IRC 965 trained contact representatives in Accounts Management (AM) respond to taxpayer inquiries as well as process claims and other internal adjustment requests. The IRS is committed to a customer service program that encourages taxpayers to comply voluntarily with the tax laws and that assists them in meeting their obligations.

AM employees provide customers with assistance in a manner that warrants the highest degree of public confidence, CSR’s practice courtesy and proper communication techniques while ensuring that taxpayers receive complete and accurate responses.

The procedures in this IRM attempt to translate a variety of legal and administrative authorities into practical guidance assistors can use. These authorities take many forms: Treasury Regulations, Internal Revenue Code (IRC), etc.

IRM 1.2.61, Servicewide Policies and Authorities, Policy Statements for Customer Account Services Activities, contains the Policy Statements which relate to Customer Account Services activities.

The authorities for this IRM include:

Accounts Management Policy and Procedures BMF(PPB) has responsibility in this IRM for issuing guidance to employees who help taxpayers in resolving account issues, work amended returns, prepare installment agreements and process penalty abatement requests among many other duties. These procedures include instructing employees on how to input data into the Integrated Data Retrieval System (IDRS).

Guidance for Accounts Management employees comes from many sources, including:

IRM 21.1.1, Accounts Management and Compliance Services Overview, provides guidance to employees assigned to the Accounts Management organization.

Program Reports: The program reports provided in this IRM help Accounts Management CSR’s. For reports concerning quality, inventory, and aged listings, refer to IRM 1.4.16, Accounts Management Guide for Managers. View aged listings by accessing Control Data Analysis, Project PCD, on the Control-D/Web Access server, which has a login program control.

Program Effectiveness: Program effectiveness is determined by Accounts Management’s employees successfully using IRM guidance to perform necessary account actions and duties. Use the following reports to ensure program effectiveness:

Annual Review: Review the processes included in this manual annually to ensure accuracy and promote consistent tax administration.

See IRM 21.10.1, Embedded Quality (EQ) Program for Accounts Management, Campus Compliance, Field Assistance, Tax Exempt/Government Entities, Return Integrity and Compliance Services (RICS) and Electronic Products and Services Support, for quality data and guidelines for measurement. The Embedded Quality Review Program is the system used by Accounts Management for reviewing employees’ work quality. The quality review process provides a method to monitor, measure, and improve the quality of work. Quality review data is used to provide statistics on quality for the Service’s Business Results part of the Balanced Measures and/or to identify trends, problem areas, training needs, and opportunities for improvement.

Centralized Quality Review System (CQRS) is operated by JOC to provide independent quality review services for a number of product lines.

Perform local and operation reviews to focus attention on areas that require improvement. The Quality Assurance Manager’s staff performs local quality reviews. Local quality reviews are used for employee development and on-the-job instruction. The Accounts Management function may also request that local quality reviews be performed on processes not subject to the national quality review. Managerial reviews, prepared on EQRS, measure employee performance.

Quality review data is used by management to provide a basis for measuring and improving program effectiveness by identifying:

The Reference Net Legal and Tax Research Service provides an Acronym Database, to research acronyms found within this IRM.

See Exhibit 21.5.13-1, Acronyms and Abbreviations Used in This IRM, to research acronyms and abbreviations found in IRM 21.5.13.

Below are websites, job aids, or electronic tools needed to complete the work in Accounts Management:

An election made under IRC 965(i)(1) allows a shareholder of an S corporation that is an IRC 958(a) US shareholder to defer the assessment and payment of the IRC 965(i) net tax liability. An IRC 965(i) deferral is indefinite and will remain intact until a triggering event occurs, provided that a transfer agreement was not entered into at which time the IRC 965(i) deferred liability is assessed and payable.

Triggering events include:

See the tables in IRM 3.14.2.6.5.2 (5) & (8) IRC 965(i) Elections which explain where the IRC 965(i) elections were reported on the inclusion year return and the Transition Tax Statement and\or Forms 965 and 965-A.

The TC 971 AC 114 represents the IRC 965 Total Tax Liability minus any amount that was deferred under IRC 965(i). A TC 971 AC 114 is only applicable to BMF MFT’s 02, 05, 06, 34, and 44. A TC 971 AC 114 should only be present on the IRC 965 inclusion year module and/or the triggering event year module. There should not be a TC 971 AC 114 on non-inclusion years and/or non-triggering event year modules.

