New IRS Guidance for Foreign Deemed Repatriation Transition Tax Relief Under Section 965

Description

The “deemed repatriation” provisions of the TCJA, requiring U.S. shareholders of “specified foreign corporations” to report and pay a one-time “transition tax” on previously untaxed foreign income, caused confusion among taxpayers engaged in foreign activities. The provisions required taxpayers to calculate and report the tax on their 2017 filings, which created an immediate compliance challenge for advisers serving clients with offshore holdings. The statute allowed taxpayers to elect under Section 965(h) to pay the transition tax interest-free over an eight-year period, with estimated payments to begin in 2018.

In June 2018 the IRS issued guidance offering impacted taxpayers temporary relief from late payment penalties arising from Section 965 transition tax failures. The guidance provides relief from three specific areas of noncompliance: where a taxpayer incorrectly applies carryforward of overpayment credits under Sections 6654 and 6655; where a taxpayer fails to make a correct first installment payment under a 965(h) election; or where a taxpayer fails to timely make the 965(h) election.

Consequences of failure to correct transition tax errors are steep. In addition to late payment penalties, taxpayers who fail to remedy any initial installment underpayment would be required to pay the entire foreign transition on an accelerated basis. Tax advisers must review impacted taxpayers’ filings to ensure the transition tax calculations, payment and election reporting were done correctly to avoid costly tax consequences.

Listen as our experienced panel provides a practical and timely guide to correcting Section 965 transition tax penalties.