IRC section 72(t) provides that if an individual receives an early distribution (prior to age 59 ½) from an individual retirement account (IRA) or other qualified retirement plan, there is an additional tax imposed equal to 10% of the amount of the early distribution includable in gross income, unless a special exception applies. The Employee Plans Compliance Unit (EPCU) has opened an International Project that will focus on determining whether there is compliance with regard to the section 72(t) tax being properly reported and paid on such early distributions by individuals with foreign addresses. If the individual is not in compliance with the reporting and payment requirements, examinations or other corrective action may then be pursued.
It is estimated that more than 7 million Americans reside outside of the United States (not including military personnel). As globalization continues to grow, tax planning is increasingly focused on minimizing the worldwide effective tax rate.
For a U.S. citizen or resident alien (Green Card Holder), the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether an individual lives inside or outside the U.S. The worldwide income of a U.S. citizen or resident alien is subject to U.S. income tax, regardless of where he or she resides. This means that all U.S. citizens or resident aliens must report and pay tax on their worldwide income, even if they live abroad.
International tax law is extremely complex. As a general rule, the pension/annuity articles of most tax treaties allow the country of residence to tax the pension or annuity under its domestic laws.
The Project Process
Compliance contact letters will be sent to a selection of individuals with foreign addresses that received distributions from a pension or individual retirement account (IRA) that was reported to the IRS on Form 1099-R. The responses from each individual will be reviewed to verify the information provided and to ascertain:
- if the Form 1099-R early distribution was properly reported on Form 5329 and/or Form 1040/1040-NR, and
- that the proper amount of section 72(t) tax has been paid.
If You Receive a Letter
Please provide the information requested in the letter.You may also furnish any other documents, clarifying or supplemental materials that you believe will be helpful for us to review.You should make every effort to answer the letter as accurately as possible by the due date. If you need additional time, make sure to contact the person whose name is listed on the letter for an extension before the due date. Failure to provide the information requested could result in further action or examination of your tax return.
If You Have Questions
Please feel free to e-mail us and we will be glad to answer questions you have about the project and how it relates to your situation. Please include the words “International Project – Foreign Distributions” in the Subject line.
- EPCU International Foreign Distributions Compliance Contact Letter
- Form 2848 (Instructions), Power of Attorney and Declaration of Representative
- International Taxpayer Information
- Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and Instructions
- Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, and Instructions
- Form 1040 and Instructions
- Form 1040-NR and Instructions
- Treaties – U.S. Tax Treaties
- Correcting Plan Errors (EPCRS)
- TE/GE ACT Report Issued June 10, 2009