IRS Warning Letter Warns Foreign Business Owners About Section 965 Transition Tax Enforcement

The IRS has recently begun sending “soft letters” (warning letters) to U.S. taxpayers owning foreign companies about IRC Section 965 transition tax compliance.

In July 2020, The IRS Large Business & International (LB&I) division expanded its list of compliance campaigns by adding one new campaign concerning the implications for individual taxpayers of section 965 as added to the Code by the 2017 tax law (Pub. L. No. 115-97 or the law that is known as the “Tax Cuts and Jobs Act” (TCJA)). As noted on the IRS website (July 6, 2020), the new campaign is described as follows:  Pursuant to the changes to IRC §965 under the Tax Cuts and Jobs Act, U.S. shareholders, including individuals, that directly or indirectly own at least 10% of the stock of a specified foreign corporation (SFC) are required to include in gross income their share of the SFC’s accumulated post-1986 deferred foreign income for the last taxable year of the SFC beginning before January 1, 2018, and report this amount on their returns for the taxable year in which or with which their SFC’s taxable year ends (generally, 2017 and/or 2018). The Internal Revenue Service will address noncompliance through soft letters and examinations.

We have seen a few of these IRS letters (Letter 6311) sent to clients who previously filed Form 5471, which indicates to the IRS that the individual owns a foreign corporation and may have had an obligation to pay transition tax for the 2017 and/or 2018 tax years.

The content of a Letter 6311 does confirm that its purpose is to serve as a notice rather than a direct opening of an examination or imposition of a penalty. The Letter 6311 states that the IRS has a Form 5471 on file and then requests the taxpayer to review its information to see if Section 965 transition tax was missed and, if so, to file an amended return to accurately report and pay the tax.

Letter 6311 then states that “failure to timely file a complete and accurate return and to pay tax due could result in penalty and interest charges.”

How to Respond to Letter 6311

If you received Letter 6311, you either you do or do not have Section 965 reporting and payment obligations. If you paid your Section 965 liability and fulfilled your obligations, there is no action required according to Letter 6311.  It still may be best to provide the IRS with a response letter explaining the situation and indicating that you have in fact fulfilled your Section 965 duties, so they will not pursue further action.

If you had a Section 965 liability and were not compliant, it strongly recommended that you seek experienced legal advice to resolve your situation.

If you own a foreign corporation and missed your transition tax deadline, or unsure if the transition tax applies to you, we can help you come into compliance Given the new IRS focus on the transition tax, and given that Section 965 is one of the more complex areas of the tax code, it strongly recommended that you seek experienced legal advice with Section 965 compliance.