IRS today provided additional information on how to comply with the transition tax payment when a triggering event occurs with S – Corporations (IR-2019-128). The updated FAQ explains when, how and where to file the Consent Agreements.
As per the provisions, S- Corporations are allowed to defer Section 965 transition tax liability after making the 965(i) election. Generally when the triggering event occurs (when S Corporation ceases to be an S Corporation, when a liquidation or sale of substantially all the assets occurs or when the shareholder of S- Corporation transfers the stock – whichever occurs first), the entire tax liability will be assessed on the shareholder’s tax return for that year. However, shareholder can make election under Section 965(h) and pay the tax liability in eight installments. Section 965(i)(4)(D) provides that the shareholder in such cases, must obtain consent of the Commissioner in order to pay in installments.
IRS explains in the updated FAQs that in such cases,
- shareholder must file a Consent Agreement within 30 days of the occurrence of the triggering event.
- IRS further clarifies that it is not possible for S Corporation to obtain the consent on behalf of the shareholders.
- The Consent Agreement may be filed with IRS Memphis Compliance Service Collection Operations at the following address: Memphis CSCO, 5333 Getwell Road MS 81, Memphis, TN 38118
- It is still required that the shareholders make Section 965(h) election on the tax return to pay the tax liability in eight installments.
- Form 965-A and 965-B, whichever is applicable must be updated as well.
- S-Corporation and the shareholders are jointly an severally liable to pay the triggered tax in installments.
FAQs have also been updated with some examples when there is an excess remittance of the transition tax.
For individual taxpayers who have a net tax liability under IRC section 965 in the individual’s 2017 taxable year of less than $1 million (i.e., the total of all eight installments is less than $1 million) and make a timely election under IRC section 965(h) but missed the April 18, 2018 deadline for making the first of the eight annual installment payments, the guidance in IRS FAQ#16 still applies: The IRS will waive the late-payment penalty (but will not waive the interest) and will not accelerate subsequent installments under IRC section 965(h)(3) if the individual pays the full amount of the first installment (and the second installment) by the due date for its 2018 return (determined without regard to extensions) (i.e., April 15, 2019 for most calendar year taxpayers).
Watch out however for state tax liability. Nearly all states require payment of the liability in the year of the section 965 inclusion and do not allow for the section 965(h) election, or otherwise spreading the liability over 8 years.
In recently published Newswire, IRS announced that it will grant penalty relief in certain cases with regard to repatriation tax under IRC 965.
In nutshell, following are the new three relief provisions:
In general, the questions and answers indicate that:
• 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. The amended Form 1040 generally must be filed by Oct. 15, 2018.
IRS accordingly updated the FAQ page and added these reliefs.
Please contact CPA Global Tax (www.cpaglobaltax.com) team if you have any questions regarding repatriation tax as well as GILTI tax.