As a result of the ramp-down of the Philadelphia Submission Processing Center (PSPC), international Master-File IMF return processing moved in its entirety to the Austin Submission Processing Center (ASPC) in June of 2007. However, the Philadelphia Accounts Management Center (PAMC) continues to process IMF international Accounts Management work.

Correspondence, amended returns, and/or Forms 1040X involving the following issues are considered "IMF International Issues" and are worked at PAMC:

Non-Master File (NMF) account processing ceased at PSC in 2006. NMF is now centralized at the Cincinnati Submission Processing Center (CSPC).

IMF International Individual Income Tax Returns:

NMF International Income Tax Returns:

Foreign Withholding Tax Returns and Associated Forms:

Foreign Information Returns:

The following publications are used for international issues. They can be used as technical reference material or provided to taxpayers when necessary. These publications are available for reference on SERP and on the internet at http://www.irs.gov.

In addition to these publications, some general information publications are also printed in Spanish for the convenience of taxpayers. On SERP, they are located under Forms/Letters/Pubs then Spanish Tax Products.

The following web-sites are helpful when researching international issues:

Helpful international telephone numbers:

Current International Post contact information can be found on the LMSB web-site at http://lmsb.irs.gov/international/dir_treaty/eoi_overseas/posts.asp .

If, during a taxpayer contact it appears that there may be a hardship situation, complete Form 911, Application for Taxpayer Assistance Order (ATAO), via DI and refer the taxpayer to the Taxpayer Advocate Service (TAS). If DI is not available, complete and route a paper Form 911 to TAS. Refer to the TAS web-site at http://tasnew.web.irs.gov for additional information on the Service Level Agreement between the Operating Divisions and TAS.

Refer the case to TAS when:

Prepare and forward Form 911 to the Local Taxpayer Advocate. Preparation instructions for the Form 911 are available on the Form and in IRM 21.1.3.18, Taxpayer Advocate Service (TAS) Guidelines.

For taxpayers who prefer to contact TAS directly, provide the toll-free number, 1-877-777-4778, or the number of the local Taxpayer Advocate, 215-516-2499.

IRC 6103 establishes the taxpayer's (T/P's) right to privacy of tax information. You must be sure that you provide correct information to the correct T/P or authorized representative. Check the Integrated Data Retrieval System (IDRS) Command Code (CC) CFINQ for the Power of Attorney (POA).

IRC 7213, IRC 7213A, and IRC 7431 provide criminal penalties and civil remedies to ensure that T/P's returns and return information remain confidential.

For more information on General Disclosure Guidelines refer to IRM 21.1.3.2, and for full discussions, refer to IRM 11.3.1 through IRM 11.3.40 .

For information on the use of FAX and Signature Stamps refer to IRM 21.3.4.14.5.

Refer all technical issues that cannot be resolved using an IRM or publication to campus management. If management is unable to make a determination, follow local assistance procedures that involve coordinating resolution through the Planning & Analysis Section.

When necessary, the analyst from the P&A Section will review and forward any International problems requiring the attention of the Headquarters International Analyst.

IRM 21.1.2.2.2, IRM 21 - Change Requests, lists the various forms used to request changes or submit comments and/or suggestions.

IRM 3.31.125, Procedures/System Change Request, provides guidance on preparing Form 5391.

Follow the steps in IRM 21.1.2.2.2, IRM 21 - Change Requests, since the IMF International Adjustments IRM is now on SERP.

When an issue is questionable, but does not meet CAT-A criteria, and assistance is needed from Examination, follow procedures in IRM 21.5.3.4.7.2.1, Examination Technical Assistance Request.

Rev. Proc. 2002–52 updated and revised the procedures to allow a U.S. citizen or resident to request a determination by the U.S. Competent Authority on issues arising under a tax treaty between the U.S. and a foreign country.

Usually, an adjustment to tax is requested when the foreign tax administration creates a double taxation issue.

The IRS Deputy Commissioner, (LMSB) International, acts as the U.S. competent authority charged in administering the provision of tax treaties, interpreting and applying the treaties, reaching mutual agreement in specific cases.

Send written requests for, or any inquiries regarding competent authority assistance to:

Direct any questions regarding Competent Authority Claims to the Office of Tax Treaty at the above address.

Nonresident Aliens generally must contact the Competent Authority in their foreign government with their inquiries.

