FREQUENTLY ASKED QUESTIONS
These “Frequently Asked Questions” have been updated to reflect changes to the initiative described in IRS News Release 2007-67 and were prepared to assist you in considering the settlement initiative. The terms of the actual agreement will be limited to the terms found in the closing agreement(s), which you and the IRS will sign. Answers to the FAQs do not enlarge, restrict or modify the terms in the closing agreement(s).
Information about the Settlement Initiative
1) Who can participate in this settlement initiative?
Current and former employees of a foreign embassy, foreign consular office or international organization may participate in this settlement initiative, if they meet the eligibility requirements.
2) What is the IRS offering to settle?
The IRS is offering to settle tax matters directly related to an employee’s work at a foreign embassy, foreign consular office or international organization.
For example, the settlement applies to income received from an embassy but it does not apply to income received from a mutual fund or other sources not related to the employee’s work at the embassy.
3) Why is the IRS offering this settlement initiative?
Some former and current employees of foreign embassies, foreign consular offices or international organizations have not accurately filed their tax returns or have not filed tax returns at all. The IRS wants to bring these former and current employees into compliance with the tax system.
4) What is the advantage to me if I choose to participate in the settlement initiative?
If you did not file tax returns or improperly filed tax returns you can limit your tax liabilities and your liabilities for penalties and “additions to tax” relating to your employment at a foreign embassy, foreign consular office or international organization. “Additions to tax” are similar to penalties.
Example
Suppose you did not file any tax returns for four years: 2001 through 2005 to report income you earned at an embassy, consular office or international organization. Under the settlement you can submit tax returns for 2004 and 2005 and pay the taxes for just those two years. Further, the IRS will impose only limited “additions to tax” to the one year with the larger amount of tax due. You will not have to pay penalties or “additions to tax” for the other year.
Example
Suppose you filed inaccurate tax returns for four years: 2001 through 2005 on matters relating to your employment at an embassy, consular office or international organization. Under the settlement you can correct (“amend”) your tax returns for 2004 and 2005 and pay tax for just those two years. Further, the IRS will impose an accuracy-related penalty to only the year with the larger tax due. You will not have to pay penalties or “additions to tax” for the other year.
Example
Suppose you failed to file or inaccurately filed tax returns for four years: 2001 through 2005. You decide not to participate in the settlement initiative. The IRS will review—and may audit—all four tax years. Where appropriate, the IRS will determine additional taxes due in each year and apply applicable penalties and “additions to tax” in each year.
5) What penalties and “additions to tax” will I have to pay if I accept the settlement initiative?
The Internal Revenue Code provides that the IRS may assert a variety of penalties and “additions to tax” when a taxpayer fails to file a tax return or files inaccurately. This settlement initiative limits your exposure to these penalties and “additions to tax.”
If you did not file tax returns reporting income relating to your employment at an embassy, consular office or international organization, under the settlement you will submit returns for 2004 and 2005. You will be assessed the “additions to tax” for failure to file and/or pay for only one year. The IRS will apply the “additions to tax” in the year with the most tax due.
If you filed tax returns, but did not properly report your income and/or claimed deductions or credits to which you were not entitled relating to your employment at a foreign embassy, foreign consular office or international organization, you will submit amended returns for 2004 and 2005. You will be assessed the accuracy-related penalty for only one year. The IRS will apply the penalty to the year with the most tax due.
6) I worked at the embassy for only one year; do I get some sort of break on the penalty or “additions to tax” because there is only the one year?
No.
7) Do I have to pay interest?
Yes. Under the settlement, you will owe all statutory interest provided by law. Interest runs on all taxes as well as the accuracy-related penalty and additions to tax for failure to file and/or pay. Further, you will not be able to file a claim requesting an abatement of interest accrued on the tax assessed.
8) What is the interest rate?
The interest rate on tax deficiencies for calendar quarters starting January 1, 2004 has fluctuated from 4% to 8%. Revenue Ruling 2007-56 provides complete information on interest rates charged on tax underpayments.
9) How long do I have to consider the settlement initiative?
To participate, your Notice of Election must be postmarked on or before Saturday, June 30, 2007.
10) What do I need to send to the IRS to accept the settlement initiative?
You must submit a Notice of Election on or before June 30, 2007 indicating your acceptance of the settlement initiative.
The Notice of Election is simply a statement that you send to the IRS saying you wish to participate in the settlement. There is no particular “form” required. Your election to participate must include the following information and must be postmarked on or before June 30, 2007:
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Your Name
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Your Address
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Your Social Security Number
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Your Legal Status: U.S. Citizen or Lawful Permanent Resident
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A daytime telephone number where you can be reached
You will also be required to mail the other items listed below. If you can not submit the required documents by the June 30 deadline with your statement of election to participate in the initiative, you must provide them by mail, postmarked on or before July 30, 2007.
