As part of tax reform initiatives in 2017, Section 965 of the Tax Cut and Jobs Act (TCJA) requires that accumulated earnings in foreign subsidiaries which were previously untaxed in the U.S. as of Dec. 31, 2017, are now subject to tax on the U.S. shareholder’s tax return as of 2017. To many US owners of foreign corporations, this new law created a “phantom” tax liability since the tax was imposed on whether the accumulated offshore earnings were brought back to the US 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. Since the IRS did not update the applicable 2017 forms (i.e. Form 5471), it is understandable that many taxpayers may have missed it.

In November 2019, the IRS Large Business and International (LB&I) Division announced its campaign promoting IRC Section 965 compliance. The IRS has stated that the “goal of this campaign is to promote compliance with IRC 965. Most recently, the IRS has started issuing letters to taxpayers who are non-compliant and informs them of the penalties that will follow suit if they don’t amend their returns.

Given the complexities associated with this new provision, the potential planning opportunities to reduce the tax, and the potential penalties for non-compliance, WilkinGuttenplan can help you amend tax returns and guide you through the process of coming into compliance with the IRS. Having significant experience with the impact of Section 965 for mid-size businesses, we are here to assist you in any way we can.

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

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