IRS gives taxpayers penalty and late-election relief for Sec. 965 transition tax

The IRS announced relief from late-payment penalties and that it will allow late elections for taxpayers subject to the new Sec. 965 transition tax on deemed repatriated foreign earnings, which was enacted by P.L. 115-97, known as the Tax Cuts and Jobs Act of 2017 (IR-2018-131). The information is posted in new FAQs on the IRS website.

In general, Sec. 965 requires U.S. shareholders, as defined in Sec. 951(b), to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Sec. 965 applies to the last tax year of certain specified foreign corporations beginning before Jan. 1, 2018, and the amount included in income is includible in a U.S. shareholder’s year in which or with which such a specified foreign corporation’s year ends. Under the new law, some taxpayers had to pay tax as a result of Sec. 965 when filing their 2017 tax returns.

Estimated tax penalty

First, the IRS granted relief from estimated tax penalties for taxpayers that made a Sec. 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 Sec. 965, and improperly attempted to apply a 2017 calculated overpayment to their 2018 estimated tax, if they made all required estimated tax payments before the due date for the second required estimated tax installment. That is, relief was granted if a taxpayer made 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 (which was June 15, 2018, for calendar-year taxpayers). This relief applied only to taxpayers whose first required installment for 2018 was due on or before April 18, 2018.

If the IRS sends a taxpayer a notice of an addition to tax for a Sec. 6654 or 6655 estimated tax underpayment, and the taxpayer qualified for the relief described above, the taxpayer should contact the IRS office that issued the notice and request abatement of the addition to tax.

Failure to make installment payment

The other two forms of relief apply to individual taxpayers. The first one is for individuals who elected to pay their Sec. 965 net tax liability in eight annual installment payments but failed to make the first of the eight installment payments by April 18, 2018. For those taxpayers, the IRS will waive the late-payment penalty if the installment is paid in full by April 15, 2019. Without this relief, a taxpayer who failed to make the first year’s payment would have had the remaining eight installments become due immediately. The IRS is granting this relief only to individual taxpayers whose total transition tax liability is less than $1 million. Interest will still be due on the late payments. A later payment deadline of June 17, 2019, applies to certain individuals who live and work outside the United States.

Late elections

The final relief is for individual taxpayers who filed their 2017 return without electing to pay the transition tax under Sec. 965(h) in eight annual installments. Those taxpayers may still make the election by filing a Form 1040-X, Amended U.S. Individual Income Tax Return, 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 (Oct. 15, 2018, for calendar-year taxpayers).

AICPA comment letters

The AICPA submitted comment letters to the IRS on April 4, 2018, and April 19, 2018, requesting clarification of some previous IRS FAQs on this issue, along with relief for certain taxpayers subject to the transition tax. The newly released penalty and other relief addresses several of the questions and concerns raised by the AICPA in the April 4 letter. However, Jonathan Horn, senior manager—AICPA Tax Policy & Advocacy, notes that “the IRS actions to date fail to mitigate the detrimental impact on taxpayers raised in the AICPA’s letter of April 19.”