November 8, 2019
IRS announces campaign to audit IRC Section 965 transition tax compliance
The IRS Large Business and International (LB&I) Division has opened a new campaign to examine companies' compliance with the IRC Section 965 transition tax, the IRS announced on its website November 4, 2019.
IRC Section 965, added by the Tax Cuts and Jobs Act (TCJA), imposed a transition tax on untaxed foreign earnings of foreign subsidiaries of US companies by deeming those earnings to be repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at 15.5%, and the remaining earnings are taxed at 8%. (For details, see Tax Alert 2018-0251.)
Final IRC Section 965 regulations were released in January. (See Tax Alert 2019-0232.) The rules were retroactive and applied to a foreign corporation's last tax year that began before January 1, 2018, and to a US shareholder's tax year in which or with which the foreign corporation's year ends.
The goal of the new LB&I campaign is to promote compliance with IRC Section 965. The IRS will conduct examinations of the reported IRC Section 965 liability on selected tax returns, in most cases looking at the returns for both 2017 and 2018. In addition, those staffing the campaign will provide technical assistance to teams examining IRC Section 965 issues, "with a focus on identifying and addressing taxpayer populations with potential material compliance risk." LB&I will also risk-assess returns selected as part of the campaign for other material issues, especially those "related to TCJA planning."
LB&I's announcement of an IRC Section 965 campaign aligns with the IRS's heightened focus on TCJA compliance. LB&I has publicly stated that it intends to examine tax planning around the TCJA, including the components underlying the calculation of a taxpayer's IRC Section 965 liability. IRS representatives have indicated that the IRS will be looking closely at taxpayers' earnings and profits calculations, the classification of assets as cash versus non-cash, and how taxpayers determined their foreign tax credits, among other issues. Exam personnel will also look at how IRC Section 965 intersects with other TCJA provisions, such as BEAT, GILTI and FDII. This is particularly significant given the extended six-year statute of limitations on assessments that applies to IRC Section 965 liabilities.