The IRS is involved in a significant number of taxpayer contacts to perfect returns during the filing process, to resolve issues identified in post-filing, and to secure delinquent returns.

Based on requests from practitioners and other stakeholders, the Service developed guidance on the acceptance of faxes and signature stamps that has been approved for Servicewide adoption.

Refer to IRM 21.3.4.14.5, Use of FAX for Taxpayer Submissions, for current procedures for the acceptance of FAX and signature stamps.

For domestic issues, refer to information contained in Exhibit, Examination Criteria (CAT-A), and Exhibit 3.11.6-3, Form 1040X Screening Guide, for applicable Examination criteria.

Forward the following types of international claims and issues to Examination for classification:

If the taxpayer cites an IRC, Regulation, Tax Treaty, etc., research the reference, attempt to secure an explanation unless the claim meets other Examination Criteria. This information may be available through the Lexis-Nexis or Westlaw data bases.

Every International case sent to Exam Classification MUST include:

When the claim year or related return modules show an "-L" freeze (generated by TC 420 input), the case MUST have an AMDISA print (do not request the original return). Every "-L" freeze has an AIMS record. The last 2 digits of the AIMS control number indicate which area office has control of the AIMS data base.

When an amended return claim is being referred to Examination Classification, ensure that pages 1 and 2 of Form 1040X are complete, including verification of all needed schedules and forms required for making an issue determination. Form 1116 is required to verify a Foreign Tax Credit. IRM 21.5.3.4.7.2, Examination "Disallows," "Accepts," or " Selects" the Claim, lists the requirements for Examination area claim referrals.

When the case is returned from Examination, follow the steps in the table below.

Attach a copy of the disallowance letter with the original return, if the copy is returned for association.

Protective Claims are formal claims or amended returns for credit or refund normally based on expected changes in a:

These claims are filed to protect the claimant's right to recover an Internal Revenue Tax before the expiration of the statue of limitations. For this reason, they are all considered to meet CAT "A" criteria. See IRM 21.5.3.4.7.3, Protective Claims, for additional information.

All Protective Claims must be sent to Examination Classification. All processable Protective Claims must be selected by Examination Classification.

Protective Claims must be processable before sending to Examination Classification. Screen all protective claims for:

If the claim is not processable, call or correspond with taxpayer for missing information. If no reply is received, follow normal adjustment procedures for rejecting the claim.

Unpostables are transactions which cannot be posted to the Master File. A transaction that fails to post to an account is returned to the originating campus for corrective action.

There are two types of unpostables

The Customer Service Representative is responsible for:

To resolve an unpostable, analyze each case, perform research and decide the proper corrective action. The unpostable condition appears on IDRS just below the posted transactions with an indicator before the transaction code such as: DU, NU, Unnn, DN, DJ, RJ or DC.

Knowledge of the following information from TXMOD and contained in Document 6209 is necessary:

Use command code UPTIN (displays all open or closed unpostables for a specific TIN). To see a specific unpostable, use command code UPDIS and the unpostable sequence number. Use CC UPCAS with definer " Z" to enter correction information for use by the unpostable function.

Due to the ramp-down of the Philadelphia Submission Processing Center (PSPC), international tax returns are no longer processed at PSPC after 2007. IMF international return processing began to phase out of Philadelphia in 2006 and moved entirely to the Austin Submission Processing Center (AUSPC) in June of 2007. BMF international returns are processed at the Ogden Submission Processing Center (OSPC) beginning in 2007. International returns are assigned unique File Location Codes (FLC).

International returns include:

International processes any Form 1040/A/EZ with the following attachments:

An International return is also any Form 1040/A/EZ with the following indications:

When adjusting IMF international accounts using CC REQ54, or transferring credits using CC ADD/ADC24, ADD/ADC34 or ADD/ADC48, input a Filing Location Code (FLC) 66 or 98 according to the primary location code shown on TXMOD or ENMOD. Input FLC 66 for primary location code 21 and FLC 98 for primary location code 20.

Input FLC 66 or 98 when adjusting accounts incorporating forms NOT filed during original processing that are listed in International Forms Processing (IRM 21.8.1.1.13 (2) & (3)) or with international return indicators (IRM 21.8.1.1.13 (4)). See IRM 21.8.1.1.14(2).

When changing an address to a U.S. Possession or territory using CC INCHG, input FLC 66. For changes to a foreign address, input FLC 98.

