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July 10, 2020

IRS announces new IRC Section 965 transition tax campaign to focus on individuals

The IRS Large Business and International (LB&I) Division announced on July 6, 2020, a new campaign that will examine individuals' compliance with the IRC 965 transition tax.

This announcement follows the IRS's campaign that was announced in November 2019, which focused on corporate compliance (see Tax Alert 2019-2010).


IRC Section 965, added by the Tax Cuts and Jobs Act (TCJA), imposed a transition tax on untaxed foreign earnings of certain specified foreign corporations (SFCs) 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%.

The IRC Section 965 requirements apply to US shareholders of SFCs, including individuals, that directly or indirectly own at least 10% of the SFC's stock. These shareholders must include in gross income their share of the SFC's accumulated post-1986 deferred foreign income for the last tax year of the SFC beginning before January 1, 2018. This amount must be reported on their returns for the tax year in which or with which the SFC's tax year ends. Final IRC Section 965 regulations were released in January 2019 (see Tax Alert 2019-0232).

LB&I campaign

LB&I said its goal "is to improve return selection, identify issues representing a risk of non-compliance and make the greatest use of limited resources." The campaign was identified through LB&I data analysis and suggestions from IRS employees, according to the announcement. The IRS will conduct the campaign through soft letters and examinations.


After the expiration of the People First Initiative on July 15, 2020 (see Tax Alert 2020-0722 for details on the initiative), the IRS is expected to start examinations of several hundred high net worth individuals, according to comments made by LB&I Commissioner Douglas O'Donnell on June 18, 2020, at New York University's 12th Annual Tax Controversy Forum. The announcement of a new campaign targeted at individuals with transition tax liability may signal that IRC Section 965 issues will be considered as part of those examinations.


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