IMF TC 971 AC 114 - represents the total transition tax reported by the taxpayer and assessed. As explained in IRM 21.5.13.3.2, IRC 965 Tax Return and Transfer Agreement Identification IMF.

See the table below for a description of when a TC 971 AC 114 should be present on the module:

The taxpayer may have received a balance due notice because computer programming was not available for processing IRC 965 transition tax on 2017 returns until the beginning of July 2018. Some returns were processed prior to the completion of the programming and the correct transaction codes were not input during pipeline processing. This condition may have caused the taxpayer’s account to show a balance owed. Each account will require verification of the net tax liability under IRC 965 and the deferral amount located on master file. In some cases, it may be necessary to review the income tax return on EUP or request the paper return. On a balance due tax module, always ensure notices are delayed preventing unnecessary collection activity. If the IRC 965(i) deferred liability was included in the total tax liability in error, take the following action(s):

While analyzing IRC 965 transition tax accounts, review the tax return data on every module to determine whether the account accurately reflects the taxpayer’s IRC 965(h) election.

For tax years where a taxpayer has an IRC 965 inclusion or assessment the IRS does not have the authority to refund or credit elect payments in excess of the currently due IRC 965(h) installment until the entire liability for the year is paid, including the full net tax liability under IRC 965. Programming froze 2017 overpayment tax modules, and the identified modules were reviewed and worked through a manual process for accounts processed through cycle 201852. A TC 767/CRN 263 (minus) for the excess remittance amount will be necessary. This action will reduce the deferred amount.

For tax years where a taxpayer has an IRC 965 inclusion or assessment if any excess credit remains after all the installments are paid and after the input of the TC 767/CRN 263 (net tax liability under IRC 965 fully paid), refund the remaining excess credit or apply it to the next tax period as requested by the taxpayer. See IRM 21.5.8.4.2, Determining Correct Credit Transfer Format, for credit elect guidance.

Beginning in cycle 201903, this process was automated for tax returns with an IRC 965 inclusion or assessment and with payments in excess of the current IRC 965(h) installment. The only time an overpayment will be applied systemically is upon return settlement, not if an overpayment is created as a result of an adjustment. Those will need to be manually input. After midyear 2023, the systemic TC 766 CRN 263 posting will be obsolete, however the systemic posting of the TC 767 CRN 263 resulting from a DPC 64 payment posting will continue.

In a year where a taxpayer has an IRC 965 inclusion or assessment until the taxpayer pays the entire amount of the liability for a year (including any amount of net tax liability under IRC 965 for the year except to the extent deferred under IRC 965(i)), there can be no overpayment. Meaning the taxpayer is not entitled to a refund. If the posting or related processing (i.e., posting freeze codes) of the administrative credit (TC 766 CRN 263), which was created solely for the IRS to process IRC 965(h) elections and prevent balance due notices from being issued, caused the taxpayer’s account (for the inclusion year) to appear overpaid and the overpayment was erroneously refunded by the IRS, the event is considered a computer processing mistake and erroneous refund procedures are required by the IRS. IRM 21.4.5.2, Erroneous Refunds Overview, provides guidance.

For subsequent years after the inclusion year (or year of assessment) where the taxpayer does not have an IRC 965 inclusion or assessment, but where the taxpayer has an IRC 965(h) installment payment due, the taxpayer may have an overpayment that can be refunded or applied as a credit elect to a subsequent year. See FAQs 2018.

Questions and Answers about Reporting related to Section 965 on 2017 Tax Returns, Question and Answer 10, (for 2017 returns) and Question and Answer 2, (for 2018 returns) instructs transition tax taxpayers to make two separate payments, one for the transition tax (identified as a TC 670 with DPC 064) and one for the remaining regular tax due. This may be an installment of the IRC 965 transition tax owed or the remaining net tax liability under IRC 965(in full or in part).

