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Friday, November 24, 2006


The IRS has determined that many U.S. citizens and lawful permanent residents working at foreign embassies, foreign consular offices and international organizations in the U.S. have failed to fulfill their U.S. income tax responsibilities. Some have not timely filed U.S. tax returns. Others have failed to accurately report the tax due by underreporting income, claiming deductions for unallowable expenses, and/or failing to pay self-employment taxes. Also, many of such employees have erroneously established SEP/IRA plans, claimed deductions for contributions to the plans and used the plans as part of their retirement planning. The IRS is offering a carrot to such persons to encourage them to correct their past mistakes.

To use the initiative, the taxpayer must file accurate income tax returns for years 2003 through 2005, and pay applicable interest on any tax underpayments. A principal benefit of filing under the initiative is that penalties will be imposed on only one of those years (the year with the biggest shortfall in tax) instead of for each year.

With respect to SEP/IRA plans, taxpayers will have to pay taxes on the erroneously claimed deductions. Taxpayers will be able to move funds to other tax-favored retirement plans that would have been available to them. The IRS will not impose the annual 6% excise tax under Code Sec. 4973(a) on the excess contributions, the 10% early withdrawal penalty under Code Sec. 72(t) , or the accuracy-related penalty under Code Sec. 6662 on underpayments relating to deductions to the erroneously established SEP/IRA account. Other penalties, additions to tax, and interest will be imposed.

Persons presently under criminal investigation may not use the initiative. The initiative expires on February 20, 2007.

Ann. 2006-95, 2006-50 IRB ; IR 2006-180.

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