Do We Only Verify the Foreign Earned Income Exclusion If an Amount Is Reported On the FAFSA?

Yes. According to guidance NASFAA has received from the U.S. Department of Education (ED), verification of the Foreign Earned Income Exclusion is limited to those who report an exclusion amount on the FAFSA and who have been selected for verification. If an application is selected for verification with either the V1 or V5 Verification Tracking Flag, and the contributor entered an amount in the Foreign Earned Income Exclusion field, the school will have to verify that amount. Since the Foreign Earned Income Exclusion is not federal tax information (FTI) retrieved using the FUTURE Act Direct Data Exchange (FA-DDX), it must be manually reported on the FAFSA; therefore, it must be verified even if all other federal tax information (FTI) was transferred from the IRS and is unchanged.

Since the Foreign Earned Income Exclusion is not transferred from the IRS, the September 19, 2023 Federal Register states that the following documentation is sufficient for verification of this data element:

"Items a through h, if transferred directly from the IRS and unchanged, do not need to be verified. When information is not transferred from the IRS, and for item i [the Foreign Earned Income Exclusion], the following documentation is sufficient for
verification:

1. A transcript ¹ obtained at no cost from the IRS or other relevant tax authority of a U.S. territory (Guam, American Samoa, the U.S. Virgin Islands) or commonwealth (Puerto Rico and the Northern Mariana Islands), or a foreign government, that lists 2022 tax account information of the tax filer; or
2. A copy of the income tax return ¹ and the applicable schedules ¹ that were filed with the IRS or other relevant tax authority of a U.S. territory, or a foreign government that lists 2022 tax account information of the tax filer."

Note that IRS Form 2555 (Foreign Earned Income) is not listed as acceptable documentation.

If you are using a copy of the federal tax return to complete verification, you'll need the 1040 and Schedule 1 to complete verification of the Foreign Earned Income Exclusion even though the exclusion only appears on Schedule 1 and not the 1040 itself. This is true even if the items in a through h do not need to be verified because they were transferred and unchanged. This results in the school having to review the 1040 for potential conflicting information even though the other tax data were retrieved via the FA-DDX.

Also, according to ED, the Foreign Earned Income Exclusion is not FTI transferred into the FAFSA using the FA-DDX because the FAFSA Simplification Act (inexplicably) does not list it as a data element that can be included in FTI. Therefore, this field is manually entered by the student or contributor.

Note: This Q&A is only related to verification requirements. There is also a separate review for anyone who reports the Foreign Earned Income Exclusion on the FAFSA, whether selected for verification or not. See AskRegs Knowledgebase Q&A, What Must a School Do When a Contributor Reports a Foreign Earned Income Exclusion?

See also AskRegs Q&A, Why Isn't the Foreign Earned Income Exclusion Transferred Into the FAFSA Using the FA-DDX?