The Internal Revenue Service said Monday it is waiving some of the late-payment penalties pertaining to the section 965 transition tax on foreign earnings in the new tax law.
The IRS also offered more information for individuals who are subject to the section 965 transition tax regarding the due date for relevant elections.
The IRS explained the relief in three new FAQs, posted Monday on its tax reform page. These supplement 14 existing questions and answers that provide detailed guidance to taxpayers on reporting and paying the tax.
Section 965 of the Tax Code, which was enacted with the passage of the Tax Cuts and Jobs Act last December, levies a transition tax on untaxed foreign earnings of foreign corporations owned by U.S. shareholders by deeming those earnings to be repatriated. Under the new tax reform law, 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 Tax Cuts and Jobs Act aims to encourage U.S. corporations to repatriate the trillions of dollars in deferred taxes that have been held abroad for many years by allowing them to pay reduced taxes on the profits. But the new tax law introduces new complications for many taxpayers, including individuals as well as businesses, prompting requests for extra guidance from the IRS.
In general, the IRS’s new questions and answers indicate that:
• In some cases, 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 paying the first of the eight annual installment payments, the IRS said it will waive the late-payment penalty if the installment is paid in full by April 15, 2019. Without the relief provided Monday, a taxpayer’s remaining installments over the eight-year period would have become due immediately. The new relief is only available if the individual’s total transition tax liability is less than $1 million, however, but interest will still be due. Later deadlines apply to some people 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. The amended Form 1040 generally must be filed by Oct. 15, 2018. See the FAQs for details. For more information about the transition tax and other provisions of the new tax law, visit IRS.gov/taxreform.
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