In a surprising development, the Internal Revenue Service (IRS) has announced that if a taxpayer’s 2017 payments, including estimated tax payments, exceed its 2017 net income tax liability described under Internal Revenue Code (Code) Section 965(h)(6)(A)(ii) (its net income tax determined without regard to Code Section 965) and the first annual installment (due in 2018) pursuant to an election under Code Section 965(h), the taxpayer may not receive a refund or credit of any portion of properly applied 2017 tax payments unless—and until—the amount of payments exceeds the entire unpaid 2017 income tax liability, including all amounts to be paid in installments under Code Section 965(h) in subsequent years. Thus, for taxpayers making an election under Code Section 965(h) to pay the transition tax over 8 years through installment payments, any overpayments of 2017 tax liabilities cannot be used as credits for 2018 estimated tax payments or refunded, unless and until the overpayment amount exceeds the full 8 years of installment payments.

The IRS’s position, announced on April 13, 2018 (the last business day before the normal due date for the filing of 2018 individual income tax returns), effectively allows the IRS to deprive taxpayers of the use of funds and credits for overpayments for a potentially multi-year period. This position is at odds with the normal practice of allowing refunds or credits of overpayments and arguably violates Code Section 7803(a), which provides for certain taxpayer rights. This position also would seem to be in conflict with Code Section 965(h) itself, allowing the Code Section 965 transition tax liability to be paid in eight backloaded installments rather than immediately. The AICPA sent a letter to the IRS on April 19, 2018, urging the IRS to change its position to avoid the “detrimental impact on all affected taxpayers, including individuals, small businesses and large corporations.” We are hopeful that the IRS will reconsider this misguided policy, but in the meantime, taxpayers need to be aware of it. Please contact one of McDermott’s lawyers if you think you might be affected by the IRS’s position on this subject.

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Photo of Lowell D. Yoder Lowell D. Yoder

Lowell D. Yoder focuses his practice on cross-border mergers and acquisitions, global tax planning and international tax controversies, representing high-tech, pharmaceutical, e-commerce, financial, consumer and industrial companies. He advises on tax-efficient structuring of cross-border acquisitions, dispositions, financings, internal reorganizations and joint ventures, as…

Lowell D. Yoder focuses his practice on cross-border mergers and acquisitions, global tax planning and international tax controversies, representing high-tech, pharmaceutical, e-commerce, financial, consumer and industrial companies. He advises on tax-efficient structuring of cross-border acquisitions, dispositions, financings, internal reorganizations and joint ventures, as well as tax-beneficial planning for intangible holding companies, global supply chains and multi-jurisdictional service arrangements. Lowell also represents clients before the Internal Revenue Service (IRS), handling audits and obtaining tax rulings. He works with an extensive network of lawyers worldwide, developing tax-favorable transactional and operational cross-border structures. Lowell is the global head of McDermott’s Tax Practice. Read Lowell Yoder’s full bio.

Photo of Sandra P. McGill Sandra P. McGill

Sandra McGill focuses her practice on international tax planning. Sandra works with US and non-US multinational companies, public and private as well as high net worth individuals and family businesses. Sandra has extensive experience advising clients on a broad range of cross-border tax…

Sandra McGill focuses her practice on international tax planning. Sandra works with US and non-US multinational companies, public and private as well as high net worth individuals and family businesses. Sandra has extensive experience advising clients on a broad range of cross-border tax issues. Read Sandra McGill’s full bio.

Photo of David G. Noren David G. Noren

David G. Noren focuses his practice on international tax planning for multinational companies. David advises clients on a wide range of “outbound” and “inbound” issues, with a particular focus on the subpart F anti-deferral rules, the application of bilateral income tax treaties, and…

David G. Noren focuses his practice on international tax planning for multinational companies. David advises clients on a wide range of “outbound” and “inbound” issues, with a particular focus on the subpart F anti-deferral rules, the application of bilateral income tax treaties, and the treatment of cross-border flows of services and intellectual property rights under transfer pricing and other rules. Read David G. Noren’s full bio.

Photo of Andrew R. Roberson Andrew R. Roberson

Andrew (Andy) R. Roberson focuses his practice on tax controversy and litigation matters. He represents clients before the Internal Revenue Service (IRS) Examination Division and Appeals Office and has been involved in more than 50 matters at all levels of the federal court…

Andrew (Andy) R. Roberson focuses his practice on tax controversy and litigation matters. He represents clients before the Internal Revenue Service (IRS) Examination Division and Appeals Office and has been involved in more than 50 matters at all levels of the federal court system, including the US Tax Court, several US courts of appeal and the Supreme Court. Andy has experience settling tax disputes through alternative dispute resolution procedures, including Fast Track Settlement and Post-Appeals Mediation, and in representing clients in Compliance Assurance Process (CAP) audits. He also represents individuals in Global High Wealth Industry Group audits and in connection with offshore disclosure programs. Read Andy Roberson’s full bio.