Section 1. Overview and Purpose of the

Settlement Initiative

This announcement provides a two-part settlement initiative offered by the Internal Revenue Service (IRS) under which current and former employees of foreign embassies, foreign consular offices or international organizations (as defined in I.R.C. § 7701(a)(18)) in the United States (U.S.) can: (1) resolve income tax matters related to their employment at a foreign embassy, foreign consular office or international organization; and (2) unwind their participation in Simplified Employee Pension/Individual Retirement Account (SEP/IRA) plans, which they erroneously established. Section 2 describes eligibility requirements to participate in this settlement initiative. Section 3 describes the settlement terms. Section 4 sets out

the settlement procedures and Section 5 states how ineligible and non-participating taxpayers will be treated. Taxpayers have until February 20, 2007, to notify the Service of their intent to participate in this settlement initiative.

The IRS has determined that a significant number of U.S. citizens and lawful permanent residents (“LPRs” also referred to as “green cardholders”) employed 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 failed to timely file 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. See Section 3(a) of this announcement for the settlement terms of the income tax part of the settlement initiative.

U.S. citizens and LPRs who perform services in the United States as common law employees of foreign governments are not considered to be self-employed for purposes of I.R.C. §§ 401 and 408. These individuals are common law employees and, thus, may not contribute to SEP/IRA plans based on their employment with foreign embassies, foreign consular offices and international organizations. Many U.S. citi

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§ 401(a) plans and IRAs) that would have been available to them for the years in which improper SEP/IRA contributions were made. The amount that may be moved will be limited to the amount of the contributions that could have been made to an allowable tax-favored retirement plan plus the earnings, as determined by the IRS, on the allowable contributions. To the extent the taxpayer would have been able to make pre-tax contributions to an I.R.C. § 401(k) plan or an I.R.C. § 408(a) IRA for the years in which the improper SEP/IRA contributions were made, the amount that is moved, plus the deemed earnings thereon, will not be treated as a taxable distribution from the SEP/IRA. To the extent the amount moved is not described in the preceding sentence, the amount moved will be treated as a taxable distribution from the SEP/IRA in the year the amount is moved and will be treated as investment in the contract for purposes of I.R.C. § 72.

(4) Taxpayers will arrange for distribution of all amounts in their erroneously established SEP/IRA accounts in excess of those allowed to be moved as provided in the preceding paragraph. In accordance with I.R.C. § 408(d)(1), taxpayers will report the amount of the distribution as ordinary income in the year the distribution is received, irrespective of the years in which the amounts were contributed.

(5) The taxpayers will advise the financial institution where the SEP/IRA account is established to withhold 20% of the taxable distribution from the erroneously established SEP/IRA account.

(6) The IRS will not assess the annual 6% excise tax under I.R.C. § 4973(a) on the excess contributions in the erroneously established SEP/IRA account.

(7) The IRS will not assess the 10% excise tax under I.R.C. § 72(t)(l) on the early distribution from the erroneously established SEP/IRA account.

(8) The IRS will not assess the accuracy penalty under I.R.C. § 6662 on underpayments relating to deductions to the erroneously established SEP/IRA account. Notwithstanding, the IRS will assess penalties and/or additions to tax related to income tax as provided in Section 3(a)(7) above. (9) No penalties and/or additions to tax will be waived with respect to taxable years after 2005 as part of this initiative.

(3) To be eligible to participate, taxpayers who are LPRs must represent that they have signed and filed a U.S. Citizenship and Immigration Services (USCIS) Form I–508 ( Waiver of Rights, Privileges, Exemptions and Immunities under Section 274(b) of the Immigration and Nationality Act ).

(4) Persons under criminal investigation. A person under tax-related criminal investigation by the IRS or the Department of Justice, or a person that has been notified, before the date on which a Notice of Election is filed pursuant to Section 4 of this announcement, that the IRS or the Department of Justice intends to commence a tax-related criminal investigation of that person is ineligible to participate in this settlement initiative.

(5) Taxpayers agree to cooperate and provide information to the IRS as required in this settlement initiative.