Volume No. US-18-15
On July 2nd, the IRS Large Business and International division (LB&I) announced five new additional compliance programs. This will bring the total to 40 new compliance programs since January 31, 2017. The five most recent programs additions are
- Restoration of Sequestered AMT Credit Carryforward;
- S Corporation Distributions;
- Virtual Currency;
- Repatriation via Foreign Triangular Reorganizations, and
- Section 965 Transition Tax.
Restoration of Sequestered AMT Credit Carryforward
The recently enacted Tax Cuts and Jobs Act eliminated the corporate alternative minimum tax (AMT). Before it was repealed, a corporate taxpayer that was subject to AMT could carry forward, indefinitely, the AMT taxes paid as a minimum tax credit (AMT credit). This credit could be utilized against the corporation’s regular tax liability in future years. For tax years beginning after 2017 and before 2022, 50 percent of the excess AMT credits are either claimable against corporate taxpayer’s federal tax liability or refundable. Any remaining AMT credits are fully refundable in tax years beginning in 2021.
Pursuant to the requirement of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended by the Budget Control Act of 2011, the Office of Management and Budget (OMB) had determined that corporations claiming refundable AMT credits were subject to sequestration (automatic spending cuts made to deal with the government’s budget deficit).
Refund payments and credit elect and refund offset transactions processed on or after October 31, 2017 and, on or before September 30, 2018 will be reduced by the fiscal year 2018 sequestration rate of 6.6% irrespective of then the IRS received the original or amended return.
LB&I is initiating a campaign for taxpayers improperly restoring the sequestered Alternative Minimum Tax (AMT) credit to the subsequent tax year. Refunds issued or applied to a subsequent year’s tax, are subject to sequestration and are a permanent loss of refundable credits. Taxpayers may not restore the sequestered amounts to their AMT credit carryforward.
S Corporation Distributions
The IRS has identified three issues with respect to S Corporation distributions: (1) when an S Corporation fails to report gain upon the distribution of appreciated property to a shareholder; (2) when an S Corporation fails to determine that a distribution, whether in cash or property, is properly taxable as a dividend, and (3) when a shareholder fails to report non-dividend distributions in excess of their stock basis that are subject to taxation.
In IRS Notice 2014-21 the IRS opined that virtual currency is property for U.S. federal tax purposes. The Notice also provided information on the U.S. federal tax implications of convertible virtual currency transactions. Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practical. The IRS is NOT contemplating any type of voluntary disclosure programs to specifically address tax non-compliance regarding virtual currency.
Repatriation via Foreign Triangular Reorganizations
In December 2016, the IRS issued Notice 2016-73, which curtailed the claimed “tax-free” repatriation of basis and untaxed controlled foreign corporation earnings following the use of these transactions. The IRS is hoping to identify and challenge these transactions.
Section 965 Tax
Section 965 requires United States shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Taxpayers may elect to pay the transition tax in installments over an eight-year period. For some taxpayers, some or all of the tax will be due on their 2017 income tax return. The tax is payable as of the due date of the return (without extensions).
The IRS updated their Section 965 webpage on June 26, 2018. The IRS wishes to raise awareness of these filing and payment obligations.
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