Penalty and Filing Relief on Foreign Earnings Transition Tax

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The Internal Revenue Service (IRS) continues to provide guidance on the implementation of certain provisions within the Tax Cuts and Jobs Act.  Nowhere is this guidance more prolific, and more welcome, than in the international tax provisions of the Act.

This week, in News Release IR 2018-131, the IRS has announced that it will waive certain late payment penalties related to the Internal Revenue Code (IRC) Section 965 transition tax.  Section 965 of the IRC, 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 percent rate, and the remaining earnings are taxed at an 8 percent rate. The transition tax generally may be paid in installments over an eight-year period when a taxpayer files a “timely election” under section 965(h).

The provision is a stalwart of the international tax regime reform intended to induce repatriation of monies earned and held offshore that might be used for investment within the United States.  The Notice offers welcome relief for taxpayers that have been struggling to comply with the many deadlines in the legislation.

The announcement also includes information related to the due date for relevant elections. The relief information was explained in three new Frequently Asked Questions posted on the IRS’s tax reform page.

The FAQs provide that: (1) the estimated tax penalty related to the transition tax will be waived in some instances if all the required estimated tax payments are made by June 15,2018; (2) the late payment penalty will be waived for those who missed the April 18, 2018 deadline for making the first of the eight annual installment payments if the installment is paid in full by April 15, 2019, and the total transition tax liability is less than $1 million; and (3) individuals who have already filed their 2017 tax return without making an election to pay the transition tax over eight annual installments can still make the election by filing an amended tax return by October 15, 2018.

Many complexities and unanswered questions remain in the international tax provisions, as well as other parts, of the Tax Cuts and Jobs Act. Should you have questions or comments, please contact Bob Grossman or Don Johnston.


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