NEW IRS GUIDANCE ON “TRANSITION TAX” CLARIFIES SOME PRESSING COMPLIANCE QUESTIONS
Today, March 13, 2018, the IRS released some FAQ guidance called “Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns.” We had been hoping for this guidance, and now it has come. The FAQs cover areas of filing and payment relating to the section 965 transition tax on deferred foreign income, mostly as it relates to 2017 calendar year foreign corporations and U.S. taxpayers. The IRS warns taxpayers to pay attention to this: “Failure to submit tax returns according to these instructions may result in difficulties in processing tax returns, including rejection, processing delays, or erroneous notices being issued.”
The following key points were made in the pronouncement:
- All individuals who electronically file Form 1040 should file on or after April 2, 2018, to allow new IRS systems to correctly process the returns. Individual taxpayers affected by these rules should amend based on the FAQ, or risk incurring interest and penalties.
- The IRS requires an “IRC 965 Transition Tax Statement,” signed under penalties of perjury, to be included with the return. A listing of the content of that Statement is included.
- A summary of the tax elections that may be made in connection with Section 965.
- Clarification that the U.S. persons making the elections are taxpayers that have a net tax liability under section 965, and not S corporations or domestic partnerships. Prior to April 2, 2018, the IRS intends to provide further guidance regarding the availability of elections to the direct and indirect owners of passthrough entities.
- Any election must be made by the due date of the return for the relevant year, including extensions.
- Payment of the tax (or installment) must be made by the due date of the return for the relevant year, not including extensions.
- How to make an election. The rules are very specific, including the name of the file if filed electronically, and examples are offered in the appendix.
- Form 5471 is required for all specified foreign corporations, including those that are not controlled foreign corporations. Schedule J (Earnings and Profits) must be included.
- Instructions for reporting by domestic partnerships, S corporations, and other passthrough entities to their partners, shareholders or beneficiaries, by attachment to Schedule K-1.
- Requirement to make a separate payment of the Section 965 tax, and specific instructions how to make that payment.
- The FAQs include an appendix that illustrates how types of taxpayers should report the 965 inclusions, deductions, foreign tax credits, net tax liability, and installments on their 2017 tax returns.
The FAQs can be found here:
