The IRS continues to revise its guidance with regard to the Section 965 transition tax adopted as part of the Tax Cuts and Jobs Act. In News Release IR-2018-131 the IRS announced waivers of certain penalties impacted by that tax and revisions to its frequently asked questions regarding the tax maintained on the IRS web site.
The IRS has added three new questions and answers to the 965 tax frequently asked questions (FAQs) page on its website (Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns).
In some ways the changes are a combination of good news and bad news. The IRS last visited this set of FAQs just before the April 15 deadline when it announced, among other things, that any overpayments on 2017 tax returns for affected taxpayer would be applied against any remaining balance due on the transition tax, even if the installment election was made under §965(h) and the proper payment had been made on that first estimate.
The AICPA had requested that the IRS reconsider the “no refund” policy after it was announced back in April 2018. This change to the FAQs does not modify that position but does give some relief for taxpayers who had planned to apply that overpayment to 2018 taxes. The IRS will now grant a waiver of the underpayment of estimated taxes for such taxes.
The new question and answer reads as follows:
Q15: If a taxpayer that has 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, will the IRS determine an addition to tax for an underpayment of taxpayer’s 2018 estimated taxes because the credit elect won’t be available for the first required 2018 estimated tax installment?
A15: No. The IRS has determined that 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.
If the IRS sends a taxpayer a notice of an addition to tax for underpayment of estimated tax under section 6654 or 6655 and the taxpayer meets all the conditions for relief described above (including making the required payment by the due date for 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 provisions in these FAQs and updated instructions to Forms 2210 and 2220.
In many cases taxpayers found at April 17, 2018 that they did not yet have the proper information to correctly compute the amount of the first estimate due in order to pay the 965 transition tax in installments. Such taxpayers had to estimate, as best as they could, the amount that should be paid.
Under IRC §965(h)(3), if the taxpayer ended up with a penalty imposed for late payment on an installment, the entire balance of the installment is due. Thus, the concern arose that if a taxpayer found that he/she had under-estimated the amount of tax due, the entire balance would come due once the failure to pay penalty was applied. Similarly, some taxpayers may not have been aware of this late December law change and had not made any payment at the April deadline.
The IRS has provided automatic relief for such taxpayers, finding that if the taxpayer’s net tax liability under 965 in the individual’s 2017 tax year is less than $1 million, no penalty will be imposed if the first estimate is paid by the unextended due date for the taxpayer’s 2018 return.
The FAQ reads as follows:
Q16: If an individual fails to timely pay his or her first installment of tax due under section 965(h), will the IRS assess an addition to tax for failure to pay? Will the taxpayer’s requirement to pay all subsequent installments be accelerated under section 965(h)(3)?
A16: If an individual meets the criteria in this paragraph and 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 under section 965(h)(3). An individual with a net tax liability under section 965 is required to report the liability on his or her tax return for the year in which or with which the inclusion year of the deferred foreign income corporation ends and pay the full amount of that liability on the unextended due date of that return, unless the individual elects to pay the liability in eight annual installments pursuant to section 965(h)(1). However, the IRS has determined 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 its second installment) by the due date for its 2018 return (determined without regard to extensions). For this purpose, the relevant due date generally is April 15, 2019. 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 Treas. 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.
If the IRS sends a taxpayer 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 these FAQs.
Finally, what if the taxpayer filed his/her 2017 income tax return without attaching the election to pay the 965 transition tax in installments under IRC §965(h)? Tax software generally was not able to handle the 965 filings by the original April due date for tax returns and, as most of us can attest to, some taxpayers just have an irrational fear of ever filing a tax return on extension.
The IRS allows such taxpayers to make a late election by filing an amended income tax return on Form 1040X by what would have been the extended due date of the tax return. That FAQ reads as follows:
Q17: If an individual has filed his or her 2017 tax return, but has not made the section 965(h) election, may the individual file another 2017 return on which he or she makes the election?
A17: Yes. If an individual with a net tax liability under section 965 in the individual’s 2017 tax year 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 these 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. For this purpose, the IRS will treat the individual as if he or she had requested…and received the extension.