Questions and Answers about Tax Year 2018 Reporting and Payments Arising under Section 965

The document entitled Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns provided answers to questions regarding tax year 2017 return filing and payment obligations arising under section 965 of the Internal Revenue Code (the "Code").  See Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns.  This document provides answers to questions related to tax year 2018 return filing and payment obligations arising under section 965 — including reporting and payment obligations resulting from amounts included in income for the 2017 tax year.

Q1: I made a section 965(h) election on my 2017 tax return, electing to pay the section 965(h) net tax liability portion of my 2017 income tax liability in eight annual installments.  How was the section 965(h) net tax liability portion of my 2017 income tax liability assessed and how do I make the second installment payment?

A1: The section 965(h) net tax liability was a portion of your overall 2017 income tax liability reported on your 2017 tax return.  The IRS assessed the entire 2017 income tax liability, including the 2017 section 965(h) net tax liability.  Section 965(h) allows taxpayers to pay the section 965(h) net tax liability portion of their overall income tax liability over eight annual installments.  The first installment is 8% of the assessed section 965(h) net tax liability and was generally due on the due date (determined without regard to any extension of time for filing) of your 2017 income tax return, except in the case of a taxpayer that received an extension of time to file and pay under §1.6081-5(a)(5) or (6).  Certain taxpayers, however, may be permitted to make the first and second installment payments on or before the due date of the second installment, as described in Q&A 16, Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns.  The second installment is also 8% of the assessed section 965(h) net tax liability and is due on the due date (determined without regard to any extension of time for filing) of your 2018 income tax return.  The IRS will issue an installment notice and payment voucher for the second installment approximately six to eight weeks before its due date.  The installment notice will provide the total amount of your unpaid 2017 section 965(h) net tax liability and the amount of your 2017 section 965(h) net tax liability to be paid by the installment notice due date. If you do not receive a notice and do not know the amount to be paid for your second installment, contact the IRS.  Individual taxpayers may contact the IRS at 855-223-4017, Ext. 729 and business taxpayers may contact the IRS at 800-830-5215, Ext. 708.

Your second 2017 section 965(h) net tax liability installment payment should be made separately from any income tax payment you make for 2018 because the second installment is not part of your 2018 income tax liability.  Your section 965(h) net tax liability installment payment may be submitted through various payment options:

  • EFTPS.gov (Web, IVR and Agent), credit cards, Direct Pay, bulk providers and batch providers – These payment options are available after January 2, 2019. Select tax year 2017, form number, and then IRC 965 from the dropdown options.
  • Fed Wire – Wire transfer your 965 Payment using the 5-digit payment type code 09650 and your 2017 tax return information.
  • Mail – Submit a separate check or money order for your section 965 net tax liability installment payment. Write on the front of your check or money order "2017 965 tax" and mail with your installment notice payment voucher. If you do not receive an installment notice payment voucher, submit your check or money order with a written statement to identify the payment as your second section 965(h) net tax liability installment payment due for your tax year 2017 return.

Your second 2017 section 965(h) net tax liability installment payment is a payment for your  2017 tax year.  The IRS cannot allow, or make a refund of, or apply as a credit to another year, any portion of properly applied 2017 tax payments until the entire 2017 income tax liability, including the full section 965(h) net tax liability, is satisfied.  Instead, the IRS will apply any amount with respect to your 2017 tax year in excess of the annual installment currently due to the next annual installment and, to the extent such excess exceeds the amount of that installment, to the next successive installment, and so on.  For rules concerning the availability of a refund or credit of amounts paid against your tax liability for 2018, see Q&A 3 below. 

Q2: I made a section 965(h) election on my 2018 tax return, electing to pay the section 965(h) net tax liability portion of my 2018 income tax liability in eight annual installments.  How is the section 965(h) net tax liability portion of my 2018 income tax liability assessed and how do I make the first installment payment?

