Related to Reporting of Income from Certain Specified Foreign Corporations

• IRS guidance about how taxpayers should report taxes due for 2017 that are related to certain specified foreign corporations under Internal Revenue Code section 965, as amended by the Tax Cuts and Jobs Act, needs further clarifications.
• The AICPA made recommendations to address issues related to four specific situations.

The American Institute of CPAs (AICPA) today informed the Internal Revenue Service (IRS) that some taxpayers, in order to file their 2017 tax returns, need additional clarification related to reporting requirements by certain specified foreign corporations under Internal Revenue Code section 965, as amended by the Tax Cuts and Jobs Act (Pub. L. No. 115-97).

The AICPA noted that the IRS provided guidance for these 2017 return filers in questions and answers posted on its website on March 17, but that there are still some unanswered questions.

Annette Nellen, CPA, CGMA, Esq., chair of the AICPA Tax Executive Committee, wrote, “In reviewing the FAQs, we have identified areas that remain uncertain or require additional clarification to allow taxpayers to properly calculate, report and pay their tax liabilities related to section 965.  Updated guidance in these areas is needed immediately, as taxpayers are required to make their initial payment and elections related to section 965 by April 17, 2018, the original return filing deadline.”

The AICPA’s April 4 letter (attached) listed four specific fact patterns to illustrate issues that need to be clarified and the 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).