Based on Rev. Rul. 2002–23, a document mailed from a foreign country with a timely official postmark of the foreign country is treated as being timely filed.

This rule applies to all documents required or permitted to be filed with the Service, including returns, claims, requests for an extension to file, and payments made with returns.

If the last day for filing falls on a Saturday, Sunday or a Legal holiday, then a document with a foreign country official postmark date on the next succeeding day that is not a Saturday, Sunday, or legal holiday is treated as timely filed under IRC §7503. The term legal holiday is defined under Rev. Rul. 2002-23 and IRC §7503 as a legal holiday in the District of Columbia in the United States, or a statewide legal holiday in the state where the federal tax return, claim for refund or other document is required to be filed or sent. The term does not include legal holidays in foreign countries unless such holidays are also legal holidays in the District of Columbia or applicable state, as described above. See Rev. Rul. 2002–23 for additional requirements when foreign mail is received later than such mail is ordinarily received.

The postmark determination for documents sent from a foreign country also applies to designated international private delivery services. The list of designated delivery services (both international and domestic) are only updated if new delivery services are added in lieu of designated Private Delivery Services (PDSs).

The current types of delivery services through designated PDS's, per Notice 2004-83 are:

Currently, only FedEx International Priority, FedEx International First, UPS Worldwide Express Plus, and UPS Worldwide Express are authorized as designated PDS's, for documents sent from a foreign country.

When an error is made on an international return, a specific range of notice code numbers are assigned. They are listed in research material according to the type of return filed, and do not follow strict numerical sequence. Often scrolling must be done to locate specific notice numbers.

Reference sources that provide literal definitions for these codes, which are also referred to as Input Codes and Notice Codes, can be found in Chapter 9 of Document 6209.

Account research is performed through the Integrated Data Retrieval System (IDRS). Command Codes are used to access different types of taxpayer information. See the Command Codes Job Aid on SERP under the " IRM Supplements" tab.

The most common command codes and their purposes are:

During return processing, a two digit unallowable code identifies item(s) that have been disallowed. These can include a taxpayer's deduction, exemption, item exceeding statutory limitations, items of a questionable nature, or items not supported by the proper information or schedule.

These codes and their explanations are listed in Chapter 3 of Document 6209. This information can also be found on SERP.

These codes appear on TXMOD and a sample can be found on SERP in the Command Code Job Aid.

The more common Form 1040 series unallowable codes and explanations are below:

The IRS Individual Taxpayer Identification Number (ITIN) is a nine digit number issued by the Internal Revenue Service (IRS) to individuals who are required, for U.S. tax purposes, to have a U.S. taxpayer identification number, but who do not have, and are not eligible to obtain, a social security number (SSN) issued by the Social Security Administration (SSA).

The ITIN is for federal tax purposes only. It does not entitle the holder to social security benefits and does not change their immigration status or their right to work in the United States.

An ITIN is formatted like an SSN and begins with "9" with the 4th and 5th digits uniquely identifying ITIN. Currently, the 4th and 5th digit range for ITIN's is "70-88" inclusive.

Income earned in the U.S. is taxable regardless of the person's immigration status. Those individuals earning income in the U.S. who have not been granted work authorization by the United Status Citizenship and Immigration Services (USCIS) must meet their tax filing obligations.

To obtain an ITIN, an individual must complete Form W-7, Application for IRS Individual Taxpayer Identification Number, or the Spanish version, Form W-7SP, and submit the required supporting identification documentation along with their valid U.S. Federal tax return or exception documentation, as required.

In December 2003, the IRS announced additional requirements that all new ITIN applicants must use the current version Form W-7/W-7SP and submit supporting identification documentation and prove a Federal tax need:

Additional changes to the ITIN process include:

The United States has income tax treaties (conventions) with a number of foreign countries. Under these treaties, residents of foreign countries are taxed at a reduced rate, or are exempt from U.S. income tax on certain types of income they receive from sources within the United States. These reduced rates and exemptions vary among countries and with specific items of income.

Tax Treaties permit foreign individuals who are residents of the treaty country to visit the United States, practice their profession, and earn income (sometimes in limited amounts) for a limited period of time without having to pay U.S. income tax.

Treaty provisions relating to such income can be found in Publication 901.

