Transition tax penalty relief, Section 965 update

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transition tax, international tax, business, IRSIn a new press release on June 4, 2018, the IRS announced its decision to provide penalty relief to certain taxpayers who were delinquent in making a tax payment for the new transition tax. Section 965 of the code, also known as the transition tax, is a one-time tax on the accumulated earnings held in a foreign corporation. The due date for this tax was April 18, 2018. The taxpayer could pay all at once or elect to pay in installments over an 8-year period.

The press release explained the IRS would grant penalty relief for certain taxpayers who incorrectly attempted to apply a 2017 income tax overpayment toward the transition tax. For those taxpayers, the IRS is allowing payment to be made by June 15, 2018 without penalty.

The IRS also announced penalty relief for those taxpayers who would like to elect the eight-year installment period but missed the April 18, 2018 due date for making the first installment. The original regulations claimed if the taxpayer missed the first installment, the remaining installments would be due immediately. The updated regulations will provide penalty relief and will allow the eight-year installment election if the first missed installment is paid by April 15, 2019 (along with the second installment). Interest will still accrue over this period. This relief is only available to taxpayers with a transition tax less than $1 million.

Lastly, the IRS will allow taxpayers to file an amended return to elect the eight-year installment payment method if they failed to make the election with their originally filed return. The amended return would need to be filed by October 15, 2018 and would need to be filed in the specific manner outlined in the IRS June 4 FAQ.

This announcement will be a welcome relief for those taxpayers who were not prepared by the original due date. Please consult a qualified tax professional for questions or assistance. This information is general and should not be relied upon.

Jill A. Helm, CPA