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A new compliance initiative announced by the IRS’s Large Business and International Division earlier this month pertains to section 965 of the Revenue Code – added by the 2017 tax reform law – which requires U.S. shareholders to pay a “transition tax” on untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States.
The IRS stated on its website that it is working to alert potentially impacted taxpayers about the obligations – and an official from the agency said on Wednesday that it expects to send thousands of letters starting in October.
Shareholders can include individuals, S corporations, partnerships, estate, trusts, cooperatives and tax-exempt organizations. Accumulated post-1986 deferred foreign income may be subject to the tax.
Prior to the law, individuals could defer taxes on income through investment in a foreign company.
According to the tax agency, there is a related deduction that lowers the effective tax rate to between 8 percent and 15.5 percent.
Taxpayers can choose to pay the one-time transition tax in a lump sum or over an eight-year period. For many, 2020 marks the third installment of payments.
Failure to comply with the law could result in interest and penalties.
As tax compliance among large businesses, in particular, has proven to be challenging for the IRS.
Of the 10,755 returns that were analyzed – and closed – by the LBI division during fiscal years 2015 through 2018, a report by the Treasury Inspector General for Tax Administration found that 47.2 percent were closed with no change to the return. The agency estimated that – accounting for the costs of examining the returns – about $22.7 million was spent on these returns, which generated no additional revenue for the government.