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AICPA Offers Section 965 Guidance

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Apr 24th 2018
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The official tax deadline has ended but that doesn’t mean busy season is over. Extensions loom for many taxpayers, including those still grappling with uncertainty about how to correctly calculate, report and pay taxes related to certain specified foreign corporations under Section 965 of the new tax law.

In fact, the American Institute of CPAs has asked the IRS for guidance in four scenarios involving Section 965 – and all four involve extensions in one way or another.

Here are the four scenarios and what the AICPA recommends:

1. Underpayment of the Initial Installment of Section 965 Tax Liability

A taxpayer submits an extension request and their first Section 965 installment payment by April 17. On or before Oct. 15, the taxpayer files the completed tax return but the final calculation of the taxpayer’s Section 965 tax liability is more than the estimated amount that was the basis for their April payment. The initial payment was based on information available at the time it was submitted.

Recommendation: The Section 965 tax liability should be treated like a deficiency under Section 965(h)(4). The AICPA suggests that the taxpayer pay a percentage of the additional tax liability (8% under Section 965(h)(1)(A) and add the remaining tax liability to the remaining installment balance, as if the correct amount had been determined as of the April 17 extension request. The AICPA also recommends that taxpayers be allowed to apply overpayment of taxes related to their 2017 tax liability to any underpayment of tax related to the Section 965 installment liability.

2. Overpayment of Initial Installment of Section 965 Tax Liability

A taxpayer files for an extension and pays their initial Section 965 installment payment by April 17. On or before Oct. 15, the taxpayer files their completed return. The final calculation of the Section 965 liability is below the estimated amount of the taxpayer’s April installment payment.

Recommendation:  The IRS should give taxpayers the option of having the Section 965 installment overpayment refunded to them or elect to apply it to one or more of the following liabilities:

  • Second installment payment of the Section 965 tax liability due in April 2019
  • Regular tax underpayment for 2017 reflected on their filed tax return
  • 2018 estimated tax payments

A taxpayer would indicate if an election is made by attaching a statement to the filed tax return.

3. Unintentional Non-payment of Initial Installment of the Section 965 Tax Liability

A taxpayer owns an interest in a partnership with an investment in a “specified foreign corporation” as defined in Section 965(e). The taxpayer doesn’t know that a Section 965 inclusion amount exists for tax year 2017 until they receive their Schedule K-1 on Sept. 15. Because this is the only Section 965 inclusion amount on the taxpayer’s return, the initial installment payment related to the Section 965 tax liability wasn’t included with their extension request in April.

Recommendation: If the only Section 965 inclusion on a taxpayer’s return results from an interest in a partnership that provided the taxpayer with a Schedule K-1 after April 17, the IRS should allow the taxpayer to make an initial Section 965 tax liability payment with their timely filed extended tax return. The AICPA suggests handling the payment as if it was properly made by April 17, with no additional interest or penalties if the taxpayer certifies that their Section 965 inclusion amount results solely from a partnership (or other pass-through entity) interest from which they first received the necessary information on a Schedule K-1 issued after April 17.

4. Clarification of Required Calculations and Document Retention

To accurately calculate their net tax liability for the taxable year with all Section 965 related amounts, taxpayers will have certain tax attributes and deductions directly affected by the Section 965 inclusion amounts. A taxpayer is only required to file a tax return showing the calculation of their net tax liability for the taxable year without the Section 965 related amounts.

Recommendation: The IRS should encourage taxpayers to prepare a pro forma copy of their tax return showing the calculation of the net tax liability for the taxable year with all Section 965 related amounts and retain the documentation until one year after the expiration of the extension of the limitation on the assessment period referenced in Section 965(k).

 

 

 

 

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