On April 13, 2018, the IRS updated Questions and Answers about Reporting Related to Section 965 on 2017 Returns (the FAQs, originally released March 13, 2018). Among other guidance, the original FAQs had instructed taxpayers to make a separate "Section 965 Payment" for their tax liability under Section 965. As updated, the FAQs indicate the following:

— The IRS will apply a taxpayer's 2017 estimated tax payments (including credit elects from 2016), first, to its net income tax determined without regard to Section 965, and second, to its tax liability under Section 965. (New Q&A13)

— A taxpayer should make a separate Section 965 Payment only to the extent its liability under Section 965 is not satisfied by such payments or credits. (Updated Q&A10)

— To the extent that such payments or credits exceed the sum of the net income tax determined without regard to Section 965 and the first annual installment (due in 2018) under a Section 965(h) election, the IRS will apply the excess to the next successive installments. The IRS will only issue a refund or credit to the extent that the payments or credits exceed the entire unpaid 2017 income tax liability, including all amounts to be paid in installments under Section 965(h) in subsequent years. (New Q&A14)

Implications

Certain taxpayers with "excess" 2017 estimated tax payments (including credit elects from 2016) were prepared nevertheless to make a separate Section 965 Payment — so as not to jeopardize their installment elections under Section 965(h). The updated FAQs are welcome insofar as they indicate the circumstances in which such excess payments should relieve a taxpayer of a separate Section 965 Payment. But the updated FAQs also indicate that the IRS otherwise will treat excess payments or credits effectively as "prepayments" of the annual installments arising under a Section 965(h) election. For taxpayers with such excess amounts, the benefit of that election is reduced. Taxpayers needing to make a 2018 Q1 estimated tax payment should not include this amount with their 2017 extension payment. Taxpayers that have already filed their 2017 extension and included their 2018 Q1 estimated tax payment amount with their extension payment should now consider making a separate 2018 Q1 estimate tax payment to protect against 2018 underpayment penalties.

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