Internal Revenue Code § 965, as added by the Tax Cut and Jobs Act of 2017, requires a controlled foreign corporation (“CFC”) to include in its Subpart F income its post-1986 accumulated but previously untaxed earnings as of November 2, 2017 or December 31, 2017. A CFC is a foreign corporation more than 50 percent of the stock of which is owned by United States shareholders. “United States shareholder” for this purpose is a shareholder who owns at lease 10 percent of the outstanding stock of the foreign corporation.
United States shareholders of a CFC must include in their gross income for U.S income tax purposes their proportional shares of the CFC’s Subpart F income. IRC § 965 requires a United States shareholder of a CFC to include in his gross income his proportional share of the CFC’s post-1986 accumulated but previously untaxed earnings as of November 2, 2017 or December 31, 2017.
The Streamlined Procedures are a popular means for taxpayer to become compliant with United States laws concerning foreign income, accounts, and entities. The Streamlined Procedures are available to a taxpayer whose noncompliance was nonwillful, and has not yet come to the attention of the IRS. Under the Streamlined Procedures, whether for a resident or a nonresient of the United States, the taxpayer must file FinCEN Forms 114, Report of Foreign Financial and Bank Accounts, “FBARs,” or amended FBARs as needed for the last six years. The taxpayer must also file U.S. income tax returns or amended U.S. income tax returns, and U.S. information returns or amended information returns, as needed for the last three years for which the filing deadline, as extended, has passed.
Under the Streamlined Procedures, whether for residents or nonresidents of the U.S., the taxpayer must pay, or arrange to pay, tax due on the tax returns, and interest on the tax. In addition, under the Streamlined Procedures for residents of the United States, the taxpayer must pay a “miscellaneous Title 26 offshore penalty” equal to five percent of the high aggregate balance of his or her foreign financial accounts as of the end of each of the preceding six years. There is no penalty under the Streamlined Procedures for nonresidents of the U.S. The taxpayer must write “Streamlined Domestic Offshore Procedures” or “Streamlined Foreign Offshore Procedures,” in red ink at the top of the first page of each income tax return or information return submitted in a Streamlined Procedures case, depending on whether the taxpayer is a resident or a nonresident of the U.S.
When a taxpayer makes a conforming submission under the Streamlined Procedures, whether as a resident or a nonresident of the U.S., the taxpayer’s noncompliance for all earlier years is forgiven.
Recently, the IRS clarified that where a Streamlined Procedures applicant has not complied with the IRC § 965 requirement of recognizing in gross income his proportionate share of a CFC’s post-1986 accumulated but previously untaxed gross income, and 2017 precedes the tax years otherwise includable in the taxpayer’s Streamlined Procedures submission, the taxpayer’s Streamlined Procedures submission expands to include U.S. income tax returns or amended income tax returns, and U.S. information returns or amended information returns, as needed for 2017 and all forward years.
For example, taxpayer makes a Streamlined Procedures in September, 2021. Taxpayer has not filed a U.S. income tax return for the last 10 years, and has not extended his 2020 U.S. income tax return. In each of the last 10 years, taxpayer has owned more than 50 percent of the voting power of Foreign Corp., a CFC. As of November 2, 2017 or December 31, 2017, Foreign Corp. had post-1986 accumulated but previously untaxed gross income. Taxpayer’s Streamlined Procedures submission must include amended U.S. income tax returns and information returns as needed for 2017, 2018, 2019, and 2020. The taxpayer must pay tax due on each of the four income tax returns, and interest on the tax. In addition, if the taxpayer is a resident of the United States, he or she must pay a “miscellaneous Title 26 offshore penalty” equal to five percent of the high aggregate balance of his or her foreign financial accounts as of the end of each of the preceding six years.
A taxpayer who makes a Streamlined Procedures submission involving IRC § 965 must write in red at the top of the first page of each delinquent or amended income tax return or information return submitted in the case “Streamlined Domestic Offshore Section 965” or “Streamlined Foreign Offshore Section 965,” depending on whether the taxpayer is a resident or a nonresident of the U.S.
Subpart F income that has been included in the gross income of a U.S. shareholder constitutes Previously Taxed Earnings & Profits and is not again subject to U.S. income tax when distributed to the U.S. shareholder.