Posted on Fri, Jun 08, 2018 ©2021 Drucker & Scaccetti

Yang1By: Yi Yang, CPA, MBA


Since our last post on the mandatory Section 965 Transition Tax, the IRS has provided additional guidelines on the reporting procedures for 2017 tax returns.  In today’s post, we’ll delve deeper into the guidelines and learn how you may secure some penalty and filing relief.


Prior to the April 18, 2018, tax deadline, the IRS released Publication 5292 How to Calculate Section 965 Amounts and Elections Available to Taxpayers to help prepare 2017 tax returns.  In addition, it updated Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns posted on its tax reform page, which addressed ordering rules for payments of 2017 and 2018 estimated tax, regular income tax and the Transition Tax liabilities.  


Q14 addresses how the IRS applies 2017 overpayments and 2017 estimated tax overpayments to the Transition Tax.  Essentially, if you make an election under Section 965(h) to pay the Transition Tax in eight installments over an eight-year period (the “Section 965(h) Election”), the IRS disallows a refund or credit of any 2017 overpayment to your 2018 regular income tax liabilities unless and until the 2017 overpayments exceed all amounts of the Transition Tax to be paid in installments in subsequent years, even though one of the installments is not due in another seven years. 


This means you cannot apply 2017 overpayments to your 2018 first-quarter estimated tax liability if you have Transition Tax installments due but need to make a separate payment to the IRS for its 2018 first-quarter estimated tax by the due date of April 18.  Late payments of estimated taxes could result in underpayment penalties, which could be significant. On June 4, the IRS updated the Q&A with guidance to three additional situations (Q15 to Q17), which waives certain late-payment penalties relating to the Transition Tax and provides relief for certain taxpayers who did not make the Section 965(h) Election.


In Q15, the IRS will waive the penalty on the missed 2018 first-quarter estimated tax for those subject to the Transition Tax who improperly attempted to apply a 2017 overpayment to their 2018 estimated tax, if they make all required estimated tax payments for the 1st and 2nd quarters of 2018 by June 15, 2018. 


This relief applies only if your first required estimated tax installment for 2018 was due on or before April 18, 2018.  If you receive a notice of underpayment penalty of the 2018 1st quarter estimated tax and you meet all the conditions for relief described in Q15, you should contact the notice-issuing IRS office and request abatement of the penalty.     


In Q16, the IRS will waive the late-payment penalty for certain taxpayers who missed the April 18, 2018 deadline for making the first of the eight annual installment payments of the Transition Tax, if the total amount of the first installment is paid on or before the due date for the second installment (i.e., April 15, 2019, for most taxpayers, and June 17, 2019, for certain taxpayers whose tax homes are outside the U.S. and Puerto Rico). 


This relief only applies if your net Transition Tax liability in the  2017 taxable year is less than $1 million and you make a timely Section 965(h) Election.  In addition, the failure to make the 1st installment payment will not result in an acceleration to pay all subsequent installments if you pay the full amount of the 1st and 2nd installment by the due date for your 2018 return (determined without regard to extensions).  However, you will still be liable for interest on such amount from the due date of the 1st installment.


In Q17, the IRS provides relief if you have already filed their 2017 return without the Section 965(h) Election.  You can make the Section 965(h) Election by filing an amended return on Form 1040X, following the procedures set forth in the IRS Q&A (including the Section 965 Transition Tax Statement(s) described in Q3 and the election statement described in Q7) on or before the extension due date of your 2017 return.  In this case, the IRS will treat you as if you made an extension request and received the extension for your 2017 return.  The Form 1040X must be filed by October 15, 2018.


Our four-part series on the mandatory transition tax demonstrates how this area of the new tax law can get extremely complex. The IRS guidance is helpful, but the basic understanding of the Transition Tax is still not for the faint of heart.  It is imperative a knowledgeable, experienced international tax advisor help you if these rules apply.


The Tax Warriors® at Drucker & Scaccetti have decades of experience helping clients with their international tax needs. Our team of dedicated international experts can help you grow and sustain your wealth.  Call on us for a consultation about your specific situation.  We are always prepared to assist.

Topics: Form 1040X, Tax update, Transition Tax, IRS Guidance, Section 965 income, mandatory, Penalty Relief, Overpayments

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