United States

Service releases memo regarding tax overpayments and Sec. 965(h)

No refunds for taxpayers that defer transition tax

TAX ALERT  | 

The IRS’ Large Business and International (LB&I) Division has recently released a memorandum addressing the question of whether taxpayers that have elected to defer payment of the one-time transition tax on offshore deferred corporate earnings (also called the section 965 tax) in eight annual installments may receive a refund for any 2017 payments or estimated tax payments that exceed their net 2017 tax liability, without regard to any remaining transition tax installment payments.

The memorandum provides additional legal analysis, but remains consistent with Service’s answer to the question in their published list of Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns: taxpayers may not receive refunds for 2017 payments or estimated tax payments that exceed their net 2017 tax liability, not including the taxpayers remaining section 965 installment payments. Instead, memorandum reiterates that the excess amounts, if any, will be applied to the “next successive annual installment (due in 2019), and to the extent such excess exceeds the amount of that installment due, then to the next such successive annual installment (due in 2020), etc.”

As part of the analysis, the memorandum explains the Service’s legal authority to issue a refund or credit, as well as discusses the limited instances in which the Service may use that authority. The memorandum also address the application of the Service’s offset refund bypass procedures to taxpayers who made elections under section 965(h) to pay in installments, ultimately concluding that these procedures – which allow the IRS to bypass the general rule requiring the IRS to offset the refund of a taxpayer to satisfy an outstanding liability – do not apply.

Taxpayers that have elected under section 965(h) to pay their transition tax liability in installments should pay particular attention to this memorandum, and will need to be careful about making overpayments moving forward. Refunds of such amounts may no longer be available, nor will overpayments be a credit to next year’s income tax liability. Instead, overpayments will be offset against the taxpayers section 965 liability that would otherwise be payable in installments. In addition, taxpayers who may have filed refund claims for 2017 and who have not yet received them should inquire with the IRS as to whether such refunds will be issued.

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