IRS Offers Limited Relief for the Section 965 Transition Tax
On June 4, 2018, the Internal Revenue Service (IRS) announced that it will provide penalty relief to certain taxpayers subject to the Section 965 transition tax, and provided additional information for individuals subject to the Section 965 transition tax regarding the due date for relevant elections.
Section 965 generally imposes a transition tax on untaxed foreign earnings of certain foreign corporations owned by U.S. shareholders by deeming those earnings to be repatriated. Taxpayers may elect to pay the Section 965 transition tax in installments over an eight-year period if the taxpayer files a timely election under Section 965(h).
The relief and additional guidance was detailed in three new questions and answers (Q&A) posted on the IRS’s updated Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns (the FAQ).
New Q&A 15 states that if a taxpayer made a Section 965(h) election for 2017, filed a 2017 income tax return that calculated an overpayment without including the taxpayer’s total net tax liability under Section 965, and the taxpayer attempted to elect to credit the calculated overpayment to its estimated tax liability for 2018, no addition to tax for an underpayment of estimated taxes under Section 6654 or 6655 will apply (nor be increased) if a taxpayer makes an estimated tax payment sufficient to satisfy both the underpayment of the first required estimated tax installment for 2018 and the full amount of the second required estimated tax installment for 2018 on or before the due date for the second installment (that is, June 15, 2018, for calendar year taxpayers). This relief from the addition to tax for the underpayment of estimated taxes applies only to taxpayers whose first required installment for 2018 was due on or before April 18, 2018. Q&A 15 also provides that if the taxpayer receives a notice from the IRS of an addition to tax for underpayment of estimated tax and the taxpayer meets all of the conditions detailed above (including making the required payment by the due date of the second installment), the taxpayer should contact the IRS office that issued the notice and request abatement of the addition to tax for underpayment of estimated taxes in accordance with the FAQ and updated instructions to Forms 2210 and 2220.
New Q&A 15 reinforces the IRS’s position on overpayments previously stated in Q&A 14 posted on April 13, 2018. Q&A 14 states that a taxpayer may not receive a refund or credit of any portion of properly applied 2017 tax payments unless and until the amount of payments exceeds the entire unpaid 2017 income tax liability, including all amounts to be paid in installments under Section 965(h) in subsequent years.
New Q&A 16 addresses situations where an individual fails to timely pay his or her first installment of tax due under Section 965(h). In particular, Q&A 16 states that if an individual’s net tax liability under Section 965 in the individual’s 2017 taxable year is less than $1 million, the individual makes a timely election under Section 965(h), and the individual did not pay the full amount of the first installment by the due date under Section 965(h)(2), the failure to make the payment will not result in an acceleration event under Section 965(h)(3) so long as the individual pays the full amount of the first installment (and his or her second installment) by the due date for his or her 2018 return (determined without regards to extensions). Q&A provides that the relevant due date generally is April 15, 2019. However, in the case of United States citizens or residents whose tax homes and abodes, in a real and substantial sense, are outside the United States and Puerto Rico, and United States citizens and residents in military or naval service on duty, including non-permanent or short term duty, outside the United States and Puerto Rico, the relevant due date is June 17, 2019, which is provided by Reg. §1.6081-5(a)(5) and (6). Although the IRS will not assess an addition to tax for failure to timely pay the first installment, a taxpayer will be liable for interest on such amount from the due date of the installment. See I.R.C. §6601.Q&A 16 further states that although the IRS will not assess an addition to tax for failure to timely pay the first installment, a taxpayer will be liable for interest on such amount from the due date of the installment. Q&A 16 also provides that if the taxpayer receives a notice of an addition to tax for failure to timely pay the first installment, and the taxpayer meets all the conditions for relief described above (including making the required payment by the due date for the second installment due under Section 965(h)), the taxpayer should contact the IRS office that issued the notice and request abatement of the addition to tax for failure to timely pay the first installment in accordance with the provisions in the FAQ.
New Q&A 17 states that if an individual with a net tax liability under Section 965 in the individual’s 2017 tax year and has already filed his or her tax return and did not make an election under Section 965(h), such individual can make the Section 965(h) election by filing a Form 1040X that complies with the procedures set forth in the FAQs (including, for example, the IRC 965 Transition Tax Statement(s) described in Q&A 3 and the election statement described in Q&A 7) on or before the due date of the individual’s 2017 return, taking into account any additional time that would have been granted if the individual had made an extension request.
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