The American Institute of CPAs (AICPA) wrote the Internal Revenue Service (IRS) twice in April about guidance regarding the Internal Revenue Code (IRC) section 965 repatriation tax under the Tax Cuts and Jobs Act (Pub. L. No. 115-97).
In its April 4 letter, the AICPA informed the IRS that in order for some taxpayers to file their 2017 tax returns they needed additional clarification related to reporting requirements under IRC section 965. The AICPA emphasized that the Frequently Asked Questions (FAQs) posted on the IRS’s website on March 17 left some questions unanswered and that guidance was needed “immediately.”
The letter listed four specific fact patterns to illustrate issues that needed to be clarified and made related recommendations:
Scenario #1 – Underpayment of Initial Installment of the Section 965 Tax Liability
Recommendation: The IRS should treat the additional section 965 tax liability in a manner similar to a “deficiency” under section 965(h)(4). And, taxpayers should have the ability to apply any overpayment of tax related to their regular 2017 tax liability to any underpayment of tax related to their section 965 installment liability.
Scenario #2 – Overpayment of Initial Installment of the Section 965 Tax Liability
Recommendation: The IRS should provide taxpayers the option of having the section 965 installment payment overpayment refunded to them or make an election to apply it to one or more of the following current or future liabilities:
- second installment payment of the section 965 tax liability due in April 2019;
- regular tax underpayment for 2017 reflected on their filed tax return; or
- 2018 estimated tax payments.
Scenario #3 – Unintentional Non-payment of Initial Installment of the Section 965 Tax Liability
Recommendation: If the only section 965 inclusion on a taxpayer’s return results from an interest in a partnership that provided the taxpayer with a Schedule K-1 after April 17, 2018, the IRS should permit the taxpayer to make their initial section 965 tax liability payment with their timely filed extended tax return.
Scenario # 4 – Clarification of Required Calculations and Document Retention
Recommendation: The IRS should encourage taxpayers to prepare a pro forma copy of their tax return showing the calculation of the net tax liability for the taxable year with all section 965 related amounts and retain the documentation until one year after the expiration of the extension of the limitation on the assessment period referenced in section 965(k).
On April 19, the AICPA wrote the IRS about two FAQs the IRS posted on April 13, which supplement the March 13 guidance. The FAQs addressed the procedures for paying the section 965(h) liability and other amounts due on April 17, 2018 (scenario #2 above).
In the April 29 letter, Annette Nellen, CPA, CGMA, Esq., chair of the AICPA Tax Executive Committee, wrote the procedures would have a “detrimental impact on all affected taxpayers, including individuals, small businesses and large corporations.” The AICPA urged the IRS to amend the FAQs.
Nellen stated, “We believe that allowing taxpayers a choice in how their tax payments are applied is consistent with the 8-year installment payment period enacted as part of code section 965(h) and necessary for the fair and sound administration of the tax system.”