Updates and guidance on key IRS practice developments.

Author:Chambers, Valrie
 
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Foreign Income & Taxpayers

IRS issues Q&A guidance on Sec. 965 transition tax issues for 2018 returns

On Dec. 12,2018, the IRS released a new set of questions and answers (available at tinyurl.com/y7p89cco) that provides guidance on Sec. 965 reporting and payment requirements for 2018 tax returns, including obligations resulting from amounts included in income for the 2017 tax year.

The newly released questions and answers provide updates and clarifications to the procedures for not only making the second 2017 Sec. 965(h) installment payment due in 2019, but also making transition-tax payments for tax year 2018 (either in eight installments or in a lump sum). Taxpayers should carefully review the new questions and answers when calculating their 2018 and 2019 estimated tax payments. Taxpayers with Sec. 965 liabilities should also ensure that first quarter 2019 estimated tax payments are made separately and specifically applied to tax year 2019.

Background

The law known as the Tax Cuts and Jobs Act of 2017, P.L. 115-97, enacted Sec. 965, which imposes a one-time transition tax (toll charge) on the undistributed, nonpreviously taxed post-1986 foreign earnings and profits of certain U.S.-owned foreign corporations as part of the transition to a new territorial tax regime. In general, U.S. shareholders of the foreign corporations may elect to pay the toll charge in installments over eight years (Sec. 965(h)).

In March 2018, the IRS issued an initial set of questions and answers related to tax year 2017 return filing and payment obligations arising under Sec. 965. The IRS subsequently updated those questions and answers in April and June to provide additional guidance. The IRS explained that this prior set of questions and answers (available at tinyurl.com/yd779u8d) provides guidance to questions regarding tax year 2017 return filing and payment obligations arising under Sec. 965.

Overview and takeaways

In the newly released questions and answers, the IRS provided the following guidance:

As explained in the answer to Question 1, the entire amount of a 2017 toll charge is assessed as a liability for that year, even though a taxpayer that made a valid Sec. 965(h) election can pay the liability in eight annual installments.

The IRS will issue an installment notice and payment voucher for the second installment approximately six to eight weeks before its due date (six to eight weeks before April 15,2019, for calendar-year taxpayers). The second installment payment should be made separately from any payment due for 2018 income tax because the installment is not part of the 2018 income tax liability. Unlike the first installment of a 2017 toll charge, the second installment can be made using the Electronic Federal Tax Payment System (EFTPS), as well as a number of other payment methods described in the answer to Question 1.

Consistent with the answer to Question 14 in the prior set of questions and answers, the IRS will not consider 2017 to be overpaid until the full amount of the taxpayer's 2017 income tax liability, including the entire toll charge liability, is satisfied. Therefore, the IRS cannot allow, refund, or apply as a credit to another year any portion of properly applied 2017 tax payments until the entire 2017 income tax liability, including the full Sec. 965(h) net tax liability, is satisfied.

In general, Sec. 6402(a) allows the IRS to apply an overpayment as a credit against tax liability and refund any balance to the extent that the overpayment exists for the liability. Sec. 6402(b) further grants the IRS the authority to allow certain taxpayers to elect to credit an overpayment from one year to the succeeding year's estimated income tax, to the extent that the amount constitutes an overpayment. In the case of a tax payable in installments, Sec. 6403 provides that if the taxpayer has paid as an installment of the tax more than the amount determined to be the correct amount of that installment, the overpayment shall be credited against the unpaid installments, if any. If the amount already paid, whether or not on the basis of installments, exceeds the amount determined to be the correct amount of the tax, the overpayment shall be credited or refunded as provided in Sec. 6402.

The Supreme Court in Jones v. Liberty Glass Co., 332 U.S. 524 (1947), provided that an overpayment is a payment in excess of what properly should have been due or collected as tax. Although certain U.S. shareholders may elect to pay their toll charge liabilities in installments under Sec. 965(h), the provision does not allow them to defer recognizing the liabilities beyond the tax year of inclusion. That is, the amount of income tax properly due for the 2017 tax period, including the full Sec. 965(h) liability, is the entire income tax liability for that period, even though a taxpayer may elect to pay the toll charge in installments.

Therefore, the new questions and answers continue to affirm...

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