This article applies to individual taxpayers who may have had or currently hold an interest in a controlled foreign corporation or “CFC” and were subject to the Section 965 Transition Tax.
Abstract: In 2021, the IRS postponed certain deadlines from April 15 to May 17, including the income tax filing deadline. As this article explains, the guidance also postponed the due date of an individual’s deferred foreign income installment payment. A sidebar notifies readers that the IRS has resumed its delinquent debt/passport certification program.
Deferred Foreign Income Installment Payments
In Notice 2021-21, the IRS announced the postponement of certain deadlines for individuals to May 17, including the income tax filing deadline that’s normally April 15. The guidance also postponed the due date of an individual’s deferred foreign income installment payment to that date.
Generally, under Section 965 of the Internal Revenue Code, U.S. shareholders must pay a “transition tax” on the untaxed foreign earnings of specified foreign corporations as if those earnings had been repatriated to the United States. This transition tax applies to only the last tax year of a “deferred foreign income corporation” that begins before January 1, 2018. The tax code allows a taxpayer to elect to pay its transition tax liability in annual installments over eight years — commonly referred to as the Sec. 965(h) installment payment election.
If a person makes the election, the first installment payment is due on the due date (without regard to extensions) for the tax return of the relevant tax year. Each succeeding installment payment is then due on the due date (without regard to extensions) for the tax return of the tax year following the tax year for which the previous installment payment was made.
As mentioned, in Notice 2021-21, the IRS states that the deadline relief otherwise granted also postpones the due date of an affected taxpayer’s Sec. 965(h) installment payment, if applicable, to May 17, 2021.
For purposes of the Notice, an affected taxpayer is any person with a federal income tax return filed on Form 1040, Form 1040-SR, Form 1040-NR, Form 1040-PR, Form 1040-SS or Form 1040(SP) (Form 1040 series). An affected taxpayer may also be someone with a federal income tax payment reported on or made in connection with one of these forms, that, absent Notice 2021-21, was due April 15, 2021.
On its website, the IRS points out that the relief doesn’t apply to Sec. 965(h) installment payments for anyone who isn’t an affected taxpayer.
If you’re an affected taxpayer who’s made a Sec. 965(h) installment payment election, consider this a heads up that an installment payment is due in May. Contact your tax advisor with questions or concerns.
Sidebar: IRS Resumes Delinquent Debt/Passport Certification Program
The IRS has resumed certifying the debt of delinquent taxpayers as part of a program under which the U.S. Department of State can revoke the taxpayer’s passport.
Having a “seriously delinquent tax debt” is, unless an exception applies, grounds for denial, revocation or limitation of a passport by the State Department. If the IRS determines that a taxpayer has a serious delinquent tax debt, it will “certify” that debt to the State Department. A taxpayer whose debt has been certified cannot be issued a U.S. passport, and such a taxpayer may have an existing passport revoked.
Seriously delinquent tax debt is an individual’s unpaid, legally enforceable federal tax debt (including interest and penalties) totaling more than $54,000 (adjusted yearly for inflation). In previous announcements, the IRS has said that it was delaying new certifications of taxpayers who are considered seriously delinquent, and that existing certifications would remain in place unless the taxpayer’s tax situation changes. However, in March, the IRS announced on its website that it has resumed notifying the State Department of taxpayers with certified debt.
Affected taxpayers will receive a notice that they’ve been certified. The notice will encourage them to pay what they owe or enter into a payment agreement with the IRS to avoid jeopardizing their passports.
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