Office of Audit
OF THE TAX CUTS AND JOBS ACT DEEMED REPATRIATION TAX
PRESENTED SIGNIFICANT CHALLENGES
Final Report issued on May 22, 2019
Highlights of Reference Number: 2019-34-033 to the Commissioner of Internal Revenue.
IMPACT ON TAXPAYERS
On December 22, 2017, the Tax Cuts and Jobs Act (hereafter referred to as the “Act”) was enacted into law. The Act was the most significant revision of the U.S. tax code in more than 30 years, and according to the IRS, implementing the Act is its highest priority.
Among its many provisions, the Act provides for a tax (subject to special tax rates) on U.S. shareholders of specified foreign corporations (and U.S. persons that own interests through domestic pass-through entities that are U.S. shareholders of specified foreign corporations) through a one-time deemed repatriation of foreign accumulated earnings set forth under Section 965 of the Internal Revenue Code. The provision was immediately effective upon enactment and included several retroactive components for Tax Year 2017. The Joint Committee on Taxation estimate for Fiscal Years 2018 through 2027 was that this provision would generate revenue for the U.S. Government of $338.8 billion.
WHY TIGTA DID THE AUDIT
This audit was initiated to provide a status of the IRS’s progress in implementing the deemed repatriation tax on the post-1986 accumulated earnings and profits of foreign corporations.
WHAT TIGTA FOUND
The retroactive components of Section 965 presented significant challenges for the IRS in implementing the provision. The IRS made reasonable efforts to provide information to external stakeholders to explain Section 965 requirements and the process for filing a Tax Year 2017 tax return reporting a Section 965 inclusion amount.
However, in issuing guidance, the IRS initially did not specifically address the circumstances when taxpayers made payments in excess of the Section 965 portion of their Tax Year 2017 income liability immediately due and did not clearly inform taxpayers of the implications of making these excess remittances. This resulted in at least 115 taxpayers making $2.8 billion in payments on their Section 965 liability that they did not intend to make. The IRS explained that the Internal Revenue Code prevents it from refunding any excess remittances until the entire Section 965 liability is paid, even if the taxpayer elected to pay the liability in installments.
Because of the retroactive aspect of this provision, some taxpayers were required to report Section 965 tax on their Tax Year 2017 returns. The IRS had less time to develop a process to identify tax returns reflecting the repatriation tax as well as procedures to process the returns manually. As a result, some taxpayers experienced delays in the processing of their filed returns, and the process established contained risks, such as the proper identification of returns reporting the tax as well as the proper tracking of Section 965 tax payments. For example, as of November 8, 2018, about $11.2 billion in taxes have been tracked as being paid pursuant to Section 965, which is far below estimates of repatriation tax liability.
WHAT TIGTA RECOMMENDED
TIGTA recommended that if the IRS is unable to refund excess remittances to taxpayers because the entire income tax liability was not overpaid, it should take steps to inform taxpayers that their excess remittances were applied to the deferred Section 965 portion of their income tax liability and inform them of the status of the liability, including when the next installment payment is due. TIGTA also recommended that the IRS take steps to ensure that Section 965 payments were properly recorded and that the IRS establish a comprehensive compliance plan.
The IRS agreed with our recommendations and initiated corrective actions.
READ THE FULL REPORT
To view the report, including the scope, methodology, and full IRS response, go to:
Phone Number / 202-622-6500
E-mail Address / TIGTACommunications@tigta.treas.gov
Website / https://www.treasury.gov/tigta