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Section 965 Payments, Filings, Refunds and More Refunds? – New IRS Guidance

On December 12, 2018 the Internal Revenue Service (“IRS”) released a Q&A document that confirms the IRS’s earlier guidance on Internal Revenue Code (“IRC”) Section 965 payments and refunds and provides 2018 guidance on the same[1].  The earlier guidance stated that taxpayers making a Section 965(h) deferral election on a 2017 income tax return could not use any overpayments of 2017 tax liabilities (from either a 965 or a non-965 excess estimated payment) as a credit against their 2018 estimated tax payments, nor could such amounts be refunded, unless and until the total overpayment amount exceeds the full eight years of obligation for the 2017 Section 965 installment payments.

 The new guidance for 2018 tax returns provides the following:

  •  Reaffirms the 2017 overpayment “no refund” position and states that the same fact pattern listed above will apply to 2018[2] Section 965 tax liabilities. A taxpayer’s 2017 or 2018 Section 965 and non-Section 965 estimated tax payments that exceed the combined tax liability for that year will be applied to the remaining Section 965 installment payments on a first-in, first-out basis to the applicable tax year, as shown in examples in the Q&A document.
  • Confirms that the 2018 calculation and payment methods for a 2018 Section 965 inclusion are the same as the 2017 methods. Taxpayers are reminded to utilize the “two separate payment” procedure of one payment/voucher for the applicable Section 965 tax liability and another one for the non-Section 965 tax liability.
  • States that overpayments from the 2018 non-Section 965 liability can be refunded or applied as a credit to the 2019 tax liability, at the taxpayer’s request, only if the outstanding 2017 Section 965 net tax liability annual installment payment obligations that are due have been paid in full.
  • Announces a new tax form, Form 965, and states that both 2017 and 2018 reported Section 965 income inclusions are to be completed and filed with 2018 returns, along with Form 965-A (Individuals) or 965-B (Corporations & REITs), and up to 14 pages of applicable schedules. The new filing procedure gives the IRS a standardized format to check a taxpayer’s Section 965 calculation(s) and to track the ongoing installment payments. Forms 965-A and/or 965-B must be filed annually until all Section 965 installment obligations are paid when applicable. Instructions for the new form and schedules are forthcoming.

At present, more than one “Tax Reform-Part 2” Bill (the “Bill”) has been introduced in Congress.  The most recent version of the Bill includes legislation to improve IRS operations, as well as various technical corrections to the Tax Cuts and Jobs Act of 2017.  Included in the Bill is a provision that would allow taxpayers to claim a credit or refund of any overpayment with respect to an installment payment of the taxpayer’s transition tax under Section 965, such that the overpayment shall not be credited against the remaining unpaid installments. This would be accomplished by introducing two new IRC Sections that would allow the IRS to credit or refund any “excess remittances” in the same manner as an overpayment of tax, but without interest. (An “excess remittance” generally means a payment (including estimated payments) that exceeds the sum of (1) a taxpayer’s US federal income tax liability without regard to Section 965 and without regard to any income or deduction attributable to any dividend received from a deferred foreign income corporation, plus (2) the sum of all installments for which the due date has passed).

These proposed amendments would be retroactive to the effective date of Section 965 (i.e., December 22, 2017), meaning that taxpayers that made an overpayment with respect to their first installment Section 965 payment may be able to claim a refund on such overpayment, or apply the overpayment to their 2018 estimated tax payments, if the legislation is enacted.

It appears unlikely that bipartisan agreement can be reached on the Bill. We will update you if that changes.

If you have any questions about Section 965 calculations, payments, or refunds thereof, please contact:

Michael Pearson

The summary information in this document is being provided for education purposes only.  Recipients may not rely on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice.  We encourage any recipients to contact the authors for any inquiries regarding the contents.  FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.

[1] See FGMK’s Tax Alert – Section 965 from August 2018 for additional information on Section 965 – the new transition tax on untaxed post-1986 earnings & profits of Controlled Foreign Corporations (“CFCs”).

[2] For taxpayers with at least one CFC with a fiscal year beginning in 2017 and ending in 2018.