Remedying Incorrect Section 965 Inclusions After Final Regulations

Description

The "deemed repatriation" provisions of the tax reform legislation, requiring U.S. shareholders of "specified foreign corporations" to report and pay a one-time "transition tax" on previously untaxed foreign income, caused immense confusion for taxpayers engaged in foreign activities. The statute allowed taxpayers to elect under Section 965(h) to pay this "toll charge" interest-free over eight years, with estimated payments beginning in 2018.

In January 2019, the IRS finalized its June 2018 proposed regulations. While the final regs cleared up several sticking points, the Service left other difficult areas unresolved. Particularly challenging for tax advisers, the final regulations made several retroactive changes from the earlier guidance.

Taxpayers with potential errors in their initial 965 remittances covering the 2017 tax year must discern how and whether to make corrective filings to cover underpayments. The issuance of new Form 965 and accompanying schedules for the 2018 tax year may require taxpayers to correct previously reported amounts. The final regulations do not explicitly provide or require a taxpayer to make forward adjustments to their remaining installments under the 965(h) election.

Given the areas of uncertainty remaining in the final regulations and the cost of underreporting Section 965(h) deferrals, tax advisers must review taxpayers' filings to ensure the transition tax calculations, payment, and election were correct to avoid costly tax consequences, and determine how to rectify underreported amounts in the absence of concrete instructions.

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