New campaign on Section 965 transition tax

Tax Hot Topics newsletter The IRS Large Business and International (LB&I) division announced on Nov. 4 that it has opened a new campaign to focus on compliance with the Section 965 transition tax. This represents an expansion of the May 21 compliance campaigns focusing on international tax reporting and withholding issues. See our prior coverage. Section 965, which was enacted by the Tax Cuts and Jobs Act of 2017 (TCJA), generally requires U.S. shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations. The provision applies with respect to the last taxable year of certain specified foreign corporations beginning before Jan. 1, 2018, and the amount included in income under Section 965 is includible in the U.S. shareholder’s year in which or with which such a specified foreign corporation’s year ends. A majority of taxpayers were required to pay the tax liability resulting from Section 965 on their 2017 and 2018 federal income tax returns.

According to the IRS, the goal of this new campaign is to promote compliance with Section 965, and it will be "providing technical assistance to teams on [Section] 965, with a focus on identifying and addressing taxpayer populations with potential material compliance risk." The campaign first will focus on 2017 tax returns, but also will examine 2018 returns. The IRS further indicated that selected returns will be risked and examined for other material issues, especially as it relates to TCJA planning.

The Section 965 campaign aligns squarely with the IRS's heightened focus on TCJA related compliance. This is especially important to note in light of the six year statute of limitations on assessments relating to Section 965. As a result, taxpayers should ensure that they sufficiently document and maintain records to support their Section 965 transition tax positions.

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

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