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IRS Offers Penalty-Filing Relief to Many Subject to New Transition Tax on Foreign Earnings

The IRS announced that it will waive certain late-payment penalties relating to the transition tax under Internal Revenue Code (IRC) Section 965 and provided additional information for individuals subject to the transition tax regarding the due date for relevant elections. The IRS explained the relief in three new FAQs on its tax reform web page. These supplement 14 existing questions and answers that provide detailed guidance to tax-payers on reporting and paying the tax.

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

In general, the questions and answers indicate the following:

  • 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 made 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 U.S.
  • 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 amended tax return with the IRS. The amended tax return, Form 1040, generally must be filed by October 15, 2018. For more information about the transition tax and other tax reform provisions, visit

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