The IRS recently announced a new area of focus under its issue-based audit strategy program focusing on Internal Revenue Code Section 965 for individuals. The campaign is aimed at US shareholders (in this case – individuals) whom directly or indirectly own at least 10% of the stock of a foreign corporation (FC). These US shareholders are required to include their share’s gross income of the FC’s accumulated post-1986 deferred foreign income for the last taxable year of the FC beginning before January 1, 2018.
The 2017 Tax Cuts and Jobs Act (TCJA) took away the possibility from US shareholders to indefinitely store accumulated profits abroad but allowed favorable transition tax rates of 15.5% or 8% and an optional 8-year installment plan to encourage US shareholders to correctly report mandatory Section 965 income under the deemed repatriation of accumulated foreign earnings. The IRS Large Business and International Division has performed a data analysis that revealed that the new law has not been applied correctly and consistently. The IRS is planning to address non-compliance through soft letters and examinations.
WG Observation: The changes imposed by TCJA with respect to foreign corporations owned by US individuals were sweeping in scope and in many cases created a significant tax liability. While the law was effective in 2017, the IRS did not update the relevant forms (Forms 965 and 5471) to report the tax until 2018. As a result, we have seen a high degree of unintentional non-compliance in this area. The IRS seems to have recognized this as well with the announcement of this campaign. As the penalties for non-compliance in this area are severe, it is best to be proactive and address any issues voluntarily with the IRS.
If you have questions regarding this or any other international tax topic, please contact your WilkinGuttenplan advisor.