Section 965 Transition Tax Overpayments
You may have questions concerning overpayment of your Section 965 transition tax liability. The Section 965 transition tax was a tax introduced in the Tax Cuts and Jobs Act (“TCJA”) in late December 2017. The 965 transition tax is imposed on U.S. shareholders who had deferred earnings offshore in certain foreign corporations. For most calendar-year taxpayers, the transition tax was a 2017 tax liability, but certain fiscal-year taxpayers and others in limited situations, the 965 transition tax liability may not arise until 2018. Additionally, due to the timing of the 965 tax liability, there were opportunities for certain taxpayers to elect to pay the liability in annual installments, and even defer payment until certain triggering events occurred, if ownership was held through an “S” corporation.
Given the Section 965 transition tax was introduced very late in 2017, and was a 2017 event for most taxpayers, there have been several instances where taxpayers have an overpayment of the 965 tax due for the 2017 tax year. Accordingly, a couple key questions have arisen regarding how the overpayments should be handled.
1. If a taxpayer who elected the eight-year installment method overpaid their first Section 965 tax installment, can they obtain a refund for the amount of the overpayment?
No. A taxpayer may not receive a refund or credit of any portion of properly applied tax payments unless and until the amount of payments exceeds the entire unpaid tax liability for the tax year in question, including all amounts to be paid in installments under section 965. If a taxpayer’s tax payments exceed the tax year’s net income tax liability and the first annual installment due under section 965, the overpayment will then be applied to the next successive annual installment (and to the extent such excess exceeds the amount of such next successive annual installment due, then to the next such successive annual installment).
2. A taxpayer made a 965 installment election for their 2017 tax year and has an unsatisfied, but properly deferred payment obligation, for their Section 965 net tax liability. The taxpayer’s 2018 income tax payments, including estimated tax payments, exceed their 2018 tax year income tax liability, and they have fully paid off 2017 Section 965 net tax liability annual installment payment obligations that are due. May he or she receive a refund of, or credit to their 2019 tax year, the 2018 overpayment?
Generally, yes. If the taxpayer made a Section 965 installment payment election for the 2017 tax year, the IRS should apply voluntary payments that are designated as 2018 income tax payments solely against the 2018 income tax liability. These payments include all estimated tax payments made toward the taxpayer’s 2018 tax year before the taxpayer’s 2018 income tax liability is due. If there is an overpayment of the income tax liability for the 2018 tax year, the IRS will refund it, or apply the overpayment as a credit to the taxpayer’s 2019 tax liability at the taxpayer’s request, except otherwise required by law including Section 6402 of the Code and the regulations under that section. The IRS should not offset the overpayment against any 2017 Section 965 net tax liability whose payment is properly deferred and not yet due. See question one, above, for the application of 2018 tax payments if a Section 965 installments election is made on the taxpayer’s 2018 tax return.