This article is reproduced with permission from Spidell Publishing, Inc.
Individual taxpayers who unexpectedly found themselves subject to the new Internal Revenue Code (IRC) Section 965 repatriation tax (aka the “transition tax”) on previously deferred foreign income can now breathe a sigh of relief.
The IRS has announced that it will not be imposing estimated tax and late-payment penalties for certain individual taxpayers who failed to make sufficient estimated tax payments or failed to meet the April 18, 2018 payment deadline for the first repatriation tax installment. The relief is not available to corporate taxpayers. Corporate taxpayers who failed to meet deadlines must seek first-time penalty abatement or reasonable cause penalty abatement.
IRC Section 965, enacted in December 2017 as part of the Tax Cuts and Jobs Act (TCJA), imposes a repatriation tax on previously untaxed foreign earnings of specific 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 15.5%, and the remaining earnings are taxed at 8%.
Paying the Tax
The tax generally may be paid in installments over an eight-year period when a taxpayer files a timely election by the extended due date of the 2017 tax return. The repatriation tax is not included in computing a taxpayer’s estimated tax liabilities. The first repatriation tax installment was due April 18, 2018, even though the installment election can be made on an extended return. If an installment payment is not timely made, including the first installment due on April 18, 2018, all future installments become immediately due.
The IRS had previously announced that all overpayments of tax, including both the taxpayer’s regular tax and repatriation tax amounts, will be applied to any outstanding repatriation tax due, even future installments. In other words, the taxpayers will not be receiving any regular tax refunds or credits if they elect to pay the tax in installments.
The following relief is provided to eligible taxpayers:
- The estimated tax penalty will be waived for taxpayers who improperly attempted to apply.
- 2017 calculated overpayment to their 2018 estimated tax, as long as:
- they make all required estimated tax payments by June 15, 2018; and
- their first required installment was due by April 18, 2018.
- For individual taxpayers with a total repatriation tax liability of less than $1 million 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 taxpayer makes a timely election and pays the installment in full by April 15, 2019 (June 17, 2019, for taxpayers living outside the U.S.), and will not require that all future installments be paid immediately.
- Individuals who have already filed a 2017 return without electing to pay the repatriation tax in eight annual installments can still make the election by filing a 2017 Form 1040X with the IRS. The amended Form 1040 generally must be filed by October 15, 2018.
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