A2: The section 965(h) net tax liability is a portion of your overall 2018 income tax liability and is reported on your 2018 tax return.  The IRS will assess the entire 2018 income tax liability including the 2018 section 965(h) net tax liability.  Section 965(h) allows taxpayers to pay the section 965(h) net tax liability portion of their overall income tax liability over eight annual installments.  The first installment is 8% of the assessed 2018 section 965(h) net tax liability and is generally due on the due date (determined without regard to any extension of time for filing) of your 2018 income tax return, except in the case of a taxpayer that received an extension of time to file and pay under §1.6081-5(a)(5) or (6). 

For the administrative purposes of the IRS and to help ensure that the IRS will properly account for your compliance, you should make two separate payments with respect to your 2018 income tax liability as follows: one payment reflecting income tax owed without regard to section 965, and a second, separate payment reflecting income tax owed resulting from section 965 and not otherwise satisfied by another payment or credit (the 965 Payment).  See Q&A 5 for information regarding how the IRS will apply 2018 estimated tax payments and amounts elected to be credited from the 2017 tax year.  Both remittances should be made by the due date of the applicable income tax return (without extensions).  However, the regulations under section 965 provide that if an individual receives an extension of time to file and pay under §1.6081-5(a)(5) or (6), the individual's due date for the 965 Payment is also extended.

Your section 965(h) net tax liability installment payment due with your return may be submitted through various payment options:

  • EFTPS.gov (Web, IVR and Agent), credit cards, Direct Pay, bulk providers and batch providers – These payment options are available after January 2, 2019. Select tax year 2018, form number, and then IRC 965 from the dropdown options.
  • Electronic funds withdrawal (EFW) – Authorize an electronic withdrawal of funds from a designated checking or savings account while filing electronically using the 965 Payment option. This payment method can only be used to submit a timely 965 Payment when your 2018 tax return is filed on or before the unextended due date.
  • Fed Wire – Wire transfer your 965 Payment using the 5-digit payment type code 09650 and your 2018 tax return information.
  • Mail – Submit a separate check or money order for your section 965 net tax liability installment payment. Write on the front of your check or money order "2018 965 tax" and include an appropriate payment voucher (such as Form 1040-V or 1041-V).

The payment owed without regard to section 965 may be made at the same or different time from the 965 Payment and normal payment procedures and requirements apply (for more information, see https://www.irs.gov/payments and also see Q&A 4 below regarding the application of excess payments).  The 965 Payment should be reported on your return as tax paid or deposited with an application for an extension if you filed an application for an extension of time to file the return.

Q3:  I made a section 965(h) election for the 2017 tax year and have an unsatisfied but properly deferred payment obligation for my 2017 section 965(h) net tax liability. My 2018 income tax payments, including estimated tax payments, exceed my 2018 tax year income tax liability and I have also fully paid all of my 2017 section 965(h) net tax liability annual installment payment obligations that are due.  May I receive a refund of, or credit to my 2019 tax year, my 2018 income tax overpayment?

A3:  Generally, yes.  If you made a section 965(h) election on your 2017 income tax year return, the IRS will apply voluntary payments that are designated as 2018 income tax payments solely against the 2018 income tax liability.  These payments include all estimated tax payments made toward your 2018 tax year before your 2018 income tax liability is due.  If there is an overpayment of the income tax liability for the 2018 tax year, the IRS will refund it, or apply the overpayment as a credit to your 2019 tax liability at your request, except as otherwise required by law including section 6402 of the Code and the regulations under that section.  The IRS will not offset the overpayment against any 2017 section 965(h) net tax liability whose payment is properly deferred and not yet due.  See, however, Q&A 4 below for information regarding the application of 2018 payments if a section 965(h) election is made on your 2018 tax return.   

Q4: I made a section 965(h) election on my 2018 tax return.  If my 2018 payments, including estimated tax payments, exceed my 2018 net income tax liability described under section 965(h)(6)(A)(ii) (my net income tax determined without regard to section 965) and my first annual installment (due in 2019) pursuant to an election under section 965(h), may I receive a refund of such excess amounts or credit such excess amounts to my 2019 estimated income tax?

