The Internal Revenue Service (IRS) is to offer waivers for expatriate Americans who faced late payment penalties relating to the new 15.5% one-off ‘transition tax’ on untaxed foreign earnings, introduced in the landmark Tax Cuts and Jobs Act at the end of last year
The legislation, hailed by President Trump as the biggest overhaul of the US tax code in a generation, imposed a transition tax on untaxed foreign earnings of foreign corporations owned by US shareholders by deeming those earnings to be repatriated.
Foreign earnings held in the form of cash and cash equivalents are taxed at 15.5%, and the remaining earnings are taxed at 8%. The transition tax generally may be paid in instalments over an eight-year period when a taxpayer files a timely election.
The new tax was originally intended to encourage multinationals such as Apple and Amazon to repatriate earnings, but an estimated one million expatriates and green card holders owning more than 10% of a controlled foreign corporation and living overseas also faced the prospect of having to pay the tax in stages, with the full amount payable upfront if the initial payment was missed.
Now the IRS says it will waive certain late-payment penalties relating to the section 965 transition tax, and provided additional information regarding the due date for relevant elections.
In some instances, the IRS says it will waive the estimated tax penalty for taxpayers subject to the transition tax who improperly attempted to apply a 2017 calculated overpayment to their 2018 estimated tax, as long as they make all required estimated tax payments by 15 June 2018.
For individual taxpayers who missed the 18 April 2018 deadline for making the first of the eight annual instalment payments, the IRS will waive the late-payment penalty if the instalment is paid in full by 15 April 2019 and the individual’s total transition tax liability is less than $1m. Interest will still be due.
Individuals who have already filed a 2017 return without electing to pay the transition tax in eight annual instalments can still make the election by filing a form 10040 with the IRS by 15 October 2018.
The IRS has added three new FAQs to its information page on the tax reforms which offers detailed guidance to taxpayers on reporting and paying the tax.
IRS FAQs on tax reform requirements are here.
Report by Pat Sweet