Taxpayers and contact representatives can access the individual country treaties through the internet. Access http://www.irs.gov and search for Tax Treaties.

Intranet access can be made through the IRS Web:

The U.S.S.R. income tax treaty remains in effect for the following members of the Commonwealth of Independent States: Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan. In 2001, Ukraine entered into a separate agreement, and in 2003, Kazakhstan also entered into a separate agreement.

The United States Senate consented to the ratification of the United States - Bangladesh income tax treaty on March 31, 2006. The treaty generally will be effective for taxable periods beginning on or after January 1, 2007.

The United States and Bulgaria signed an income tax treaty on February 23, 2007. This treaty is the first of its kind between the two countries.

The following paragraphs classify many types of income into three categories.

Earned income is compensation for personal services performed. The source of earned income is the place where the services are performed. The following types of income have been classified as earned income:

The following types of income have been classified as Unearned Income:

Some types of income are considered Variable, they may fall into the category of earned, unearned or partly both . They are:

For additional information on the various types or classifications of income, see Publication 54.

The following tests are used to determine if a taxpayer qualifies for the Foreign Earned Income Exclusion:

Qualified individuals may elect to exclude their foreign earned income from their gross income. To qualify, the taxpayer must:

Residence or presence in a U.S. Possession does not qualify an individual for the Foreign Earned Income Exclusion.

For purposes of the Foreign Earned Income Exclusion, foreign earned income does not include any amount paid by the United States or any of its agencies, whether from appropriated or non-appropriated funds, to its employees. Payments to employees of non-appropriated fund activities include the following:

If a U.S. Government employee, paid by a U.S. agency that assigned that person to a foreign government to perform specific services, for which the agency is reimbursed by the foreign government, the compensation is from the U.S. Government. It does not qualify for the exclusion or deduction as long as the individual continues to be an employee of the U.S. Government.

Consider the following factors when determining the taxpayer's tax home:

Consider the following factors when determining if a taxpayer qualifies for the foreign earned income exclusion as a bona fide resident ( IRC §911(d)) of a foreign country.

The following definitions are clarification of terms used in the chart which identifies bona fide residence factors.

Consider the following factors when determining if a taxpayer qualifies for the foreign earned income exclusion due to their physical presence in a foreign country.

Consider the following explanations when determining if the taxpayer qualifies for the §911 Foreign Earned Income Exclusion due to their physical presence:

The physical presence test does not depend on the type of residence the taxpayer establishes, the nature or purpose of the stay abroad, nor his or her intentions about returning to the United States. It is based only on how long the taxpayer stays in a foreign country or countries.

IRC §911(d)(4) allows certain taxpayers who had to leave a foreign country because of war, civil unrest, or similar adverse conditions to waive the minimum time limitation requirements specified under the bona fide residence or physical presence test.

Taxpayers who qualify for the waiver must be able to show that they reasonably could have expected to meet the minimum time requirements, if they had not been required to leave the country.

Waiver of the minimal time limitation requirement can be accomplished by:

When the documentation which would prove the taxpayer's intent to meet the physical presence time requirement is unavailable, the taxpayer must provide a statement with a complete explanation. If the taxpayer meets the waiver based on his statement, allow the claim. To qualify for relief under §911(d)(4), an individual must have established residency or have been physically present in the foreign country prior to the date determined that the individual was required to leave.

Individuals who establish residency, or are first physically present in the foreign country after the date that the Secretary prescribes, are not treated as qualified individuals under IRC section 911.

See Rev. Proc. 2007-28, Rev. Proc. 2006-28, Rev. Proc. 2004-17, Rev. Proc. 2004-10 I.R.B. 562, Rev. Proc. 2003-26, Rev. Proc. 2003-1, C.B. 666 and Rev. Proc. 2002-20, 2001–1 C.B. 132 for a list of countries and the dates those countries are subject to the §911(d)(4) waiver.

Taxpayers may claim the exception on their original return, or if an original return has been previously filed, taxpayers must file Form 1040X, with the correct Form 2555/2555-EZ for the year the exception is being claimed, within the normal 3 year statute period.

Once the taxpayer has established that their tax home is in a foreign country and the taxpayer meets either the bona fide residence test or the physical presence test, they may elect to exclude from their income all or some of the amount of their foreign earned income.

