Washington (Aug. 6, 2004) -- The Internal Revenue Service has issued new proposed regulations to determine the source of compensation for labor or personal services.  The new rules apply to individuals who, as employees, perform labor or personal services partly within and partly outside the United States.  Corresponding regulations that had been proposed in 2000 have been withdrawn.

 “These new regulations provide clear and straightforward rules for determining the source of employee compensation income in the cross-border context. At the same time, they provide much needed flexibility that will allow taxpayers and the IRS to take into account specific circumstances in order to reach the right result,” said Greg Jenner, acting assistant secretary for tax policy.  “This approach will reduce disputes between taxpayers and the IRS and allow more efficient use of IRS resources.”

Current regulations provide that in cases where a person performs labor or personal services partly within and partly outside the United States, the amount that is treated as income from United States sources is determined under the facts and circumstances of the particular case.  Regulations proposed in 2000 would have required that the source of compensation received by any individual for a specific time period be determined solely based on the portion of the time worked within and without the United States.  The new proposed regulations generally provide that in the case of an individual who receives compensation as an employee, identified fringe benefits are sourced on a geographic basis and all other compensation is sourced on a time basis.

The proposed regulations also provide for the opportunity, in appropriate circumstances, to use a different approach to determine the source of compensation received by an individual as an employee.  The new regulations would retain the current-law rule providing that the source of compensation for labor or personal services that is received by a corporation or an individual who is not an employee is determined under the facts and circumstances of the particular case.


— WebCPA staff

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