In a memo, the IRS Small Business/Self-Employed (SB/SE) Division has issued guidance to its employees on how to process an offer in compromise (OIC) when the taxpayer’s offer seeks to compromise tax periods that include assessed and/or deferred taxes attributable to the Code Sec. 965 transition tax.
Under Code Sec. 7122(a), the IRS has the authority to compromise a taxpayer’s tax liability. An OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. The IRS generally won’t accept an OIC if it believes that the liability can be paid in full through an installment agreement or in a lump sum. (Form 656 Booklet Offer in Compromise)
Generally, Code Sec. 965 requires U.S. shareholders to pay a “transition tax” on the untaxed foreign earnings of specified foreign corporations as if those earnings had been repatriated to the U.S.
Code Sec. 965(h) allows a taxpayer to elect to pay its transition tax liability in installments over eight years. A taxpayer who is a shareholder in an S corporation may elect to defer a Code Sec. 965 assessment until a “triggering event” occurs, at which point the taxpayer can elect to pay the net Code Sec. 965 tax liability in installments over eight years (installment payment election). (Code Sec. 965(i))
Processing OIC with a Sec. 965 liability.
The IRS SB/SE Division has provided guidance, in a memo, for processing an OIC that includes Code Sec. 965 liabilities.
According to the memo, there are unique issues involving OICs that include Code Sec. 965 liabilities, including the taxpayer’s ability to defer the assessment, that may affect the processing and investigation of those offers.
The memo states that the processing, investigation, and resolution of any offer involving Code Sec. 965 liabilities depends on:
- Whether the taxpayer made a Code Sec. 965(h) election or a Code Sec. 965(i) election; and
- Whether there is a current assessment under Code Sec. 965 and the tax payment is deferred under Code Sec. 965(h), or a Code Sec. 965 assessment will not occur until a triggering event in accordance with Code Sec. 965(i).
The memo provides instructions in an if/then format for employees to follow when determining how to process and investigate offers involving Code Sec. 965 liabilities.
For example, if a Form 656, Offer in Compromise, which includes a tax year ending 12/31/2017 or 12/31/2018, or with a tax year ending in 2018, is received for processing, then the Process Examiner will review the IDRS tax module for codes involving Code Sec. 965 liabilities to see if any deferral elections have been made. If the taxpayer made a deferral election but there is no tax assessment recorded on the module, then the offer is not processable. However, if the Form 656 includes more than one year, but only one year has issues relating to Code Sec. 965(h) or Code Sec. 965(i) then the offer is processable.
The memo notes that consideration of a taxpayer’s ability to repatriate the foreign earnings that are the basis for the Code Sec. 965 liabilities may require the assistance of an Abusive Tax Avoidance Transaction Revenue Officer to evaluate financial information and assist in conducting research relative to the taxpayer’s income and assets.
The memo also includes the steps employees should follow when recommending acceptance of an offer that includes Code Sec. 965 liabilities.
This memo’s effective date is March 30, 2020.
To continue your research on OICs, see FTC 2d/FIN ¶T-9601; United States Tax Reporter ¶71,224.01.
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