The foreign earned income of an individual which can be excluded for any taxable year cannot exceed the amount of foreign earned income computed on a daily basis. The maximum excludable annual rates are listed in the following table:

When both spouses have foreign earned income and each meet either the bona fide residence test or the physical presence test, each must file a separate Form 2555. In this case, for tax year 2008, up to $175,200.00 can be excluded.

IRC §911(d)(6) denies the double benefit that could occur if taxpayers claimed the foreign earned income exclusion and did not reduce it by adjustments to income, or did not reduce certain itemized deductions and credits related to the excluded income. An adjustment to income can cause an adjustment to the foreign earned income exclusion on Form 2555, line 40. This line is always checked when there is an adjustment to income which is related to the excluded earned income.

Itemized deductions which are related to excluded income must be reduced on Schedule A. Such reductions must always be checked when there are itemized deductions, (i.e., moving expenses, employee business expenses, etc.), which are related to excluded earned income. See Publication 54 for more details.

Generally, the reduction of nonrefundable credits (i.e., child care credit, foreign tax credit, etc.) is limited to that portion which is specifically related to the excluded income.

In applying the IRC §911 foreign income exclusion limitations under community property laws, the total community income excluded cannot exceed the amount that would be excludable if the income was not community property income.

Wages received by employees of the United States Government, or any of its agencies, working overseas do not qualify for exclusion of foreign earned income under IRC §911. These employees include:

The Foreign Earned Income Exclusion has no impact on the requirement for the payment of self-employment tax. See IRM 21.8.1.16.

The exclusion is not available if travel, and therefore employment, in a foreign country is restricted by regulations pursuant to the Trading With the Enemy Act (50 U.S.C. 1701 etc. seq.) or the International Emergency Economic Powers Act (50 U.S.C. App.) mentioned in section 911. There are some exceptions, primarily for journalists who travel with permission from the Treasury Department.

If income is excluded under the Foreign Earned Income Exclusion, the income cannot be considered as compensation in determining the amount of IRA contribution.

Qualified individuals may separately elect to claim the housing exclusion or the housing deduction, in addition to the foreign earned income exclusion. The housing exclusion applies only to amounts considered paid for with employer-provided amounts. The housing deduction applies only to amounts paid for with self-employment earnings.

The initial election must be made by filing Form 2555 with:

The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) made the following changes to Section 911 which are effective for tax periods beginning on or after January 1, 2006.

Form 2555-EZ is the simplified version of Form 2555. Qualified taxpayers may use Form 2555-EZ when they meet the seven conditions below:

Foreign Earned Income Exclusion may be claimed on a 2006 Form 2555-EZ, if all five of the following apply:

The taxpayer must report, in U.S. dollars, the total foreign income earned and received on line 7, Form 1040, and exclude this same amount (show in parentheses) on line 21 of the same form.

Once a taxpayer chooses to exclude foreign earned income or housing amount, that choice remains in effect for that year and all later years unless they revoke it.

If an election choice is revoked, a new election may not be made before the sixth (6th) taxable year after the revocation without the consent of the IRS.

Taxpayers can request IRS consent for reelection before the sixth taxable year after the revocation by requesting a Private Letter Ruling (PLR) from the address below:

Regulation §1.911-7(a)(2)(i)(D), which was also issued under IRC §911(d)(9), allows citizens or residents of the United States to take the Foreign Earned Income Exclusion. The exclusion is allowed under certain conditions and with some limitations. Publication 54 contains further information.

The §911 Foreign Earned Income Exclusion (Form 2555/2555-EZ) must be made:

The Section 911 Foreign Earned Income Exclusion is allowed on prior year returns not listed above when the taxpayer has a Private Letter Ruling (PLR) under §301.9100-3 of the regulations, allowing the exclusion.

The taxpayer does not need a Private letter Ruling to claim the Section 911 Foreign Earned Income Exclusion on prior year returns in the following situations:

If the taxpayer owes federal income tax and there is IRS discovery that the taxpayer failed to make a timely election:

U.S. citizens and resident aliens abroad have the option to file Form 2555, Form 2555-EZ, or an acceptable facsimile that exhibits their entitlement to the benefits under section 911 of the Internal Revenue Code. The Form 2555/2555-EZ should accompany Form 1040, but is sometimes submitted without the return.

Research to determine if a return is on file for the taxpayer. Use research command code TXMOD and/or the CFOL commands.

