IRS offers penalty and filing relief for transition tax on foreign earnings

The Internal Revenue Service (IRS) announced on Monday that it will waive certain late-payment penalties relating to the section 965 transition tax, and provided additional information for individuals subject to the section 965 transition tax regarding the due date for relevant elections.

The IRS explained the relief in three new FAQs, posted today on the agency’s tax reform page. These supplement 14 existing questions and answers that provide detailed guidance to taxpayers on reporting and paying the tax.

Section 965 of the Internal Revenue Code, enacted in December 2017, imposes a transition tax on untaxed foreign earnings of foreign corporations owned by U.S. shareholders by deeming those earnings to be repatriated. This means, that if you are a US shareholder or tax resident who directly or indirectly owns more than 10% of the shares of a foreign company, you are most likely subject to this mandatory transition tax.

Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an 8 percent rate. The transition tax generally may be paid in installments over an eight-year period when a taxpayer files a timely election under section 965(h).

In general, the questions and answers indicate 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 United States.
   
• 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 October 15, 2018.

If you are unsure whether or not you are subject to Transition Tax, we have compiled several articles, updates and commonly asked questions on this transition tax law that you can use to analyze your situation: