The American Institute of CPAs (AICPA) requested that the U.S. Department of the Treasury and the Internal Revenue Service (IRS) provide relief for estimated tax penalties imposed under Internal Revenue Code section 6654 and section 6655 for any taxpayer subject to the provisions of section 965 as enacted by the Tax Cuts and Jobs Act (TCJA). Section 6654 applies to individuals and section 6655 applies to corporations. Section 965 requires certain United States shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States.
Annette Nellen, CPA, CGMA, Esq., chair of the AICPA Tax Executive Committee, recommended in the January 9 letter that Treasury and the IRS “issue guidance establishing that the additional amount of tax due as a result of section 965 is not included in the calculation of a taxpayer’s required annual payment for purposes of sections 6654 and 6655 for the 2018 and subsequent tax years.”
“Taxpayers faced substantial uncertainties relating to how to determine the amount of their actual tax liability for the 2018 taxable year as regulations addressing many of the statutory changes made by the TCJA were not yet available or were released late in the year as proposed regulations,” Nellen wrote. Furthermore, “Taxpayers who were subject to section 965 inclusions had their 2017 tax liability significantly inflated by a one-time amount. The calculation and inclusion of the separate tax liability under section 965 creates uncertainty among taxpayers as to what amount from their 2017 return represents the safe harbor amount,” she stated.
The determination of the correct safe harbor amount is further complicated for S corporation shareholders who elected under section 965(i) to defer their entire section 965 tax liability until the occurrence of a triggering event, Nellen wrote. In subsequent tax years, a similar issue reoccurs if a taxpayer was required to make a section 965 installment payment in the prior year, she stated.
Nellen explained in the letter that taxpayers are generally required to make prepayments of estimated federal income taxes. Individuals, with limited exceptions, are required to pay at least 90 percent of the tax due for the current year or either 100 percent or 110 percent (based upon their individual adjusted gross income levels) of the amount of tax shown on their U.S. income tax return for the prior year, whichever is smaller. Corporations, other than large corporations, are required to pay at least 100 percent of their income tax due for the current year or 100 percent of their tax amount shown on their U.S. income tax return for the prior year.