IRC §3402(a) requires employers to withhold taxes from wages as they are earned at "source" . However, an employer may discontinue the withholding of income tax from the wages of an employee who is a citizen or resident alien employed abroad, if certain conditions are met.

IRC §3401(a)(8)(A) allows employees to file a signed statement including a declaration under penalties of perjury, along with a current Form W-4, declaring that they meet or will meet the qualifications of IRC §911(d) (qualified individual) for the taxable year and that they are exempt from tax on the maximum foreign earned income exclusion amount of earned income for the year in question.

The Form W-4 must specify either:

The Internal Revenue Service provides Form 673 , Statement for Claiming Exemption from Withholding on Foreign Earned Income Eligible for the Exclusions Provided by Section 911, for U. S. citizens. A statement can be accepted in lieu of Form 673 if the taxpayer indicates to their employer that they will meet either the bona fide residence test or the physical presence test and indicates the estimated housing cost exclusion. A statement may be obtained from the Deputy Commissioner (LMSB), International.

Employers withhold income tax from any wages the employee earns in the U.S. and any income exceeding the section 911 limitations.

For questions involving the Form W-4 penalty program, contact the Campus Collection Branch.

Form 673 can only be used by a U.S. Citizen.

The following chart contains the countries to which travel restrictions have been recently in effect and those to which they still apply.

Taxpayers present in one of the foreign countries listed above during the time frames indicated are in violation of U.S. law and are not treated as a bona fide resident of or physically present in a foreign country.

If a taxpayer participates in or cooperates with an international boycott during the tax year, their foreign taxes resulting from boycott activities reduce the total taxes available for credit.

Use Form 5713, International Boycott Report, to report operations in or related to boycotting countries, and the receipt of boycott requests and boycott agreements made.

A list of the countries that may require participation in or cooperation with an international boycott is published by the Department of the Treasury each calendar quarter. As of the date this IRM was prepared for publishing, the following countries were listed.

Form 5713, International Boycott Report, is currently processed at the Ogden Campus. Prior to 2007, this form was processed at the Philadelphia Campus.

Individuals, either U.S. citizens or resident aliens, avoid double taxation by electing to claim the foreign tax credit by using Form 1116 as allowed under IRC §901(a). If a non-U.S. citizen is a bona fide resident of Puerto Rico for the entire tax year, the resident alien rules apply.

A nonresident alien can claim a credit for taxes paid or accrued to a foreign country or possession of the United States only on foreign source or possession source income that is effectively connected with a trade or business in the United States. For information on alien status and effectively connected income, see Publication 519 , U.S. Tax Guide for Aliens.

Eligible taxpayers may claim a foreign tax credit for foreign income taxes, war profits, and excess profits paid or accrued (or taxes paid or accrued in lieu of those taxes) during the tax year to any:

Important: When foreign tax is taken as a credit:

IRC §164(a)(3) allows a U.S. citizen or resident alien who itemizes to claim foreign income tax paid or accrued as a deduction on Schedule A.

Taxpayers excluding income from the possessions cannot take the foreign tax credit for taxes paid on excluded income. See IRC §931 and IRC §933.

Citizens or residents cannot take a credit for foreign taxes paid or accrued on income that is exempt from tax under the foreign earned income exclusion ( IRC §911). See Publication 514, Foreign Tax Credit for Individuals, for definitions of accrued and paid.

A Form 1116 must be filed to claim the foreign tax credit unless one of the following exceptions is met:

Adjust accordingly, using TC 29X with Reason Code 036 (Tax Credits).

A credit may not be claimed for the following foreign taxes:

On January 1, 2008, Mexico adopted the "impuesto empresarial a tasa unica" (IETU), a single rate business tax. The IRS and Treasury Department are conducting a study to determine if it is a creditable income tax under Article 24(1) of the Convention between the United States and Mexico. Until the conclusion of the study, which is expected in 2010, the IRS will not challenge that the IETU is an income tax that is eligible for the foreign tax credit under Article 24(1) of the treaty.

Each tax year, an individual has a choice of electing:

The taxpayer must treat all foreign taxes in the same manner. A taxpayer cannot deduct some foreign taxes and take a credit for others.

An individual may change their election to claim a deduction or credit at any time during the period within 10 years from the due date for filing the return for the tax year for which the change is requested. See IRC §901(a) and IRC §6511(d)(3).

