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Streamlined filing may lengthen transition tax lookback period

September 2021


In brief

The IRS on August 17 updated its Streamlined Filing Compliance Procedures and Section 965 webpage to clarify that a taxpayer that uses the agency’s streamlined filing compliance procedures must include in its submission the tax year in which the Section 965 transition tax is levied (generally, 2017 and/or 2018), if the taxpayer is not compliant with Section 965. Accordingly, the lookback period for any streamlined filing submission involving specified foreign corporations (SFCs) with a Section 965(a) inclusion in 2017 must include 2017 and all subsequent years affected. In addition, taxpayers must account for and report Subpart F income and Section 956 amounts in their submission.

Action item: Taxpayers affected by the updated guidance should take into account that the impact of the guidance may be additional tax liability and penalty exposure for items beyond the Section 965 transition tax for the additional years required to be included in their submission. In addition, they should monitor the IRS website for additional guidance as the updated guidance does not address how they may be affected if they submitted a streamlined filing before the updated guidance was posted and whether any omission of information required to be included pursuant to the updated guidance would subject them to audit and assessment exposure for 2017.

In detail

The updated guidance provides that a taxpayer that uses the streamlined filing compliance procedures to come into compliance generally remedies a specific number of years — usually, the three most recent years for which the US tax return due date has passed. The streamlined procedures are intended to bring into compliance individual taxpayers who failed to report foreign assets, but the failure did not result from willful conduct on the taxpayer’s part. The streamlined procedures provide two eligibility categories, one for US residents and one for non-US residents. 

The updated guidance provides that taxpayers that own SFCs, have a Section 965 (a) inclusion amount, and are using the streamlined filing compliance procedures must include in their submission the tax year in which the transition tax is levied even if that tax year is not within the standard three-year lookback period, if the taxpayer is not in compliance with Section 965.  

The Section 965 transition tax, enacted as part of the 2017 tax reform legislation, generally treats as Subpart F income the greater of a SFC’s accumulated post-1986 deferred foreign income (DFI) as of November 2, 2017 or December 31, 2017. The one-time tax is levied at 15.5% on cash and cash equivalents and 8% on noncash and noncash-equivalent assets. The updated guidance provides that taxpayers submitting delinquent returns under the streamlined filing compliance procedures may not elect to pay their Section 965(a) tax liability in installments.

Since a SFC’s streamlined filing submission must include 2017 and/or 2018 and subsequent years affected by the Section 956 inclusion, noncompliant years prior to the submission scope may have previously untaxed Subpart F income or Section 956 amounts. The updated guidance provides that if the taxpayer previously did not report Subpart F income or Section 956 amounts, its streamlined filing submission does not constructively provide the taxpayer with previously taxed earnings and profits (PTEP) for pre-disclosure years. Therefore, a taxpayer using the streamlined filing compliance procedures must comply with Section 965 and PTEP reporting requirements and properly account for and report Subpart F income and Section 956 amounts in its submission. Only the amounts included in income by the taxpayer prior to the submission period and amounts included as part of the submission will constitute PTEP.

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Ruth Perez Kim

Ruth Perez Kim

Partner, Tax Controversy and Regulatory Services, PwC US

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