United States

IRS issues payment guidance affecting taxpayers subject to section 965


Late Friday, Apr. 13, the IRS revised the Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns. These revisions make clear that the IRS will 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. This new development could result in reducing or eliminating the amount of 965 transition tax liability hat may be deferred where the taxpayer elects an installment plan. In addition, this new IRS guidance could result in a material adverse impact on a taxpayer's cash flow because over-payments of 2017 regular tax will not be eligible for refund (or as a credit towards 2018 estimated tax) but will instead reduce outstanding 965 transition tax liability even if such liability would otherwise be due in the future. Taxpayers with a section 965 transition tax liability are strongly encouraged to speak with their tax advisors to ascertain, and potentially mitigate, the impact of this new guidance.

Taxpayers that have already made tax payments for 2017, Q1 of 2018, and the section 965 transition tax should first confirm that their payments have been processed as intended. Assuming payments were processed as intended, then to the extent any Q1 estimated tax for 2018 was included as part of a 2017 overpayment then that payment will likely be applied to the 2017 section 965 transition tax liability and may not be credited as a 2018 estimated payment under the new IRS guidance. As a result, in certain situations a separate and additional Q1 estimate for 2018 may need to be paid.

Corporate taxpayers with a fiscal year-end may have an additional planning opportunity. Those corporations that have an overpayment of estimated income tax for 2017 and that have covered their first annual installment of the section 965 transition tax through their 2017 estimated tax payments, or through a separate payment of the tax as specified in the FAQs, may want to consider requesting a refund of that overpayment prior to filing Form 1120. This is done by filing Form 4466, Corporate Application for a Quick Refund of Estimated Tax. IRC section 6425 allows a corporation to apply (via Form 4466) to adjust its estimated income tax paid during the taxable year and obtain a credit or refund of the excess amount resulting from the adjustment. The corporation may request that the excess amount be applied to any liability of an internal revenue tax owed by the corporation and that any excess be refunded. Fiscal-year corporations would need to file Form 4466 at least one day before the filing of the Form 1120. For those corporations filing Form 1120 on its due date without extension, Form 4466 needs to be filed at least one day before. Corporations that intend to file Form 7004 to obtain an automatic extension of time to file the Form 1120, would need to file Form 4466 by the non-extended due date of their Form 1120.

Taxpayers that are subject to the section 965 transition tax but have not yet made tax payments for 2017, Q1 of 2018, or the transition tax should consider the nuances of how these payments will be made. For example, taxpayers should consider whether to make a separate payment for Q1 of 2018 as opposed to one payment that includes 2017 tax and Q1 of 2018 together. Based on the new IRS guidance it appears that separate payments would prevent any amounts intended to be for Q1 of 2018 from being applied to the section 965 transition tax liability. Additionally, despite IRS guidance indicating that any over-payments may be applied to the taxpayers remaining section 965 transition tax liability, a separate transition tax payment should be made, even if nominal. Due to a quirk in the tax rules a separate payment may be required in order for a taxpayer to elect to pay their section 965 transition tax liability in installment payment over eight year.

Finally, RSM is aware that some taxpayers have experienced issues with their banks not being able to process wire payments to cover section 965 transition tax liabilities using the instructions provided by the IRS. While some banks have been able to process the payments, many taxpayers may need to have specific discussions with their financial institution's customer service function in order to ensure proper transmittal of the section 965 transition tax payment to the IRS. Taxpayers having issues making the wire payment should ask to speak with a customer representative at their financial institution. If the taxpayer's financial institution ultimately refuses to make the payment, the taxpayer should obtain documentation of their financial institution’s refusal to process the wire transfer and remit their payment by check to the IRS with the memo "section 965 transition tax."

Taxpayers should note that the IRS issued the revisions to the Q&A on the afternoon of Friday, Apr. 13 when the payment for many taxpayers was due in just a few days. Also it is important to note that the IRS has been inconsistent with respect to its guidance around payment of section 965 transition tax liability. More guidance, and hopefully clarity, from the IRS is expected in the coming months. In the mean time, taxpayers should keep an open dialogue with their tax advisors to ensure they remain up to date.