An individual changing no other election may file a claim or an amended return:

There is a ten year period of limitation allowed for filing a claim for refund of U.S. tax when a taxpayer is required to pay or had accrued a larger foreign tax than originally claimed as a credit.

The same limitation period applies to:

The 10 years are counted from the due date of the return for the year in which the foreign taxes were paid or accrued.

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The Tax Reform Act of 1986 revised IRC §904(a) on the limitation of the foreign tax credit. After 1986, the foreign tax credit is calculated separately for the following categories of income, then added together:

For tax years beginning after 2006, the following categories of income will be eliminated for purposes of computing the foreign tax credit (Income that previously fell in these categories will fall into either the passive income category or the general limitation income category):

Taxpayers are instructed to use a separate Form 1116 for each category of income. Also, they are instructed to use a separate form for the foreign tax credit offset of alternative minimum tax. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ If adjusting the alternative minimum tax foreign tax credit, use Reason Code 041 (Alternative Minimum Tax Foreign Tax Credit).

If the taxpayer paid taxes to more than 3 countries or possessions with the same type of income, then additional Forms 1116 also must be used.

The credit on each type of income cannot exceed the proportionate amount of U.S. tax paid on that type of income. This is called the foreign tax credit limitation. Therefore, the foreign tax credit is limited to the lower of the foreign tax credit limitation or the foreign tax paid or accrued.

For each type of income, the taxpayer totals all the taxes paid on that category of foreign source taxable income and compares it to the total U.S. tax liability multiplied by the fraction equal to the amount of that type of foreign source taxable income over world-wide taxable income.

The second limitation is the "reduction" or "scale down" of foreign tax due to excluded or exempt income. When income is excludable or exempt from tax (e.g., IRC §911(a), 931(a) for income from sources within Guam, American Samoa, and Northern Mariana Islands, and §933(a) for income from sources in Puerto Rico), the foreign tax credit or deduction must also be reduced or "scaled down " to account for the income on which no U.S. tax is going to be paid. See Form 1116, Part III, line 12, "Reduction in foreign taxes " .

The amount allocable to excludable income is determined by multiplying the foreign tax paid or accrued by a fraction of the excluded foreign earned income (minus apportioned deductible expenses) divided by the total foreign earned income (minus allocable deductible expenses).

When income, other than earned income, is taxed by the foreign government, and it is not separately taxed, the denominator is the foreign source income less allocable deductible expenses

For tax years beginning after 2004, the amount of alternative minimum tax foreign tax credit (AMTFTC) you can use to offset your alternative minimum tax is generally increased to 100% of your pre-credit tentative minimum tax. For tax years beginning before 2005, the amount of AMTFTC was generally limited to 90% of your pre-credit tentative minimum tax.

U.S. citizens may be able to claim an additional credit for part of the tax imposed by treaty partners on U.S. source income when the U.S. citizen resides in the treaty country. This credit is calculated using the work sheet at the end of Publication 514. It is separate from and in addition to, the foreign tax credit, for foreign taxes paid and accrued on foreign source income. This special credit is provided by the treaties of the following countries:

The additional foreign tax credit cannot be calculated on Form 1116 for U.S. citizens residing in the following countries:

IRC §901(j) denies the foreign tax credit for taxes paid to certain countries due to nonrecognition of the foreign government (in most instances), the severance or lack of diplomatic relations, or the classification of the foreign country as one supporting terrorism.

The foreign tax credit is not currently available for taxes paid to the following countries:

If, due to a limitation, a taxpayer cannot claim the credit for the full amount of qualified foreign taxes paid or accrued in the tax year, IRC §904(c) was amended to allow a one-year (rather than two-year) foreign tax credit carryback for excess foreign taxes in tax years beginning after October 22, 2004 and a ten-year (rather than five-year) foreign tax credit carryover of the unused credits carried to tax years ending after October 22, 2004. This amendment was a result of the American Jobs Creation Act of 2004 (H.R. 4520).

There are special restrictions which apply to carrybacks and carryovers.

An unused foreign tax that is being carried back to the preceding tax year may be claimed by filing an Amended Return - Form 1040X with a Form 1116. IRM 21.5.9, Carrybacks, further explains processing carryback/carryover claims.

Neither Form 1045 nor Form 1139 may be used to carryback foreign tax credits. Taxpayers must file Form 1040X or amended returns to carryback these credits. See IRM 21.5.9.5.44, Carryback of Foreign Tax Credit (FTC), for specific instructions and restrictions.