A4: No. You may not receive a refund or credit of any portion of properly applied 2018 tax payments unless and until the amount of your payments exceeds your entire unpaid 2018 income tax liability, including all amounts to be paid in installments under section 965(h) in subsequent years.  If your 2018 tax payments exceed the sum of your 2018 net income tax liability described under section 965(h)(6)(A)(ii) (net income tax determined without regard to section 965) and your first annual installment (due in 2019), the excess will be applied to your next annual installment (due in 2020) and so on until the full amount of your 2018 section 965(h) net tax liability is satisfied or until the full amount of the 2018 tax payment is applied. 

Q5: I made a section 965(h) election on my 2018 tax return.  How will the IRS apply my 2018 estimated tax payments (including amounts elected to be applied as a credit against estimated tax from the 2017 tax year) to my 2018 net tax liability under section 965?

A5: The IRS will apply your 2018 estimated tax payments (including amounts elected to be applied as a credit against estimated tax from the 2017 tax year) first to the portion of your 2018 net income tax liability described in section 965(h)(6)(A)(ii) (your net income tax determined without regard to section 965), and then to your 2018 section 965(h) net tax liability, which is the portion of your 2018 net income tax described in section 965(h)(6)(A), including those amounts that are subject to payment in installments pursuant to your 2018 tax year election under section 965(h).

Q6: I reported income under section 965 on either my 2017 or 2018 tax returns (or both).  What forms am I required to complete and attach to my 2018 income tax return?

A6:  You must complete and attach Form 965 and either Form 965-A or 965-B to your 2018 income tax return.

If you reported income under section 965 in your 2017 tax year (that is, a tax year beginning in 2017) or 2018 tax year (that is, a tax year beginning in 2018), or both, you must complete and attach Form 965 to your 2018 income tax return.  In addition, if you would be required to include amounts in income under section 965 but for an aggregate foreign E&P deficit allocated in accordance with section 965(b), you must also complete Form 965 and attach it to your 2018 income tax return. 

If you are an individual taxpayer (or a taxpayer taxed like an individual) who has a section 965 net tax liability in either tax year 2017 or 2018 (or both), you must file Form 965-A with your 2018 income tax return. If you made a section 965(h) or section 965(i) election, you must continue to file Form 965-A with your income tax return each year as long as you have any section 965(h) net tax liability or section 965(i) net tax liability remaining unpaid at any time during a tax year.

If you are a corporate taxpayer who has a section 965 net tax liability in either tax year 2017 or 2018 (or both), you must file Form 965-B with your 2018 income tax return.  If you made a section 965(h) election or a section 965(m) election, you must continue to file Form 965-B with your income tax return each year as long as you have any section 965(h) net tax liability remaining unpaid at any time during a tax year or are an electing REIT with any section 965 amount not taken into account at any time during a tax year.

Exception. An organization exempt from tax under section 501(a) is required to complete Form 965 only if the section 965 amounts are subject to tax under section 511 (unrelated business income) or section 4940 (private foundation investment income).

The following examples illustrate the principles of these FAQs.

Example 1:  A taxpayer makes a section 965(h) election with respect to its 2018 section 965(h) net tax liability.  The taxpayer's 2018 net income tax liability described under section 965(h)(6)(A)(ii) (its net income tax determined without regard to section 965) is $1,000, and the section 965(h) net tax liability is $500.  The taxpayer made payments designated as 2018 tax year payments of $1,700.  The first annual installment of the taxpayer's 2018 section 965(h) net tax liability is $40, equal to 8% of the $500 section 965(h) net tax liability.  For 2018, the taxpayer must pay $1,040 (equal to the $1,000 tax liability determined without regard to section 965 plus the first $40 installment of the 2018 section 965(h) net tax liability).  For 2018, there is an excess remittance of $660 ($1,700 less $1,040).  After applying the $40 installment payment, the unpaid 2018 section 965(h) net tax liability is $460.  The $660 excess remittance is first applied to the $460 unpaid 2018 section 965(h) net tax liability, and the IRS will refund or apply as a credit to the following year's tax liability (if requested by the taxpayer) the $200 remainder, except as otherwise required by law including section 6402 of the Code and regulations under that section. 

