FAQs Provide Penalty and Filing Relief for Taxpayers Subject to Section 965 Transition Tax


Three new FAQs covering the Code Sec. 965 transition tax provide welcome penalty and filing relief for taxpayers who make the election to pay the tax in eight annual installments. The IRS will waive penalties for some late payments of the transition tax on foreign corporation income. The IRS has also extended the period for individuals to elect to pay the tax in eight annual installments.

Transition Tax

Code Sec. 965 is a deemed repatriation tax on some income from foreign corporations. A U.S. shareholder’s income must include a portion of the corporation’s untaxed post-1986 accumulated foreign earnings. This portion is then taxed as if it had been repatriated, even if the corporation does not actually distribute any of the funds.

Many shareholders must include these deemed distributions on their 2017 tax returns.

Penalty for Estimated Tax Payment

The IRS will not impose a penalty for an underpayment of estimated tax if the taxpayer:

  • calculated a tax overpayment for 2017 without including the taxpayer’s total transition tax liability; and
  • incorrectly attempted to apply that overpayment against estimated tax payments for 2018.

However, this penalty relief applies only if:

  • the taxpayer’s first estimated tax payment for 2018 was due by April 18, 2018; and
  • the taxpayer pays both the first and second estimated tax payments for 2018 by June 15, 2018.

Penalty for Missed Installment Payments

If a taxpayer elected to pay the transition tax in installments, the IRS will waive the penalty for missing the first payment if:

  • the taxpayer is an individual;
  • the taxpayer’s transition tax for 2017 is less than $1 million; and
  • the taxpayer pays both the first and second installment payments by April 15, 2019.

Without this relief, a missed installment payments is an “acceleration event” that causes all remaining installment payments to become due immediately.

Although eligible individuals will not be penalized for missing their first installment payment, they still must pay interest on the late payment.

Election Period Extended

The IRS also extended the deadline for taxpayers to elect to pay the transition tax in installments. The extension applies if the taxpayer:

  • is an individual;
  • filed a 2017 tax return without making the election; and
  • makes the election on an amended return filed by the date the 2017 return would have been due if the taxpayer had asked for and received any kind of filing extension.

For example, any taxpayer can get an automatic six-month filing extension by simply asking the IRS for it. Thus, an amended return to make the election is due, at the earliest, on October 19, 2018. Particular individuals might also qualify for a longer extension.