June 13, 2018

IRS Grants Relief to Taxpayers in Connection with Certain Transition Tax Penalties

By Susan Yea, Supervisor, Tax & Business Services & Zacarias Quezada, Staff, Tax & Business Services

IRS Grants Relief to Taxpayers in Connection with Certain Transition Tax Penalties Tax & Business

On June 4, 2018, the Internal Revenue Service (“IRS”) released IR-2018-131, providing that it will waive certain penalties relating to the newly enacted transition tax assessed under Section 965 of the Internal Revenue Code of 1986, as amended (the “Code”).

Section 965 is one of the provisions under P.L. 115-97 (the “Act”) enacted in December 2017. It imposes a one-time, mandatory transition tax applicable to 10 percent (or more) U.S. shareholders of Specified Foreign Corporations, on their pro rata share of unremitted and previously untaxed post-1986 earnings and profits. Specifically, in the case of 10 percent (or more) corporate shareholders that are taxable under subchapter C, a 15.5% tax rate is assessed on foreign earnings held in cash or cash equivalents, while an 8% tax rate is assessed on all other accumulated foreign earnings. Individuals subject to federal income tax at the maximum rate of 39.6% are taxed at the slightly higher rates of approximately 17.54% for foreign earnings held in cash or cash equivalents and approximately 9.05% on all other accumulated foreign earnings.

Generally, under the previously issued IRS Q&A and other IRS guidance, a taxpayer was eligible to pay the transition tax in installments over an 8-year period, provided an election was properly made under Section 965(h) of Code with the 2017 tax return, and the first installment payment was timely remitted by the due date of the tax return (determined without regard to any extension of time for filing the return); otherwise, a penalty could have applied and all subsequent payments could be accelerated. However, under the newly released guidance, the IRS has indicated it will grant taxpayers relief from penalties arising from the Transition tax under certain circumstances, as follows:

  • In some instances, the IRS may 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 the taxpayer makes all required estimated tax payments by June 15, 2018.
  • The IRS may waive the late-payment penalty for individual taxpayers who missed the April 18, 2018, deadline in connection with the first of the eight annual installment payments, provided the total transition tax liability is less than $1 million and the first installment is paid in full by April 15, 2019.
  • The IRS may allow individuals who have already filed a 2017 From 1040, U.S. Individual Income Tax Return, and did not make a Section 965(h) election to still make the election by filing a 2017 Form 1040X, Amended U.S. Individual Income Tax Return, generally by October 15, 2018.

The U.S. Treasury Department and IRS are still working to address the complications arising from the transition tax. We will continue to monitor and provide updates on any new guidance that may be released.

Please contact your dedicated Marcum professional to address any questions regarding the above or any other tax matter.