On June 4, 2018 the IRS issued News Release IR-2018-131. In this release the IRS address some concerns in regards to penalties associated with the late payment of the first instalment of the transition tax.
New IRC §965, enacted on December 22, 2017 as part of the Tax Cuts and Jobs Act (P.L. 115-97), imposes a one-time tax on untaxed foreign earnings and profits (E&P) of foreign corporations owned by “United States shareholders”, as defined under the Internal Revenue Code, by deeming those earnings to be repatriated as a subpart F income.
Earnings and profits held in the form of cash and cash equivalents are taxed at an effective rate of 15.5 percent, for corporations, and up to 17.5 percent for individuals. The remaining earnings and profits are taxed at an effective 8 percent rate, for corporations, and up to 9 percent for individuals.
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).
Many taxpayers have struggled with understanding these new rules especially given the fact that the IRS continues to issue guidance. Much of this guidance has been issued AFTER the filer’s original due date. Though extensions can be filed, the first instalment payments were due by the original due date.
The Release states:
“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 make 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 Form 1040X with the IRS.”
For individual taxpayers who reside outside the United States, the IRS has previously announced that they would allow the first instalment payment to be made by June 15th, 2018, the “normal” due date for these taxpayers. This is evident in the last sentence of the first bullet point. It is not clear, however, if the IRS would also allow nonresident taxpayers to defer their first instalment payment to April 15, 2019.
While providing penalty relief is a step in the right direction, we would hope that the IRS and/or Congress would see fit to exclude United States expatriates from the provisions altogether. It is clear that the intent of this legislation was to encourage (force?) large U.S. based multi-national enterprises to bring the offshore money back “home” and re-invest in the U.S. to create U.S. jobs. For individual United States shareholders abroad, it is doubtful that any of these “repatriated” funds would actually be re-invested in the U.S. In many cases the foreign countries would be the beneficiaries as planning is being undertaken to accelerate foreign tax to eliminate any potential double taxation. We are hopeful that further IRS guidance will be forth coming.