The Internal Revenue Service and the U.S. Treasury announced that they have released guidance on the estimated tax penalty for citizens or residents of the United States living and working abroad.The Tax Increase Prevention and Reconciliation Act of 2005, which was enacted in May 2006, changed the maximum amount of foreign earned income and housing costs that can be excluded from gross income -- increasing the maximum amount of foreign earned income that may be excluded from gross income to $82,400 and limiting the amount of housing costs that may be excluded or deducted.

The act also changed a provision so that the tax applicable to income not covered by the foreign income exclusion would be calculated as though the exclusion had not been elected.

All of those changes became effective for taxable years beginning after Dec. 31, 2005.

Because the changes are retroactive to the beginning of the taxable year, people relying on the law as it previously existed may have underpaid their estimated tax liabilities for 2006. The IRS will waive those additions so long as the underpayment is attributable to the changes.

About 300,000 individual taxpayers filed Form 2555 and Form 2555-EZ (which would make them eligible for the waiver) in the 2004 tax year, the latest year for which data is available.

Separately, the agency the IRS said that it would extend a deadline for current and former U.S.-based employees of foreign embassies, consular offices and missions and international organizations to participate in a one-time settlement initiative to resolve outstanding tax matters related to their employment.

The deadline, originally Feb. 20, will be pushed back to March 30.

The offer is open to employees of organizations who are U.S. citizens, green card holders and foreign employees who have U.S. tax obligations. The IRS estimates that as many as half of these employees subject to U.S. tax either fail to report their wages, claim deductions they are not entitled to, incorrectly establish SEP/IRA retirement plans, fail to pay self-employment tax or fail to file tax returns at all.

To participate, employees must submit amended or original tax returns that properly reflect their income and expenses, for the 2003, 2004 and 2005 tax years.

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