On November 4, 2019, the IRS Large Business and International (LB&I) Division announced its recent campaign regarding promoting the IRC Section 965 compliance. The goal of this campaign is to ensure the transition taxes are properly reported on taxpayers’ 2017 and 2018 tax returns. The IRS has stated that the “goal of this campaign is to promote compliance with IRC 965. The treatment stream will include conducting examinations as well as providing technical assistance to teams on 965, with a focus on identifying and addressing taxpayer populations with potential material compliance risk.”  Thus, taxpayers impacted by Section 965 could be the focus of additional IRS scrutiny.

As part of tax reform initiatives in the 2017 Tax Cut and Jobs Act (TCJA) , Section 965 imposes a transition tax (also known as a repatriation tax) on U.S. shareholder’s untaxed accumulated earnings and profits of certain foreign corporations, as if those earnings had been repatriated to the U.S. In other words, accumulated earnings in foreign subsidiaries which were previously untaxed in the U.S. as of Dec. 31, 2017 became subject to tax on the U.S. shareholder’s 2017 or 2018 U.S. tax return. This tax applies regardless of whether those accumulated earnings were transferred to the U.S. shareholder or not.  Due to the significant complexity and limited time between the enactment and the effective dates of this TCJA provision, many taxpayers failed to realize that Section 965 tax applied to them. In addition, since the IRS did not update the applicable forms in 2017 (i.e. Form 5471), it is understandable that many taxpayers may have missed it.

Taxpayers should be aware of the potential risk if their 2017 and 2018 tax returns were filed without fully understanding the implication of the Section 965 transition tax.  Generally speaking, it is better to address any noncompliance proactively with the IRS rather than risk the issue identified by the IRS upon audit.

For more information, or if you have any questions about this or any other tax matter, please contact your Wilkin & Guttenplan advisor.

April Peng

Author April Peng

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