The IRS Large Business and International (LB&I) division has announced that it will target compliance with the Code Sec. 965 transition tax in one of its new audit campaigns
Generally, Code Sec. 965, which was added to the Code by the Tax Cuts and Jobs Act (TCJA, PL 115-97), requires U.S. shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the U.S. Code Sec. 965 applies to the last tax year of a specified foreign corporation that began before January 1, 2018, and the amount included in income under Code Sec. 965 is included in the U.S. shareholder’s income in the tax year in which or with which such foreign corporation’s tax year ends.
The term “U.S. shareholder” means a U.S. person who owns, or is considered to own under the attribution rules in Code Sec. 958(b), 10% or more of the total combined voting power of all classes of stock entitled to vote of any foreign corporation, or 10% or more of the total value of shares of all classes of stock of such corporation. (Code Sec. 951(b))
Generally, A U.S. person is a citizen or resident of the U.S., a domestic partnership, a domestic corporation, any estate (other than a foreign estate), and any trust that is controlled by a U.S. person or subject to supervision by a U.S. court. (Code Sec. 7701(a)(30))
In January 2017, the IRS announced a new audit strategy for LB&I known as “campaigns”. With the new campaigns, LB&I essentially shifted to examinations based on compliance issues that LB&I had determined presented greater levels of compliance risk, thereby improving return selection. The IRS initially selected 13 compliance issues when it rolled out this strategy. (See IRS rolls out Large Business and International campaign audit strategy)
New LB&I campaign
The new LB&I campaign will examine Code Sec. 965 transition tax compliance. In addition, to conducting audits, LB&I will provide technical assistance to its audit teams, with a focus on identifying and addressing taxpayer populations with the potential for material compliance risk.
Under the new campaign, LB&I will start by auditing 2017 tax returns; however, taxpayers chosen for audit will generally have both 2017 and 2018 returns examined, since for most affected taxpayers, liability for the transition tax will arise on tax return for the 2017 and/or 2018 tax years.
The IRS also anticipates that returns selected as part of the Code Sec. 965 campaign will also be examined for other material issues, especially those related to TCJA planning.
To continue your research on the treatment of pre-2018 deferred foreign income treated as subpart F income under Code Sec. 965, see FTC 2d/FIN ¶ O-2700 et seq.; United States Tax Reporter ¶9654.
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