases. Please reply to info@trustmakers.com.

By Michael B. Nelson, Esq.
TrustMakers.com

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