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What happens if you didn't pay the transition tax under 965(e)?

The Internal Revenue Service (IRS) recently provided guidance on the application of section 965(e) of the Code. This section applies specifically to those who receive income from “certain specified foreign corporations.” The law basically requires a transition tax on foreign earnings.

Who must pay this tax? The IRS requires United States shareholders as well as both direct and indirect partners of deferred foreign income corporations pay a transition tax on income from these corporations.

How was this tax reported? The agency required the report of such income within the 2017 tax return. This included the need to also file an IRC 965 Transition Tax Statement. This form included various information such as the taxpayer’s aggregate foreign cash earnings and deductions as well as any foreign taxes already paid.

What if the deadline was missed? Those who neglected to report this information on their 2017 tax returns have two options:

  • File an amended tax return. An individual or business can file an amended tax return for the 2017 tax year with the IRs. Taxpayers generally can file this amended form until October 14, 2018.
  • Low liability. The IRS recently stated that it will likely waive the late-penalty payment for individuals’ with a total transition tax liability that equals less than $1 million who pay the tax in full by April 15, 2019.

A failure to comply with tax obligations in this matter can result in late-payment penalties as well as additional monetary fees and, depending on the details surrounding the failure to comply, potential imprisonment. Additional options for compliance may be available.

Prompt action can reduce these risks. An attorney experienced in international tax law matters can guide you through the process and mitigate the risk of penalties and criminal charges.

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