Example 2:  A taxpayer made a section 965(h) election on its 2017 tax return and computed its section 965(h) net tax liability to be $4,375.  The first installment of $350 (8% of the $4,375 section 965(h) net tax liability) was paid by the due date of the 2017 income tax return.  The remaining unpaid section 965(h) net tax liability is $4,025 ($4,375 - $350).  The second installment amount is also $350 (8% of the $4,375 section 965(h) net tax liability). The taxpayer submits a second installment payment of $400 and designates the payment as a 2017 tax year payment.  The IRS will apply $350 in full satisfaction of the second annual installment and will apply the $50 excess remittance ($400 - $350) to the taxpayer's unpaid 2017 section 965(h) net tax liability and the amount of the third annual installment will be reduced by $50 to $300 ($350 - $50). 

Example 3:  A taxpayer made a section 965(h) election with respect to a 2017 tax year section 965(h) net tax liability of $500.  The taxpayer timely paid the first annual installment of $40 (8% of $500).  The taxpayer's 2018 income tax liability is $1,000 and the taxpayer has no section 965(h) net tax liability for the 2018 tax year.  The taxpayer made 2018 tax year payments of $1,700.  Additionally, the taxpayer paid the second $40 annual installment (a 2017 tax year payment) in accordance with Q&A 1.  For 2018, there is an overpayment of $700 ($1,700 less $1,000).  The IRS will not offset the 2018 overpayment against any 2017 section 965(h) net tax liability whose payment is properly deferred and not yet due.  The IRS will refund or apply as a credit to the 2019 tax year's tax liability (if requested by the taxpayer) the $700 overpayment, except as otherwise required by law including section 6402 of the Code and the regulations under that section.  The taxpayer has an outstanding section 965(h) net tax liability with respect to its 2017 tax year of $420 ($500 minus the $40 first installment payment and $40 second installment payment).

Q7: Just like the taxpayer in Q3, I made a section 965(h) election for the 2017 tax year and have an unsatisfied but properly deferred payment obligation for my 2017 section 965(h) net tax liability. My deferred payment obligation for the 2017 tax year was paid timely.

Unlike the taxpayer in Q3, I am entitled to a minimum tax credit pursuant to section 53 (the section 53 credit) for 2018.  My section 53 credit and my 2018 income tax payments (including estimated tax payments) exceed my 2018 income tax liability. May I receive a refund of my 2018 income tax overpayment or have that amount credited to my 2019 income tax liability?

A7: As described in Q3, the answer is generally yes. The IRS will take into account the section 53 credit (as well as all other refundable tax credits) in determining your 2018 income tax overpayment. The IRS will not offset any 2018 overpayment against any 2017 section 965(h) net tax liability whose payment is properly deferred and not yet due. See, however, Q&A 9 below for information regarding the application of 2018 payments if a section 965(h) election is made on your 2018 tax return.

Posted: 03/11/2019

Q8: I am a corporate taxpayer whose situation is like the one described in Q7. Is the refund, or credit to my 2019 tax year, of my 2018 income tax overpayment subject to sequestration?

A8: No. For taxable years beginning after December 31, 2017, refund payments and credit elect transactions due to section 53(e) will not be subject to sequestration. For more information, see Effect of Sequestration on the Alternative Minimum Tax Credit for Corporations (fiscal year 2019).

Posted: 03/11/2019

Q9: Just like the taxpayer in Q4, I made a section 965(h) election on my 2018 return. Unlike that taxpayer, I am entitled to a credit related to the prior years’ minimum tax pursuant to section 53 (the section 53 credit). After taking that credit into account, my 2018 payments, including estimated tax payments, exceed my 2018 net income tax liability described under section 965(h)(6)(A)(ii) and my first 2018 section 965(h) annual installment payment (due with my 2018 return filed in 2019). May I receive a refund or credit to my 2019 estimated income tax of that excess amount?

A9: No. If you made a 2018 section 965(h) election and your 2018 tax payments exceed the sum of your 2018 net income tax liability described under section 965(h)(6)(A)(ii) (net income tax determined without regard to section 965) and your first 2018 section 965(h) annual installment payment (due with your 2018 return filed in 2019), the excess will be applied to your next annual installment payment (due with your 2019 return filed in 2020) and so on until the full amount of your 2018 section 965(h) net tax liability is satisfied or until the full amount of the 2018 tax payment is applied. 

Posted: 03/11/2019