Procedures to settle cases of double taxation are provided in bilateral agreements between the U.S. and the following possessions:

Written requests for the assistance provided under the mutual agreement procedures may be referred to the:

Requests for assistance must contain the necessary information outlined in Publication 570 under the heading, "Double Taxation" . Taxpayers may be referred to the following offices for special information regarding the islands:

The IRS has established general ledger accounts for the following possessions:

When transferring/covering over money to or from one of the U.S. Possessions identified in paragraph (4) above, use Form 3809, Miscellaneous Adjustment Voucher. Accounting uses a specific blocking series when numbering the Form 3809. The chart below lists how Accounting numbers the document and this DLN blocking series gives the indication of which possession was involved in the transfer.

* For use on Form 3809 by ACCOUNTING ONLY.

When preparing a Manual Refund Posting Voucher, Form 3753, for one of the possessions, the following information must be included on the form:

The American Jobs Creation Act of 2004 (AJCA) clarified and supplemented the U.S. tax rules dealing with U.S. possessions for determining if a taxpayer is a bona fide resident of a possession and whether income is possession sourced or effectively connected with the conduct of a possession trade or business.

Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession, was issued as a result of the American Jobs Creation Act of 2004. (See IRC 937(c)).

The Form is used to notify the IRS that an individual became or ceased to be a bona fide resident of a U.S. Possession.

The Form must be filed beginning with tax year 2001 by individuals who have worldwide gross income in the tax year of more than $75,000 and meet one of the following conditions:

IRS Notice 2006-57 extended the due date for filing Form 8898 from July 17, 2006 to October 16, 2006, for years 2001 through 2005. Generally, individuals who are required to file Form 8898 must do so by the due date (including extensions) for filing Form 1040 or Form 1040NR.

In accordance with Notice 2006-73, two questions were deleted from Form 8898 in the January 2007 revision. Taxpayers using older versions of the form are not required to answer questions 17 and 29.

Taxpayers are instructed to send Forms 8898 to the Philadelphia Campus. Route any Forms 8898 received to the Low Income Housing Team at the Philadelphia Campus: Drop Point S-607.

Forms 1040-PR and 1040-SS are filed by taxpayers residing in Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands or the Commonwealth of the Northern Mariana Islands (CNMI) to:

Form 1040-PR and 1040-SS are 4 page returns with six parts which are:

Additional child tax credit can be claimed directly on the Form 1040-PR/1040-SS starting in tax year 2001.

On the 2002 thru 2008 returns, the Additional Child Tax Credit (ACTC) is entered on Part I, Line 8.

When ACTC is claimed, the city and U.S. Possession must be present on the document to verify residency in Puerto Rico. If not in Puerto Rico, disallow the ACTC using letter 105C and formal claim rejection procedures.

The filing status is used to accurately compute the ACTC. Four filing status are now available on the Form 1040-PR or 1040-SS. They are:

Dependent information from Part 1, line 2, Qualifying Children, is used to compute additional child tax credit.

Form 8812 is not required, but the filer must include the qualifying children's names, SSN and relationship on the Form 1040-SS or 1040-PR.

There must be at least three (3) qualifying children for the ACTC. This is different from domestic tax return rules.

The instruction booklets for Form 1040-PR and 1040-SS contain the specific guidelines for this credit. Do not use Publication 17.

Duplicate filing conditions may result from U.S. Virgin Island bona fide resident information returns posting to 1040-SS accounts, or vice versa. Follow procedures in IRM 21.8.1.6.11 for processing resultant CP36 notices.

Nonresident aliens are not subject to self-employment tax. Residents of the following possessions or territories are subject to SE tax:

Puerto Rican residents liable for self-employment tax must report it on Form 1040-PR or 1040-SS. Part V or VI on Page 4 of the Form 1040-PR/1040-SS must be completed for SE Tax.

Self-Employment Tax is reported on Form 1040-SS for residents of:

Additional information regarding self-employment tax, as applicable to each U.S. possession, is contained in subsequent chapters.

For 1990 and subsequent years, the Self Employment Tax deduction is 7.65% (1/2 the SE Tax rate).

As of 1991, the self-employment tax rate is 15.3%;

Although the tax rate continues at 15.3%;