Under the Tax Increase Prevention and Reconciliation Act, substantial changes were made to the Section 911 foreign earned income and housing cost exclusions available to taxpayers who live and work abroad. These changes occurred in May 2006, but they apply for tax years beginning after 2005.
Therefore, taxpayers that calculated their estimated tax based on the old law may have paid less than required. In recognition of the retroactive changes, the IRS has announced that it will waive payments for underpayments of estimated tax that are attributable to these law changes. The IRS is authorized to waive such penalties since Section 6654(e)(3) allows IRS to waive penalties for underpayments of estimated tax in unusual circumstances to the extent its imposition would be against equity and good conscience.
The waiver applies only to individuals who file a Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, with their timely filed Form 1040, U.S. Individual Income Tax Return, or Form 1040X, Amended U.S. Individual Income Tax Return. While the IRS does not specifically advise how taxpayers who may have already filed may recover any penalties they paid, presumably they can get these back through an amended tax return filing.
Notice 2007-16
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