More on Transition Tax. Including extension and waiver
On 6/4/18, IRS added 3 additional questions to the existing 14 Questions in its: “Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns” : https://www.irs.gov/newsroom/questions-and-answers-about-reporting-related-to-section-965-on-2017-tax-returns. IRS originally published these FAQs on 3/13/18 as Section 965 of the Internal Revenue Code (IRC) could give rise to a 2017 tax liability for a calendar year for US shareholders holding an interest in a calendar year specified foreign corporation.
IRC Section 965
⦁ Requires US Shareholders to pay a one-time “transition” tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States.
⦁ Allows taxpayers to reduce the amount of such inclusion based on deficits in earnings and profits with respect to other specified foreign corporations.
⦁ The effective tax rates applicable to such income inclusions are adjusted for corporate shareholders by way of a participation deduction set out in IRC Section 965.
⦁ Taxpayers may elect to pay the transition tax in installments over an eight-year period.
⦁ A specified foreign corporation means either a controlled foreign corporation, (CFC), or a foreign corporation (other than a passive foreign investment company, that is not also a CFC) that has a US shareholder that is a domestic corporation.
⦁ A person that has income under IRC Section 965 of the Code for its 2017 taxable year is required to include with its return an IRC 965 Transition Tax Statement (https://www.irs.gov/pub/irs-news/Appendix%20-QA3_IRC-965-Transition-Tax-Statement_Fillable.pdf), signed under penalties of perjury.
The 3 Additional Q & A’s posted by IRS on 6/4/18
Situation: Taxpayers subject to the transition tax erroneously attempted to apply a 2017 calculated income tax overpayment to their 2018 estimated tax without including the taxpayer’s total net tax liability under IRC Section 965.
⦁ IRS has determined that no addition to tax for an underpayment of estimated taxes 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).
⦁ 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.
⦁ If the IRS sends a taxpayer a notice of an addition to tax for underpayment of estimated tax the taxpayer should contact the IRS office that issued the notice and request abatement of the addition to tax for underpayment of estimated taxes.
Situation: Taxpayers who missed the April 18, 2018, deadline for paying the first of the eight annual installment payments.
⦁ If an individual pays the total amount of the first installment on or before the due date for the second installment, the IRS will not assess an addition to tax for failure to timely pay the first installment and will not accelerate subsequent installments.
⦁ If an individual’s net tax liability under IRC Section 965 in the individual’s 2017 taxable year is less than $1 million, the individual makes a timely election under IRC Section 965, and the individual did not pay the full amount of the first installment by the due date, the failure to make the payment will not result in an acceleration event under IRC Section 965 so long as the individual pays the full amount of the first installment (and its second installment) by the due date for its 2018 return (determined without regard to extensions). The relevant due date generally is April 15, 2019.
⦁ If the IRS sends a taxpayer a notice of an addition to tax for failure to timely pay the first installment, 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.
Situation: Taxpayers who have already filed a 2017 return without electing to pay the transition tax.
If an individual with a net tax liability under IRC Section 965 in the individual’s 2017 tax year has already filed his or her tax return and did not make an election under IRC Section 965, such individual can make the IRC Section 965 election by filing a Form 1040X 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.
Don’t be a victim of your own making
IRS is offering relief to Taxpayers that have Transition Tax Liability. Taxpayers ought to consult their specialized Tax Advisor and determine the best course of action.