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Amended tax returns for 2004 and 2005
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Copies of original tax returns filed, if any, for 2004 and 2005
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Employer earnings statements for each year 2004 and 2005
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Tax returns for 2004 and 2005, if you did not file tax returns in those years OR amended tax returns for 2004 and 2005, if the tax returns you filed were inaccurate. These tax returns must be original and be signed by you (and your spouse if they are joint tax returns).
Elections to participate and required documents must be mailed to:
Internal Revenue Service
1111 Constitution Ave. NW -- LE 4423
Washington, D.C. 20224
Attn: SE: LM: IN: C: FR: ELECTION
11) What happens if I cannot find copies of the tax returns I filed for 2003, 2004 and 2005?
If you do not have copies of the tax returns you filed for 2004 and 2005, you may call the IRS at (202) 874-1789 (not a toll free call) and request computerized transcripts of those tax returns. You must provide copies of those transcripts in lieu of copies of your returns with your Notice of Election.
12) If I am not able to get an annual earnings statement from my employer, what should I do?
If the foreign embassy, foreign consular office or international organization where you worked in 2004 and 2005 did not provide you with an annual earnings statement, you can ask them to prepare one for you. You also can use the periodic earnings statements that you received to verify your income as long as they reflect the total amount paid to you during each of the years 2004 and 2005.
13) What tax returns do I have to include with the Notice of Election?
If you did not previously file U.S. tax returns, you must submit original federal tax returns for 2004 and 2005. (Form 1040, Form 1040A or Form 1040EZ)
If you previously filed U.S. tax returns but they were not accurate, you must submit amended tax returns for 2004 and 2005. (Form 1040X)
14) I have not filed U.S. tax returns since I started working at the embassy. Do I have to pay taxes for the back years?
If you are eligible to participate in the settlement initiative, you will only have to pay back taxes for the years 2004 and 2005 and “additions to tax” in one year. The closing agreement that you will sign with the IRS will limit your liability. If your only income was paid by a foreign embassy, foreign consular office or international organization where you worked, you will not have to submit tax returns for years before 2004.
15) I have filed U.S. tax returns, but I have not reported my embassy income on my U.S. tax return since I started working at the embassy. Do I have to pay taxes on the back years?
If you are eligible to participate in the IRS settlement initiative, you will only have to pay back taxes for the years 2004 and 2005 and a penalty in one year. The closing agreement that you will sign with the IRS will limit your liability. No adjustments will be made for years prior to 2004 relating to your employment at a foreign embassy, foreign consular office or international organization.
16) Is the settlement limited to tax matters arising from my employment at a foreign embassy, foreign consular office or international organization?
Yes.
17) What if I have other sources of income that I did not report that are not related to my employment at a foreign embassy, foreign consular office or international organization?
You must report all of your worldwide income on your U.S. tax returns, including the tax returns you prepare as part of this offer. Remember you are signing the tax returns submitted with the Notice of Election under penalties of perjury.
If there are significant inaccuracies on your prior year tax returns or you have failed to file a tax return to report a large amount of income NOT related to your employment at a foreign embassy, foreign consular office or international organization, the IRS may—in its sole discretion—deny you eligibility to participate in this settlement initiative.
18) Does the IRS have the right to reject my Notice of Election?
Yes.
19) What happens if I elect to participate in this settlement but do not have enough money to pay the back taxes due?
IRS can accept an installment agreement if the taxpayer can not make full payment. IRS can not accept an election to participate from any taxpayer unable to pay either in full or by installment agreement.
20) What happens to me if I choose not to participate in the settlement initiative process?
The IRS will review your tax returns and will contact you if they believe you have not reported your income or expenses correctly. Once the settlement initiative offer has expired, the number of years to be examined and the penalties and “additions to tax” to be assessed will be determined by your individual circumstances.
21) Will I need to submit any additional information?
In addition to the information required to be submitted with your Notice of Election, the IRS may request additional information, including but not limited to, documentation of expenses or credits shown on the amended or delinquent tax returns you submit for the two years 2004 and 2005.
22) Can the IRS help me prepare my amended tax returns?
No. However, if you have problems completing the tax returns, you should make your best effort to fully complete the returns and include them with your acceptance of the settlement initiative.
23) My employer told me that I was not subject to tax on the income they paid to me. Why am I responsible for paying the tax?
