The Large Business and International team (LB&I) within the US Internal Revenue Service (IRS) are responsible for a number of areas affecting international US taxpayers. This includes administration of business taxes and the international compliance programs, including the Streamlined Filing Procedures program.
Since 2017, LB&I have been identifying various compliance enforcement campaigns to focus their resources on. The number of active campaigns now exceeds fifty. These campaigns can take the form of general ’soft’ letters to certain taxpayers or can be more targeted, whether through correspondence or a formal examination.
One of the newer campaigns announced is the enforcement of the Section 965 transition tax or repatriation tax for individuals.
What is the transition tax?
The transition tax was brought in as part of the 2018 US tax reform passed very late in 2017. It was heavily reported on at the time as it impacted large US multinational companies. Essentially, they would be taxed on their accumulated overseas earnings in a bid to encourage them to repatriate the funds back to the US. However, this one-off transition tax would be at a reduced rate than would usually be paid on repatriated earnings. However, what was not as widely known was that this tax would also affect US individuals and their overseas companies.
For US individual taxpayers, there is a host of compliance reporting required for their various non-US interests. This includes receipts of gifts, bank accounts and certain non-US shareholdings.
Where US individuals own non-US companies these companies can be required to be reported annually as part of the US individual’s tax return. A typical example is a US citizen who lives in the UK and owns a UK company.
The individual may be subject to US taxes on the company income, dependent on the nature of the company. However, apart from the reporting burden each year, this historically was not necessarily an issue for many entrepreneurs with non-US active trading companies.
The imposition of the transition tax meant that the owners faced the same tax treatment as the large corporations and the historically accumulated earnings of their company would be taxed by the IRS.
What does the IRS’ new transition tax campaign mean?
Unlike other provisions of the 2018 tax rule changes, the transition tax applied to the last taxable year prior to 1 January 2018. Where the transition tax applied, decisions and planning were required to be taken in a short space of time as part of many taxpayers’ 2017 US tax returns. This had not only tax but operational implications for the business owners, such as cash extraction and asset investment.
Over time, the IRS have issued various regulations and pieces of guidance with respect to the transition tax for taxpayers and their accountants.
The current LB&I campaign highlights that they think enough guidance and time has passed for taxpayers to have correctly filed for and addressed any transition tax in relation to their non-US company interests.
LB&I have now begun sending letters to certain taxpayers, who previously reported their foreign companies to the IRS, to ask them to review their transition tax position and to action any amendments required to bring them into compliance.
Would you like to know more?
If you would like advice as to whether you are affected by the transition tax and how to ensure you are compliant with your IRS filing obligations, please get in touch with your usual Blick Rothenberg contact or Alex Straight whose details are to the right.