A 965(i) election to defer tax must be on a paper filed return
Current IRS guidance requires taxpayers to file a paper tax return rather than e-file the return if the taxpayer wishes to make a Section 965(i). The current IRS position is contained in Q&A 17, footnote 8 of the IRS official Q&A for Section 965.
Section 965(i) allows shareholders in S Corporations to elect to defer payment of the tax due arising from the inclusion of deferred foreign income arising from section 965. The election can result in virtually permanent deferral because the tax is due upon a, “triggering event.”
A triggering event, with respect to any shareholder’s net tax liability, occurs whenever the following occurs first:
- The corporation ceases to be an S corporation;
- A liquidation or sale of substantially all of the assets of the S corporation, a cessation of business by the S corporation, the S corporation ceases to exist or any similar circumstance; or
- A transfer of any share of stock in the S corporation by the shareholder.
The IRS provided guidance in the, “Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns.” To make the 965(i) election, the taxpayer will have to file a paper Form 1040. Unfortunately, some e-file software may not provide an e-filing diagnostic that advises on the paper filing requirement.
RSM’s Washington National Tax office has communicated with the National Office of the IRS and has asked for guidance on how taxpayers who have e-filed may nonetheless make an election under 965(i).
In the meantime, if a return has already been e-filed with the election attached as a PDF, a best practice is to re-file the taxpayer’s return in paper format and write, “Superseding Return,” on the return’s first page in red, bold letters. While it is not clear whether individuals or trusts may file superseding returns, the taxpayer can argue that 965(i) merely requires the filing of the election prior to the extended due date of the return since the statute does not require that the election be made with an original return.
IRS guidance related to section 965 was issued by the IRS in April and is available to all taxpayers & practitioners. Affected taxpayer should promptly consult their tax advisors.