A powerful ally of taxpayers, the American Institute of CPAs (AICPA) has formally asked the IRS to grant relief from certain estimated tax penalties triggered by the Tax Cuts and Jobs Act (TCJA).
Generally, individual taxpayers must pay estimated tax through withholding or quarterly installment payments or both. Failing to do so may result in an underpayment penalty.
However, this may be avoided under a safe harbor rule based on 90 percent of current tax liability or 100 percent of the prior year’s tax liability (110 percent if the taxpayer’s AGI exceeded $150,000). Corporations are required to pay at least 100 percent of current tax liability or 100 percent of the tax shown on their return for the prior year. These rules are covered under Sections 6654 and 6655, respectively.
In a letter sent by the AICPA to IRS Commissioner Chuck Rettig and Kirsten Wielobob, Commissioner Deputy for Services and Enforcement, chairperson of the AICPA Tax Executive Committee, Annette Nellen, requested the Treasury Department to issue guidance that “the additional amount of tax due as a result of Section 965 is not included in the calculation of a taxpayer’s required annual payment for purposes of sections 6654 and 6655 for the 2018 and subsequent tax years.” Section 965 governs the inclusion of income from certain foreign entities.
“Taxpayers faced substantial uncertainties relating to how to determine the amount of their actual tax liability for the 2018 taxable year as regulations addressing many of the statutory changes made by the TCJA were not yet available or were released late in the year as proposed regulations,” wrote Nellen.
“Taxpayers who were subject to Section 965 inclusions had their 2017 tax liability significantly inflated by a one-time amount. The calculation and inclusion of the separate tax liability under Section 965 creates uncertainty among taxpayers as to what amount from their 2017 return represents the safe harbor amount,” she stated.
For example, a taxpayer must choose from the following possible safe harbor amounts:
- The non-Section 965 tax liability (i.e. their regular tax liability);
- The regular tax liability plus the first installment payment of their Section 965 tax liability with a Section 965(h) election; or
- The regular tax liability plus the entire amount of their Section 965 tax liability.
Nellen went on to say that the determination of the correct safe harbor amount is further complicated for S corporation shareholders who elected under Section 965(i) to defer the entire Section 965 tax liability until the occurrence of a triggering event. In subsequent tax years, a similar issue reoccurs if a taxpayer was required to make a Section 965 installment payment in the prior year, she stated.
The IRS often reacts favorably to requests from the AICPA. We will keep an eye on further developments.