How Does the IRS Verify the Physical Presence Test?

The physical presence test is a method used by the Internal Revenue Service (IRS) to determine if a U.S. citizen or resident alien qualifies for the Foreign Earned Income Exclusion (FEIE). This exclusion can lower the U.S. income tax liability for individuals living and working abroad. Meeting the test’s requirements is a matter of counting days and maintaining records. This article explains the regulations, necessary documentation, the agency’s verification methods, and how to report your time to the IRS.

Understanding the Physical Presence Test Rules

To meet the physical presence test, a taxpayer must be physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months. The 330 qualifying days do not need to be consecutive. The test is based on the amount of time spent outside the United States, not on the type of residence established or the reasons for being abroad. This test applies to U.S. citizens and resident aliens who have a tax home in a foreign country.

A “full day” is a continuous 24-hour period starting at midnight. Days of travel to or from the United States do not count as full days in a foreign country. For example, if you depart from a foreign country and arrive in the U.S. on the same day, that day is considered a U.S. day. Time spent over international waters also does not count as a day in a foreign country.

The 12-month period is flexible and does not have to align with the calendar year; a taxpayer can choose any 12-consecutive-month period to meet the 330-day threshold. For instance, a qualifying period could run from April 1, 2023, to March 31, 2024. Failure to meet the 330-day count for any reason will result in failing the test, though limited waivers exist for leaving a country due to war or civil unrest.

Essential Records for Substantiating Your Presence

The responsibility for proving you meet the physical presence test rests with you. You must maintain adequate records to substantiate your foreign presence for every day claimed. A range of evidence can be used to support your claim in the event of an examination.

You should keep copies of every page of your passport, even blank ones, as the entry and exit stamps create an official timeline of your international movements. Other documents help corroborate your location and timeline.

Useful records include:

• Travel itineraries, airline tickets, and boarding passes for all flights.
• Rental agreements or mortgage statements for your foreign residence.
• Utility bills for electricity, water, or internet service that show you maintained a household.
• Credit card and bank statements showing transactions made in a foreign country.
• An employment contract specifying your work location and duration of assignment.

The IRS Verification Process

The IRS verification process begins with a review of Form 2555, Foreign Earned Income. Agency personnel scrutinize the travel dates and day counts, and any inconsistencies or mathematical errors can increase the likelihood of further review.

If an audit is initiated, the IRS will issue an Information Document Request (IDR). This formal request will ask you to provide the records needed to substantiate your claim. An auditor will review the evidence to reconstruct your timeline and verify that you were physically present in a foreign country for at least 330 full days.

During this process, the auditor will confirm that travel days were not improperly counted. The failure to provide sufficient documentation or the discovery of records that contradict Form 2555 can lead to the disallowance of the FEIE. This can result in back taxes, interest, and potential penalties.

Reporting Your Time on Form 2555

You report your time in Part III of Form 2555, titled “Physical Presence Test.” This section is where you formally present your day count to the IRS.

The first step is to enter the beginning and ending dates of your 12-month qualifying period on line 16. You must enter specific dates, as leaving a date blank is not acceptable and could lead to processing delays.

Next, you must complete the table in line 18. This table requires you to list all your travel during that period, including the country visited and the dates of arrival and departure. You must also note whether you were present in the U.S. on those dates.

Finally, you will calculate your total days present in a foreign country and enter that number on line 19. This is done by subtracting the days you were not in a foreign country from the total days in your 12-month period. The result must be at least 330 to pass the test.