In 2017, Congress passed the most significant tax legislation since 1986 – the Tax Cuts and Jobs Act of 2017 (TCJA). Under the TCJA, U.S. shareholders were required to pay a transition tax on untaxed foreign earnings of certain specified foreign corporations, as if those earnings had been repatriated to the U.S.
The “transition tax” per Section 965 of the Internal Revenue Code generally treats the accumulated untaxed post-1986 deferred foreign income of a specified foreign corporation as Subpart F income.
Under Section 965, corporations are expected to pay 15.5% transition tax on accumulated earnings and profits (E&P) related to cash assets. Other assets are subject to an 8% transition tax. Slightly higher rates apply to individuals.
What are Streamlined Filing Compliance Procedures?
The purpose of the IRS Streamlined Filing Compliance Procedures is to bring taxpayers into U.S. tax and reporting compliance. Specifically, it is to bring non-willful applicants with foreign income, assets, accounts, and investments into compliance. Generally, this includes the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed.
The IRS’s announcement
The IRS has updated the guidelines for the Streamlined Filing Compliance Procedures so that now the taxpayers that own foreign entities and have a Section 965 inclusion using the Streamlined Filing Compliance Procedures must come into compliance with the Section 965 transition tax in their submission and include the tax year in which the transition tax inclusion might occur (generally 2017 and/or 2018) even if that tax year would not be within the standard three-year lookback Streamlined period. In other words, the lookback period for any submission to the Streamlined Filing Compliance Procedures involving taxpayers with a Section 965 inclusion in 2017 must include tax year 2017 and include all subsequent tax years.
Also, the election to pay net tax liability in installments under Section 965(h)(1) is not available for taxpayers submitting delinquent returns under the Streamlined Filing Compliance Procedures.
The program still provides taxpayers a way to come into compliance with increasingly stricter requirements. For more information on how you might qualify for the Streamlined procedures, please contact your current Schneider Downs representative for additional information.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.