Streamlined Filing Compliance Procedures and Section 965

 

The "transition tax" per section 965 of the Internal Revenue Code generally treats the accumulated post-1986 deferred foreign income (DFI) of a Specified Foreign Corporation (SFC) as Subpart F income. Section 965(a) defines DFI as the greater of the DFI of such SFC determined as of November 2, 2017 or December 31, 2017. For general information on the transition tax, see Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns.

A taxpayer who uses the Streamlined Filing Compliance Procedures to come into compliance remedies a specific number of tax years, generally the most recent 3 years for which the U.S. tax return due date (or properly applied for extended due date) has passed. Taxpayers that own SFCs and have a section 965(a) inclusion using the Streamlined Filing Compliance Procedures must come into compliance for the section 965 transition tax in their submission and include the tax year in which the transition tax inclusion might occur (generally 2017 and/or 2018) even if that tax year would not be within the standard three-year lookback period. In other words, the lookback period for any submission to the Streamlined Filing Compliance Procedures involving SFCs with a section 965(a) inclusion in 2017 must include tax year 2017 and include all subsequent tax years.

Note: The election to pay net tax liability in installments under section 965(h)(1) is not available for taxpayers submitting delinquent returns under the Streamlined Filing Compliance Procedures.

Since the disclosure scope for a submission to the Streamlined Filing Compliance Procedures with a SFC will include tax years 2017 and/or 2018 and forward, noncompliant years prior to the submission scope may have previously untaxed Subpart F income or section 956 amounts. Absent the Subpart F income or section 956 amounts being reported by the taxpayer, making a submission to the Streamlined Filing Compliance Procedures does not constructively provide the taxpayer with Previously Taxed Earnings & Profits (PTEP) for pre-disclosure years. In other words, a taxpayer using the Streamlined Filing Compliance Procedures must strictly comply with the Internal Revenue Code for purposes of section 965 and computing PTEP. Taxpayers must properly account for and report Subpart F income and section 956 amounts in their submission, and only amounts included in income by the taxpayer prior to the submission period and amounts included as part of the submission will constitute PTEP.

Please include "Section 965" written in red at the top of the first page of each delinquent or amended tax return and at the top of each information return. The addition of "Section 965" should be after the annotation of "Streamlined Foreign Offshore" or "Streamlined Domestic Offshore" written in red.

The following hypothetical for a Streamlined Foreign Offshore submission illustrates this requirement:

Taxpayer A is a U.S. citizen who has lived abroad for her entire adult life. On January 1, 2010, Taxpayer A formed a foreign entity classified as a corporation for U.S. income tax purposes, Foreign Co. B. Taxpayer A owns 51% of Foreign Co. B, which has a calendar year end, and manages a successful and profitable business through Foreign Co. B. Taxpayer A has not filed U.S. individual income tax returns for the last ten years, and she has never filed an extension of time to file any of her income tax returns. Taxpayer A also has never reported her signature or other authority over various foreign bank accounts, including the bank accounts of Foreign Co. B, on FBARs. Her failure to file income tax returns and FBARs was non-willful. On August 1, 2021, Taxpayer makes a submission to the Streamlined Foreign Offshore Procedures (SFO). Taxpayer A's SFO submission includes a Form 14653 and delinquent income tax returns for tax years, 2017, 2018, 2019, and 2020. Taxpayer A separately electronically filed FBARs with FinCEN. Taxpayer A must file Forms 5471 reporting her ownership of Foreign Corp. B, and Taxpayer A must address the section 965 transition tax on her 2017 income tax return including completing a Form 965. Taxpayer A must write in red ink on the top of the first page of each of her delinquent income tax returns and at the top of each information return "Streamlined Foreign Offshore Section 965."