Tax & AccountingSeptember 23, 2021

IRS Streamlines Filing Compliance Procedure for Code Sec. 965 Transition Tax

By: CCH AnswerConnect Editorial

IRS Streamlines Filing Compliance Procedure for Code Sec. 965 Transition Tax

The IRS describes the Streamlined Filing Compliance Procedures for reporting the Code Sec. 965 tax (the “transition tax”) on the accumulated post-1986 deferred foreign income of a specified foreign corporation. Deferred foreign income is the greatest amount of the specified foreign corporation’s deferred income, as of either November 2, 2017, or December 31, 2017. The transition rule treats the deferred foreign income of a specified foreign corporation as subpart F income.

Reporting Requirements for the Transition Tax

Amounts of includible income for the tax year must be reported on Form 965, Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System. Form 965 is used to report amounts included in income for a taxpayer’s 2017 or 2018 tax year. Form 965 should be attached to the income tax return or other applicable form.

IRS Guidance on the Transition Tax

The IRS has provided guidance on the Code Sec. 965 tax through several Frequently Asked Questions (FAQs).

General Section 965 Questions and Answers (including Transfer and Consent Agreements) answers questions that are not specifically related to the 2017 or 2018 tax year. The FAQs include general information on payment obligations and also cover Transfer and Consent Agreements under Code Secs. 965(h) and 965(i).

FAQs on 2017 returns, Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns, address a taxpayer’s filing obligations and payment requirements with respect to the transition tax. The instructions in the FAQs are for filing 2017 returns with an amount of transition tax.

FAQs relating to 2018 return filing and payment obligations, Questions and Answers about Tax Year 2018 Reporting and Payments Arising under Section 965, address many questions from taxpayers who make the election to pay the tax in eight annual installments. The portion of the installment due is referred to as the “section 965(h) net tax liability.”

Streamlined Filing Compliance Procedures

When a taxpayer uses the Streamlined Filing Compliance Procedures, a specific number of tax years (generally the most recent three years) are remedied. Taxpayers that have a Code Sec. 965(a) inclusion and use the Streamlined Filing Compliance Procedures must come into compliance for the transition tax in the submission and include the tax year in which the transition tax inclusion might occur (usually 2017 and/or 2018). That year must be included even if it is not within the standard three-year lookback period.

Taxpayers that submit late returns under the Streamlined Filing Compliance Procedures cannot elect to pay the net tax liability in installments.

Finally, since years 2017 and/or 2018 and forward are included in the disclosure scope, noncompliant years prior to that time may have previously untaxed subpart F income or Code Sec. 965 amounts. If the taxpayer does not report the subpart F income or Code Sec. 965 amounts, a submission to the Streamlined Filing Compliance Procedures does not constructively provide the taxpayer with previously taxed earnings and profits (PTEP).

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