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IRS Section 965 requires U.S. shareholders of specified foreign corporations to include their gross income and 2017 overpayments.

An About-Face by the IRS? Not Likely

As part of the Tax Cuts and Jobs Act, Congress enacted IRC Section 965, commonly referred to as the repatriation tax or the transition tax. IRC Section 965 required U.S. shareholders of specified foreign corporations to include in their gross income the accumulated post-1986 deferred foreign income of such corporations. In addition to a reduced rate of tax, the U.S. shareholders were allowed to make an election to pay the tax over an eight-year period -- the “Section 965(h) election.”

For taxpayers that made a 2017 Section 965(h) election, the first installment was due with the U.S. shareholder’s 2017 tax return and the second installment payment will be due on the due date of the 2018 income tax return (without extensions). The IRS will issue an installment notice and payment voucher six-to-eight weeks prior to the due date of the 2018 income tax return. The second installment will be made separately from any other 2018 tax payments as it is considered a 2017 tax liability.

In a controversial move, the IRS announced in April 2018 that it would apply any 2017 tax overpayment to the Section 965 installments, even if the taxpayer requested the overpayment to be refunded or credited to their 2018 regular tax liability.  This basically circumvents Congressional intent to defer the tax over an eight-year period.

Recently, the IRS released its 2018 version of frequently asked questions (“FAQs”) relating to section 965 reporting and payments.

The 2018 FAQs reinforce the IRS position that a 2017 overpayment would be applied to the taxpayer’s 2017 Section 965 deferred liability. However, any 2018 overpayment will either be refunded or applied to tax year 2019.

Taxpayers that report Section 965 income and choose to make a 2018 Section 965(h) election will have similar rules apply as those taxpayers that made the Section 965 election in 2017.  A taxpayer that makes the election in 2018 will have any tax overpayment applied to the installments. In the event that the 2018 overpayment exceeds the Section 965 tax, either a refund or the application of the overpayment to tax year 2019 will apply.

Notwithstanding the IRS position, industry leaders and members of Congress have requested that the IRS withdraw from its position of applying 2017 overpayments against the deferred payments.  The outgoing House Ways and Means Committee chairman, Kevin Brady, included in a year-end tax bill a provision that would in effect allow taxpayers to have their overpayments refunded or applied against subsequent year tax liabilities. 

Although the bill is unlikely to be approved, it does give taxpayers hope for a possible about face-by the IRS. 

Gerard O’Beirne is a Tax Partner and leader of the firm’s International Tax Group, with more than 25 years of experience. Gerry has extensive experience with both inbound and outbound structuring, including mergers and acquisitions.

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