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Issue 41347

Form 965, schedules A & B

Project Statement:

Determine if Form 965 and Instructions clearly communicates appropriate guidance to the public.

Goal Statement:

The goal of this project is to review Form 965 and Instructions and make recommendations to the IRS that will enhance customer service and improve the taxpayer’s experience.

TAP RECOMMENDATION

Form 965 Instructions, Page 1 – Contents

Specific Instructions Change to read: Schedule A (Form 965) – U.S. Share Holder’s Section… Schedule B (Form 965) – D Deferred Foreign Income Corporation’s Earnings & Profits Schedule C (Form 965) – U.S. Shareholder’s Aggregate Foreign Earnings and Profits Deficit Schedule D (Form 965) – U.S. Shareholder’s Aggregate Foreign Cash Position Schedule E (Form 965) – U.S. Shareholder’s Aggregate Foreign Cash Position – Detail Schedule F (Form 965) – Foreign Taxes Deemed Paid by Schedule G (Form 965) – Foreign Taxes Deemed Paid by Schedule H (Form 965) Section 1- Amounts Reported on Forms 1116 and 1118 and Disallowed Foreign Taxes Schedule H (Form 965) Section 2 – Applicable Percentage Disallowance of Foreign Tax Credit Not From Pass-Through The schedule names in Form 965 instructions are incomplete. The names should be modified to include the complete name of the Schedule by including, (Form 965) after the Schedule A, Schedule B, Schedule C, etc. Referring to a Schedule by the letter only may cause confusion as Schedule A, Schedule B, Schedule C (etc.) are names given to schedules used with Form 1040. Referring to the Schedules by their complete name will eliminate confusion. Besides changing the name of Schedules, A, B, C, D, E, F, G, H, on page 1 of the Instructions, as indicated in the paragraph above, the changes should be made throughout Form 965 instructions.

IRS Action:TAP reviewing IRS response

The table of contents in the January 2019 instructions for Form 965 provided the title of each related schedule. As such, we believe it would be highly unlikely that that filers could confuse the 965 schedules with 1040 schedules. Besides, the vast majority of Form 965 filers were domestic corporations who file Form 1120.

TAP RECOMMENDATION

Form 965 Instructions, Page 1 – Column 2, Definitions, above last paragraph

Insert directly above, E&P deficit foreign corporation.

E&P. E&P is the current and accumulated earnings and profits of any corporation. E&P is frequently referred to in other instructions, but there is no definition included. This definition will help the taxpayer understand the text within the publication.

IRS Action:TAP reviewing IRS response

We did not define the term “earnings and profits” because for each product, we consider the target audience when determining which terms to define. Our assessment was that a definition of earnings and profits was not necessary for this product. Note that we also do not define that term earnings and profits in the instructions for Forms 5471 and 1118 (two forms that a domestic corporation filing Form 965 would also complete).

TAP RECOMMENDATION

Form 965, Part III

E. Was the election provided for in Regulations section 1.965-2(f) (2) made? Yes ___ No ___

F. Was an election made under Code section 962 in determining the transition tax? Yes ___ No ___. If yes, please attach any related forms used in computing the transition tax (including forms used in claiming any possible foreign tax credit used to reduce or eliminate the transition tax). An individual may have made an election under Code §962, which allows an individual to be taxed as if he or she is a corporation. Such election may be beneficial since it may allow the individual to claim a foreign tax credit for foreign taxes imposed on the company’s income. IRC sec. 962 allows certain individuals to apply the tax rates of corporations for income includible in gross income under IRC sec. 951. But there is no place on Form 965 to show that the election under IRC sec. 962 is being made.

Instructions for Schedules E, F, and G (at page 2) address the election under section 962. Here’s the text of those instructions: “Deemed paid foreign taxes and disallowance (Schedules F, G, and H). Eligible individuals making a section 962 election and corporations should use Schedules F, G, and H to determine the foreign taxes deemed paid with respect to their section 965(a) inclusions and the portion of such deemed paid foreign taxes disallowed under section 965(g). Under section 962 and Regulations sections 1.962-1 and 1.962-2, an individual U.S. shareholder of a CFC may elect for a tax year to be taxed at corporate rates under section 11 on amounts included in his or her gross income under section 951(a) and to claim a foreign tax credit for foreign income taxes deemed paid with respect to such amounts under sections 902 and 960.”

It would be helpful to add a question as to whether such election was made to better allow the IRS to analyze the computation of the transition tax. It would also be helpful to then ask the taxpayer to supply any related forms used in computing the transition tax to allow for easier review of the actual tax due.

IRS Action:TAP reviewing IRS response

Regulations section 1.962-2(b) indicates that “a United States shareholder shall make an election under this section by filing a statement to such effect with his return for the taxable year with respect to which the election is made.” As such, the election would have already been made with Form 1040, and it is not necessary to duplicate this information on Form 965. An individual will only file Schedule F or Schedule G if a section 962 election is in effect. If an individual files a Schedule F or G, the IRS verifies that an section 962 election was made with the taxpayer’s Form 1040 return.

TAP RECOMMENDATION

Form 965, Instructions, page 2, left hand column

Who must file

…In addition, any person that would be required to include amounts in income under section 965 of the Code but for an aggregate foreign E&P deficit allocated in accordance with section 965(b) must complete and attach Form 965 to its tax return.

