On December 22, 2017, President Trump signed into law a sweeping tax bill which, among other provisions, imposed a one-time transition tax on overseas earnings and profits. This one-time repatriation was deemed to have occurred during the 2017 tax year.
Over the past several months, the IRS has provided official guidance regarding the implementation of the law in the form of FAQs. On June 4, 2018, the IRS announced that it would be updating its FAQs to address estimated payments and penalties for failure to timely pay the tax as well as installment payments.
The law allowed for taxpayers to elect to pay the tax over the course of eight annual installments. To qualify for the eight-year installment sale, taxpayers were required to make the first of the eight payments by April 17, 2018.
The IRS also indicated that 2017 payments would first be applied to net income tax determined without regard to the transition tax, and then to tax liability under the transition tax. Furthermore, taxpayers were advised that in the event an election to pay the tax over installments has been made, any overpayment of 2017 estimate payments in excess of the total tax due with the 2017 tax return will not be refunded, but rather, credited towards future installment payments of the transition tax.
The IRS provided relief for an individual who failed to timely pay their first installment of tax and consequently would lose the ability to elect the installment payment method. If the taxpayer’s net transition tax liability is less than $1 million, taxpayers can still elect the installment plan for payment of the tax if both the first and second installments are paid by the due date of the second installment on April 15, 2019. Note that in this scenario the taxpayer will be liable for interest on the late payment of the initial installment.
Finally, the IRS indicated that an individual that has already filed their 2017 tax return without an election to pay the transition tax over eight years, may file an amended tax return (Form 1040X) for purposes of filing the election. The IRS will treat the individual as having received an extension for filing the return for purposes of the election.
Taken together, these statements provide significant relief for individual taxpayers that did not file and pay the transition tax in a timely fashion.
For additional information on transition tax, please contact a member of Withum’s International Services Group by filling out the form below.