You are responsible for filing accurate tax returns, as well as payment of the tax due. The fact that your employer gave you inaccurate tax advice does not relieve you of your responsibilities.
24) What about my state and local taxes?
This settlement initiative covers only federal income tax.
25) Is there someone at the IRS that I can talk to about this matter?
Yes, you can contact Brant Meadows at (202) 874-1789 (not a toll-free call). You may also send us an email to embassy@irs.gov.
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Information for Lawful Permanent Residents (“LPRs” also referred to as “Green Cardholders”)
Note - If you are an LPR and fail to comply with federal, state and local tax laws it may affect your status as a permanent resident (i.e., your green card). Under U.S. immigration law, an LPR who fails to file tax returns, when required to do so, may lose their permanent resident status through legal proceedings. For more information, see United States Citizenship and Immigration Services (“USCIS”), Fact Sheet M-607 (“I am a Permanent Resident…How Do I Know What My Responsibilities Are?) available on the USCIS Web site at http://www.uscis.gov.
26) To participate in the settlement initiative, I have to represent that I have signed and filed USCIS Form I-508. Why?
When you started to work for an embassy, consular office or international organization, you had two options:
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You could elect to keep your green card and agree to pay U.S. taxes by signing and filing Form I-508 with USCIS or its predecessor organization, the Immigration and Naturalization Service, or
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You could elect to give up your green card and your U.S. immigration status would be adjusted to nonimmigrant (i.e., A or G visa holder.)
If you want to participate in this initiative, we assume that you are in compliance with U.S. immigration law and have signed the Form I-508 and filed it with USCIS. The IRS cannot give you advice about immigration matters; please contact either the USCIS or your own attorney or advisor if you need additional details about your immigration status.
27) What is the difference in taxation between a nonimmigrant employee and an immigrant employee of a foreign government or international organization?
In general, nonimmigrant employees of a foreign government or international organization enter the U.S. with an “A” or “G” visa. Under international agreements, such employees may be entitled to certain rights, privileges, exemptions and immunities. Nonimmigrant employees of a foreign government or international organization may be exempt from U.S. taxes on their compensation.
In contrast, LPR employees (green cardholders) are immigrants and they have a choice with respect to taxation. LPRs who work for a foreign government or international organization are required to have their status adjusted to a nonimmigrant (“A” or “G” visa holder). However, LPRs may choose to be subject to U.S. tax and keep their LPR status (green card) by signing a waiver. The USCIS Form I-508 is a waiver of the rights, privileges, exemptions and immunities the employee would otherwise have.
28) Are there any circumstances where I do not have to report income from an embassy, consular office or international organization even if I elected to keep my green card and filed the USCIS Form I-508?
Yes. It is possible that your income may be exempt from tax in the U.S. even if you filed the USCIS Form I-508. The U.S. has agreements with international organizations and consular agreements with some countries that include income tax provisions. Some of these agreements provide that LPRs are not subject to tax on wages that they receive from those employers. Please contact your employer or the IRS to determine if you are exempt from U.S. tax under one of these agreements.
29) If my wages are exempt under the terms of a consular agreement or international agreement and I elect to file a joint tax return with my spouse, do I then have to report the income on my tax return?
No. Filing a joint tax return with your spouse does not change the character of your wage income. If the income is not taxable according to the terms of a consular agreement or international agreement, it will remain exempt even if you file a joint return with your spouse and are required to report worldwide income. Keep in mind that some of the agreements limit tax exemptions to wages and salaries, but do not apply to other types of income such as rental receipts, capital gains and or dividends.
30) Do LPRs have to pay self-employment tax on wages paid by an embassy, consular office or international organization?
No, if you hold a green card, you are not required to pay self-employment tax on the wages you receive from an embassy, consular office or international organization.
For additional information about this settlement initiative, email embassy@irs.gov, or call Brant Meadows at (202) 874-1789.
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Information for U.S. Citizens
31) Are U.S. citizens employed by foreign governments in the United States considered to be self-employed for U.S. tax purposes?
No. U.S. citizens employed in the United States by a foreign government are employees of the foreign government; they are not self-employed.
However, for purposes of paying self-employment tax and getting Social Security coverage, they are treated as if they were self-employed.
32) How is the self-employment tax calculated?
You should compute your self-employment tax using Schedule SE. The embassy wages that you report on Form 1040, Line 7 should be carried to Schedule SE, Line 2. Follow the instructions on the form to compute the amount of SE tax that you owe.
33) I am a dual citizen of the U.S. and another country. Is it possible that I may not be required to report my income earned at a consular office?
