The AICPA in a letter issued on April 19, 2018 has asked the IRS to reconsider its view, expressed in a change added to the questions and answers on the §965 transition tax, that any overpayments for taxpayers who elect to pay the tax in installments will not be refunded unless the entire balance of the tax is paid.
The IRS added Question and Answers 13 and 14 to the information in Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns. The added material reads as follows:
Q13. How will the IRS apply 2017 estimated tax payments (including credit elects from 2016) to a taxpayer’s net tax liability under section 965?
A13. The IRS will apply 2017 estimated tax payments first to a taxpayer’s 2017 net income tax liability described under section 965(h)(6)(A)(ii) (its net income tax determined without regard to section 965), and then to its tax liability under section 965, including those amounts that are subject to payment in installments pursuant to an election under section 965(h).
Q14. If a taxpayer’s 2017 payments, including estimated tax payments, exceed its 2017 net income tax liability described under section 965(h)(6)(A)(ii) (its net income tax determined without regard to section 965) and the first annual installment (due in 2018) pursuant to an election under section 965(h), may the taxpayer receive a refund of such excess amounts or credit such excess amounts to its 2018 estimated income tax?
A14. No. 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. If a taxpayer’s 2017 tax payments exceed the 2017 net income tax liability described under section 965(h)(6)(A)(ii) (net income tax determined without regard to section 965) and the first annual installment (due in 2018) pursuant to an election under section 965(h), the excess will be applied to the next successive annual installment (due in 2019) (and to the extent such excess exceeds the amount of such next successive annual installment due, then to the next such successive annual installment (due in 2020), etc.) pursuant to an election under section 965(h).
Under IRC §965, certain taxpayers owe tax equal to a share of any previously untaxed earnings and profits held by offshore corporations in which they hold an interest. While the tax is computed in full on a single tax return (most often the taxpayer’s calendar year 2017 return), a taxpayer can elect to pay the tax in installments over eight years under IRC §965(h), with only 8% of the ultimate tax being due for an installment payment at the unextended due date of the affected return.
The IRS’s “no refund” policy for such taxpayers was announced on the Friday before many taxpayers would have to make a payment. As the law was only added to the IRC in December as part of the Tax Cuts and Jobs Act, many taxpayers were still in the process of attempting to determine the amount of such earnings and profits.
Taxpayers generally were estimating “high” on the amount of payment due, as IRC §965(h)(3) provides the following in part:
(3) Acceleration of payment
If there is an addition to tax for failure to timely pay any installment required under this subsection, a liquidation or sale of substantially all the assets of the taxpayer (including in a title 11 or similar case), a cessation of business by the taxpayer, or any similar circumstance, then the unpaid portion of all remaining installments shall be due on the date of such event (or in the case of a title 11 or similar case, the day before the petition is filed).
Taxpayers did not wish to risk a failure to pay penalty on this payment due to this provision in the law.
The AICPA’s letter provides the following three objections to the IRS’s last-minute position:
Taxpayers who had anticipated applying an overpayment of their regular tax liability to their first quarter estimated tax payment were required to immediately submit an additional payment to the IRS to cover an unexpected shortfall. For many individual and small business taxpayers, obtaining available cash resources to cover this sudden, unanticipated liability is likely to have created a hardship. For those taxpayers unaware of this last-minute change, a late payment of the additional amount will likely result in imposition of an underpayment penalty. For large corporations, with potentially a substantial additional liability, a significant penalty amount could result.
The IRS's application of regular tax overpayment to an installment payment amount which is not legally due until a future date is seemingly inconsistent with Congressional intent. Section 965(h) and the accompanying Joint Explanatory Statement of the Committee of the Conference (Conference Report) support allowing a taxpayer to pay in installments without any added interest payment nor a requirement for estimated payments. Specific rules are included regarding the treatment of “deficiency” amounts – in general a “catch-up” payment for installments previously due and proration of the remainder to the subsequent future installments. In addition, provisions specifying circumstances which would constitute an acceleration triggering immediate payment of the remaining installments are included in the statute.
Finally, the IRS decision, announced via new FAQs on April 13, 2017, to now treat all tax payments made for the 2017 tax year (estimated tax payments, extension payments, and amounts paid specifically to satisfy the initial section 965(h) installment) as a single pool of funds is inconsistent with Q&A 10 released on March 13, 2018. This FAQ required taxpayers to make two separate payments, one designated for their regular 2017 tax liability and one designated to cover their entire initial section 965(h) installment.
The AICPA letter recommend the IRS make the following changes to their position on any overpayment:
The AICPA urges the IRS to amend Q&A 13 and Q&A 14 to reflect the following. Taxpayers should have the ability to direct the application of any overpayment resulting from their combined 2017 estimated taxes, 2017 extension payments and amounts paid specifically to satisfy the initial section 965(h) installment in some combination of the following:
- Application to 2018 estimated tax liability (non-section 965 tax liability); or
- Application to one or more future section 965(h) installment payments; or
- Refund to the taxpayer in whole or partial amounts.