The IRS recently announced that it will waive certain late-payment penalties related to the Section 965 transition tax. In addition, the IRS provided additional guidance for individuals subject to the Section 965 transition tax regarding the due date for relevant elections.
Earlier this year, we posted about the new Frequently Asked Questions page created by the IRS that describes how to report Section 965 income and how to report and pay the associated tax liability. With the announcement of the penalty and filing relief, the IRS has added three new FAQs to the page.
Enacted in December 2017 as part of the Tax Cuts and Jobs Act, Section 965 of the Internal Revenue Code imposes a transition tax on untaxed foreign earnings of certain foreign corporations owned by U.S. shareholders by deeming those earnings to be repatriated.
Per the IRS news release, the new information indicates that:
- In some instances, the IRS will waive the estimated tax penalty for taxpayers subject to the transition tax who improperly attempted to apply a 2017 calculated overpayment to their 2018 estimated tax, as long as they make all required estimated tax payments by June 15, 2018.
- For individual taxpayers who missed the April 18, 2018, deadline for making the first of the eight annual installment payments, the IRS will waive the late-payment penalty if the installment is paid in full by April 15, 2019. Absent this relief, a taxpayer’s remaining installments over the eight-year period would have become due immediately. This relief is only available if the individual’s total transition tax liability is less than $1 million. Interest will still be due. Later deadlines apply to certain individuals who live and work outside the U.S.
- Individuals who have already filed a 2017 return without electing to pay the transition tax in eight annual installments can still make the election by filing a 2017 Form 1040X with the IRS. The amended Form 1040 generally must be filed by Oct. 15, 2018.
Although most of the provisions in the Tax Cut and Jobs Act affect tax years beginning in 2018, the Section 965 deemed repatriation tax affects 2017 returns. This left the IRS scrambling to provide timely guidance to taxpayers preparing their 2017 returns this filing season. The Section 965 provisions are complicated, and many questions remain unanswered. These penalty and filing relief provisions are welcomed, and we hope more relief will be forthcoming.