On Dec. 12, 2018, the U.S. Internal Revenue Service (IRS) posted a list of Frequently Asked Questions (2018 FAQs) and answers on IRS.gov to address how taxpayers are to report and pay the section 965 transition tax on 2018 returns. The 2018 FAQs are notable as they announce that many taxpayers with an overpayment of their 2018 income tax liability will be eligible for a refund even if they have an outstanding transition tax liability. The 2018 FAQs supplement a prior set of FAQs, issued and amended throughout 2017, which addressed taxpayers’ 2017 tax year return obligations. The 2018 FAQs are coming on the heels of recently released proposed regulations under section 965, and in advance of expected technical corrections from Congress. The release of the 2018 FAQs also coincided with the release of the draft instructions for Form 965, the tax form required to report the transition tax liability and payments. Like the 2017 FAQs, it is likely that the list of FAQs will be updated in the future.
The 2018 FAQs currently contain six questions and answers focused on the payment and refund of 2018 tax liabilities with regard to the transition tax. The main take away from the 2018 FAQs is that the IRS is apparently reversing its position with regard to taxpayer refunds, at least for certain taxpayers. The 2017 FAQs made clear that the IRS would apply any 2017 overpayment of regular tax as a payment toward the taxpayer's section 965 transition tax liability, if any, including future installments that would not otherwise be payable until future years. Under the new 2018 FAQs the IRS will allow certain taxpayer’s refunds of voluntary payments that were designated as 2018 income tax payments, and they will not apply these overpayments towards a taxpayer’s properly deferred outstanding net transition tax liability. The catch is that the guidance only applies to taxpayers that elected to pay their transition tax liability in installments using the general election to defer payment of the transition tax It does not apply to S corporation shareholders who made elections to defer their transition tax liability until a subsequent triggering event. Fiscal year taxpayers making their first transition tax installment payment in 2018 will still be subject to the no refund rule, but refunds will be available for their 2019 filing year.
In addition, due to the uncertainty surrounding 2017 overpayments, and how they would be applied to any outstanding transition tax liability, many taxpayers are unsure of the balance of their remaining net transition tax liability. The IRS acknowledged this issue in the 2018 FAQs and has promised to issue taxpayers an installment notice and payment voucher. Taxpayers can expect to receive this from the IRS approximately six weeks before the due date of their return. Alternatively, taxpayers may contact the IRS by phone to receive their payment liability information.
