Section 965 audits are on the rise. Taxpayers under section 965 transition tax audits often face significant potential liability exposure. The IRS previously announced an active “campaign” specifically targeting unpaid section 965 transition tax liability resulting from amendments to section 965 under the Tax Cuts & Jobs Act. For taxpayers with ownership in foreign corporations, that could mean increased exposure to an IRS audit.
On December 22, 2017, Congress amended the Internal Revenue Code (“IRC”) Section 965 through the Tax Cuts & Jobs Act (“TCJA”). As amended, Section 965 required that certain taxpayers include a “Section 965 inclusion” in income as part and parcel of the transition to a participation-exemption tax system (or, at least, a quasi participation-exemption system). The Section 965 inclusion is an amount based on the accumulated post-1986 deferred foreign income of certain foreign corporations directly or indirectly owned by the taxpayer. Notably, taxpayers can have Section 965 inclusions due to ownership of deferred foreign income corporations (“DFICs”) indirectly held through pass-through entities that are themselves U.S. shareholders of DFICs.
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