Yes, some of the consular agreements that the U.S. entered with other countries provide that dual citizens working at consular offices (not embassies) will be exempt from U.S. tax on their wages earned at the consular office. Please contact your employer or the IRS to see if you may be covered by one of these consular agreements. Keep in mind that some of the agreements limit tax exemptions to wages and salaries, but do not apply to other types of income such as rental receipts, capital gains or dividends.
For additional information about this settlement initiative, email embassy@irs.gov, or call Brant Meadows at (202) 874-1789.
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Information about Income and Expenses
34) Do U.S. citizens and LPRs have to report income earned at an embassy, consular office or international organization?
Yes. In general, U.S. citizens and LPRs are required to report income from worldwide sources on their U.S. tax returns.
However, there are some exceptions. Please contact your employer or the IRS to see if one of these exceptions applies to you.
35) Where do I report my income from the embassy, consular office, or international organization on the Form 1040?
Income received as an employee of an embassy, consular office or international organization should be reported on Form 1040, Line 7.
36) Can wages received from an embassy, consular office or international organization be reported on Schedule C?
No. Only income from an unincorporated business (“self-employment”) is reported on Schedule C. Employees of embassies, consular offices and international organizations are considered to be common law employees and should report their wages on Form 1040, Line 7.
37) What portion of my wages from an embassy, consular office or international organization has to be reported? Can I report the net amount of wages after deductions or do I have to report my gross wages before any deductions?
For U.S. reporting purposes, you are required to report the total amount of your wages before any deductions on Form 1040, Line 7. A limited exception exists for contributions to certain types of employer retirement plans.
38) Can I claim deductions for employee business expenses that my employer will not reimburse?
Yes. If you are eligible to itemize deductions on Schedule A, you may claim deductions for ordinary and necessary business expenses attributable to your job that you paid and which are not reimbursable expenses as defined by your employer. The deduction is claimed on Line 20 of Schedule A (Form 1040). You can claim expenses that are greater than 2% of your adjusted gross income; no deduction is available for amounts below the 2% limit. If you claim a deduction for employee business expenses, the IRS may ask you to provide documentation to verify the expenses are deductible.
For additional information about this settlement initiative, email embassy@irs.gov, or call Brant Meadows at (202) 874-1789.
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Information about SEP/IRA Plans
39) Why can’t I make contributions to a SEP/IRA account?
In order to make contributions to a SEP/IRA you must be self-employed. If you work at an embassy, consular office or international organization, you are an employee.
You are only treated as if you were self-employed for purposes of paying self-employment tax and getting Social Security coverage. U.S. citizens employed by embassies, consular offices and international organizations in the U.S. are considered to be common law employees and cannot contribute to SEP/IRA accounts.
40) If I accept the IRS settlement, do I have to terminate my SEP/IRA account?
No.
41) If I accept the IRS settlement, what do I need to do about the contributions I made to my SEP/IRA account for years prior to 2004?
You will not be required to distribute funds that were contributed to an erroneously established SEP/IRA account for years prior to 2004. These contributions, along with earnings on these contributions, may be kept in the SEP/IRA, or may be transferred or rolled over to another tax-favored retirement plan.
42) If I accept the IRS settlement, what do I need to do about the contributions I made to my SEP/IRA account for 2004 and later years?
Deductions for contributions to your SEP/IRA account for 2004 through 2006 will be disallowed, except to the extent you could have made the same contributions as deductible contributions to another tax-favored retirement plan (for example, a 401(k) plan under which you were eligible to make deferrals for that year) in the absence of the SEP/IRA. The amount of the contributions for which deductions are disallowed, along with the earnings accrued on these amounts within the SEP/IRA, generally must be distributed from the SEP/IRA. However, to the extent that after-tax contributions could have been made to another tax-favored retirement plan (for example, after-tax contributions to a traditional IRA) for 2004 through 2006, the amount of after-tax contributions that could have been made, along with the earnings accrued on those amounts, need not be distributed from the SEP/IRA. The taxable portion of the distribution is the amount of the distribution less the amounts that were disallowed as deductions for contributions to the SEP/IRA for 2004 through 2006 and were consequently subject to Federal taxation in those years.
43) If I accept the IRS settlement, will I be subject to the 6% excise tax on excess contributions and/or the 10% excise tax on premature distributions from the account?
Under the terms of the SEP/IRA closing agreement the IRS will not assess the excise tax for excess contributions made to the erroneously established SEP/IRA for any years prior to 2006 or the excise tax for premature distributions with respect to the amounts distributed on account of contributions made for 2004 through 2006.
For additional information about this settlement initiative, email embassy@irs.gov, or call Brant Meadows at (202) 874-1789.
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Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.
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