On July 16, the IRS announced additional guidance on the transition tax under IRC Section 965. The announcement directed taxpayers to new questions and answers (Q&As) recently posted to its website. These Q&As are posted separately from Q&As that provide guidance on reporting and paying the IRC Section 965 transition tax with respect to 2017 and 2018 tax returns and address questions that do not specifically relate to filing 2017 and 2018 returns.
Under the Tax Cuts and Jobs Act of 2017, U.S. shareholders of certain specified foreign corporations are required to pay a transition tax under IRC Section 965 on untaxed foreign earnings for the last taxable year of specified foreign corporations beginning before Jan. 1, 2018. Taxpayers are permitted to make a one-time election to pay the transition tax, which was due with the 2017 or 2018 tax return, depending on the taxable year-end of the specified foreign corporation owned by the U.S. shareholder, in installments over eight years under IRC Section 965(h).
If the taxpayer did not make the election, the entire transition tax was due on the due date, without extension, of the taxpayer’s return for the year in which the inclusion occurred. If the taxpayer made the election, the first installment was due on the due date, without extension, of the taxpayer’s return on which the inclusion occurred. The remaining installments are due on the due date, without extension, of the taxpayer’s return for each of the seven successive years. Overpayments of income tax or transition tax for the year transition tax liability was incurred were applied to future Section 965(h) installments.
Q&A 1 provides guidance on how to make subsequent installment payments. Noting that annual installments are due by the due date of the taxpayer’s return, without regard to extensions, the guidance indicates that going forward the IRS intends to send a reminder prior to the installment due date, but adds this caveat:
[T]he IRS will make every effort to issue an installment notice and payment voucher for each successive installment approximately six to eight weeks before their respective due dates. The installment notice will provide the total amount of your unpaid section 965(h) net tax liability and the amount of your section 965(h) net tax liability to be paid by the due date.
Q&A 1 also provides that in the event a taxpayer does not receive a notice, an individual taxpayer should contact the IRS at +1 855 223 4017, ext. 729. A business taxpayer should call +1 800 830 5215, ext. 708.
Q&A 1 clarifies that an installment payment under Section 965(h) must be a separate payment and not combined with a taxpayer’s estimated tax payments with respect to the taxpayer’s income tax liability for successive years. Application of a portion of the taxpayer’s income tax overpayment to a 965(h) installment will preclude a refund or credit of any amount of the income tax overpayment in excess of the IRC Section 965(h) installment due for that taxable year. Instead, the entire income tax overpayment will be applied to the remaining outstanding Section 965 liability until that liability has been satisfied.
The guidance also provides instructions for three different payment alternatives for the payment of IRC Section 965(h) installments, and it reiterates the IRS position that the IRS will not refund an overpayment of an IRC Section 965(h) installment or apply such an overpayment against any other tax obligation until the entire liability under IRC Section 965 is satisfied. An overpayment of an IRC Section 965 installment is applied to future installments on a next-in-line basis.
Q&A 2 provides guidance related to filing transfer agreements to defer payment of an amount due under IRC Section 965(h) or (i) as a result of certain acceleration or triggering events. Q&A 3 through Q&A 6 provide guidance relating to consent agreements under Section 965(i). Q&A 7 provides guidance about the treatment of excess remittances in the year of a triggering event. Q&A 8 provides guidance on joint and several liability after an installment election to pay triggered tax.