2017 Tax Year: If you already filed your 2017 Tax Return and reported income under section 965 transition tax, which may have also included a separate Transition Tax Statement in accordance with IRS 2017 guidance, you do not have to file an amended 2017 return with a Form 965. However, you must attach Form 965 to your 2018 tax return. See Questions and Answers about Tax Year 2018 Reporting and Payments Arising under section 965, FAQ 6, for more information: https://www.irs.gov/newsroom/questions-andanswers-about-tax-year-2018-reporting-and-payments-arisingunder-section-965 The “Who Must File” discussion refers to the 2017 and 2018 tax years, but it is unclear whether Form 965 must be filed with a 2017 tax return.

Taxpayers affected by the transition tax have likely filed their 2017 tax returns and accounted for the transition tax following IRS guidelines in effect at that time. The Instructions do not give guidance as to whether those taxpayers must file an amended 2017 return and now include Form 965, or just file Form 965 with their 2018 return. That conclusion should be included in the Instructions along with the specific guidance on the need to file Form 965 with their 2018 return.

IRS Action:TAP reviewing IRS response

We understand and appreciate the concern, however, we believe that when a January 2019 set of instructions asks filers to “complete and attach Form 965 to its income tax return,” it is reasonable to believe that filers will know that the instructions are referring to the taxpayer’s 2018 income tax return, and that, if the instruction was instead intended to refer to the taxpayer’s 2017 income tax return (with an amended return required), the instructions would have stated so. Furthermore, as noted in the recommendation, to the extent clarification is needed, this clarification is available in other IRS published guidance. As indicated in a later response below, because of the effective date of P.L. 115-97, section 14103, which amended section 965 of the Code, the IRS had to issue guidance quickly and in a piecemeal manner. The January 2019 instructions for Form 965 were never intended to be read as the one and only source of guidance for completing tax year 2017 and tax year 2018 Forms 965.

TAP RECOMMENDATION

Form 965, Instructions, page 2, left hand column

Who must file

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).

Form 965-A and Form 965-B. Individual taxpayers and entities taxed like individuals must also file Form 965-A with their income tax return if they have a section 965 net tax liability in tax year 2017 or 2018, or both. A corporate taxpayer must file Form 965-B with their tax return when there is a net section 965 tax liability in tax year 2017 or 2018, or both. Consult the instructions to these forms for added details, including the requirements for filing these forms.

Taxpayers should be alerted in the Instructions the need to file Forms 965-A or 965-B if they have an inclusion.

IRS Action:TAP reviewing IRS response

At the top of Form 965, there is a statement that says “Go to www.irs.gov/Form965 for instructions and the latest information.” Form 965-A is listed as a related product in that location. As indicated in the previous response, because of the effective date of P.L. 115-97, section 14103, which amended section 965 of the Code, the IRS had to issue guidance quickly and in a piecemeal manner. The January 2019 instructions for Form 965 were never intended to be read as the one and only source of guidance for completing tax year 2017 and tax year 2018 Forms 965. It is but one of many sources of information issued by the IRS.

TAP RECOMMENDATION

Form 965, Instructions, page 2, right hand column

How To Complete

All U.S. persons … In addition, any person that would be required to include amounts in income under section 965 of the Code but for an aggregate foreign E&P deficit allocated in accordance with section 965(b) should file Form 965. Please attach a statement to the Form explaining this situation. The Form does not indicate where the taxpayer would disclose this E&P deficit situation. It may be helpful to add the text to the Instructions to address this situation.

IRS Action:TAP reviewing IRS response

There is no need to attach a statement. The taxpayer reports an aggregate foreign E&P deficit on the line 16 total of Schedule A, column (i).

TAP RECOMMENDATION

Form 965, Instructions, page 2, right hand column -Corrections

Corrections to Form 965

If you file a Form 965 that you later determine is incomplete or incorrect, file a corrected Form 965 … and attach a statement identifying the changes.

Domestic Partnerships, S Corporations or Other Pass-Through Entities

A domestic partnership, S corporation, or other passthrough entity should attach a statement to its Schedule K-1s that includes the following information for each deferred foreign income corporation for which such passthrough entity has a section 965(a) inclusion amount. See Questions and Answers about Tax Year 2018 Reporting and Payments Arising under section 965, FAQ 9, for more information: https://www.irs.gov/newsroom/questions-andanswers-about-tax-year-2018-reporting-and-payments-arisingunder-section-965 There are added burdens put on domestic partnerships, S Corporations or Other Pass-Through Entities arising from the transition tax in conveying pertinent information to their partners or owners. This added Instruction alerts them to this responsibility and refers them to a FAQ for additional guidance.

IRS Action:TAP reviewing IRS response

The January 2019 instructions for Form 965 was but one of many sources of guidance issued with respect to tax year 2017 and 2018 filings of Form 965. Because of the timing of P.L. 115-97 and the effective date of P.L. 115-97, section 14103, which amended Code section 965, the IRS had to issue guidance quickly and in a piecemeal manner. As such, it wasn’t practical to develop a comprehensive 100-page set of instructions that addressed all section 965 issues. These instructions were never intended to be read as the one and only source that addressed all section 965 issues.

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The 2020 TAP Annual Report highlights our key recommendations to improve IRS customer service and summarizes our key accomplishments and activities, including the 237 recommendations submitted to the IRS in 2020.

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