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IRS updates FAQs on transition tax, easing certain penalties

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Tax Hot Topics newsletterThe IRS issued updated its frequently asked questions (FAQs) page on the Section 965 transition tax on June 4 to state that it would not impose certain penalties related to estimates of installments of the tax. Notably, the updated FAQs do not provide for a refund mechanism for taxpayers that overpaid the tax through an additional tax payment or a credit-elect. For more information on the Section 965 transition tax, click here.

The Question 15 section on the IRS document states the IRS will not assess a penalty for an underpayment of estimated tax for taxpayers that made the election under Section 965(h) to pay the transition tax in installments, but applied their 2017 overpayment to their 2018 estimated tax liability, without calculating the net Section 965 liability, if the taxpayers’ estimated tax payment is sufficient to satisfy the first and second required installments for 2018 estimated tax.

Taxpayers who receive a notice from the IRS proposing or assessing penalties under Sections 6654 or 6655 who follow the fact pattern in the FAQs should respond to the notice accordingly and request an abatement of the penalties.

The Question 16 section states that the IRS will not assess any additions to tax or penalties against an individual taxpayer who makes an election under Section 965(h), but fails to timely pay the first installment of tax due, so long as the individual pays the total amount of the first installment on or before the due date for the second installment. In addition, the IRS will not require the subsequent installments to be accelerated under Section 965(h)(3).

Finally, the Question 17 section clarifies that an individual taxpayer who did not make a timely election under Section 965(h) can yet to do so on an amended return filed on or before the individual’s extended due date, which is Oct. 15, 2018. This relief is similar to the type of late-election relief provided under Treas. Reg. Sec. 301.9100-2.

Contacts David Sites
Partner, Washington National Tax Office
T +1 202 861 4104

Liz Askey
Managing Director, Tax Practice Policy & Quality
T +1 202 521 1513

Shamik Trivedi
Senior Manager, Washington National Tax Office
T +1 202 521 1511

Cory Perry
Senior Manager, Washington National Tax Office
T +1 202 521 1509

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