The IRC 965 initial transition tax payments can be made electronically using Direct Pay, credit/debit card payment options and EFTPS. This is either the first year’s installment of the IRC 965 transition tax owed or the remaining net tax liability under IRC 965(in full or in part). For the IRC 965 transition tax payment, there is no penalty for taxpayers electing to use wire transfers as an alternative to otherwise mandated EFTPS payments. Taxpayers normally required to pay through EFTPS must submit the net tax liability under IRC 965 via wire transfer or they may be subject to penalties. On a wire payment of net tax liability under IRC 965, the taxpayer must use a 5-digit tax type code of 09650.

IRC 965(k) allows for a 6-year statute of limitations (SOL) on assessments for IRC 965 net tax liabilities. This provision allows 6 years from when the original return was filed, including extensions (3 years past the assessment statute expiration date (ASED)) to assess IRC 965 net tax liabilities.

If the ASED is within 90 days of expiration or expired, review the original return, and amended return if applicable, to determine the needed changes. Use the table below for procedures.

If there is an IRC 965 inclusion on the return and it was originally filed and accepted, and the ASED must be extended an additional three years, correct the ASED by inputting a TC 560 to extend the ASED an additional three years (i.e., three years from the IRS received date of the return). Input the following using CC REQ77:

If the Statute function forwards cases to the IRC 965 team to review, review the cases on an expedited basis to see if the adjustment has a non-IRC 965 tax increase.

IRC 965 Recovery cases, identified by the posting of a TC 971 AC 114 will show a total net tax liability greater than the TC 150. However not all of the recovery cases will be a result of TC 971 AC 114 greater than the TC 150. Headquarters will refer these cases to the IRC 965 Tiger Teams. Thorough research of the original and duplicate filed returns (if applicable) is performed on the same tax period for the inclusion year. Research may extend to subsequent years, which requires obtaining the original returns if paper filed or accessing MeF for electronically filed returns.

Taxpayers may not understand that the total IRC 965(h) tax must be reported only on the inclusion year. A common scenario for these cases shows only a part of the IRC 965(h) tax being reported with the total tax liability of the inclusion year return.

To research and process the IRC 965 recovery cases per IRC 6213(g)(2)(C), applicable returns must be obtained or accessed.

To create a CII case:

Adjustment process:

For accounts processed through 201852, the manual issuance of the Notice and Demand letter was a collaborative effort by Submission Processing (SP) and AM. Letter 3064C will be issued to taxpayers with an IRC 965(h) election advising them that the IRS assessed the 2017 tax liability (regular tax plus the IRC 965 transition tax) and reminding them that future installments are required to pay the tax in full. AM will issue letters on tax modules identified with a zero balance or overpayment/excess remittance. SP will issue letters on accounts with a balance due. In certain situations, a balance due account may require the issuance of a Notice and Demand letter by AM when perfecting the account.

HQ will periodically provide a Notice and Demand Excel listing to Brookhaven and Ogden for issuance of the Notice and Demand letters to accounts identified with a zero balance or overpayment/excess remittance.

CSRs will analyze the tax module for IRC 965 transactions and make the account whole (ensure accurate IRC 965 transactions, STAUPS, etc.). A valid IRC 965(h) election must have a TC 971 with AC 114 and a TC 766 with CRN 263. If necessary, correct any erroneous transactions or input missing transactions.

If a taxpayer has an IRC 965 inclusion and made an IRC 965(h) election and there is a payment in excess of the amount currently due, FAQs 13 and 14 (for 2017 returns) and FAQs 4 and 5 (for 2018 returns) explain that the Service cannot issue a credit elect or refund for the inclusion year until the net tax liability under IRC 965 is paid in full. A TC 767/CRN 263 (minus) for the excess payment amount will be necessary. This action reduces the deferred amount. If the net tax liability under IRC 965 is paid in full, (the full amount of the inclusion year tax liability, including the full net tax liability under IRC 965), the taxpayer may receive the remaining overpayment as a credit elect or refund, if available. If a taxpayer had an IRC 965 inclusion in a previous year but not in the current year, the taxpayer may receive a refund or credit elect of an overpayment for the current year as long as the taxpayer has fully paid their tax liability for the current year along with any installment payment due for the current year. See FAQ 1 of the General 965 FAQs.

An Account Management System (AMS) case note identifying the date and condition of the issuance of the Letter 3064-C, (i.e., 3064-C 02/07/2019 condition 1) is required.

Update the Notice and Demand Excel listing with the date the Letter 3064-C is input.

Input the Letter 3064-C with selective paragraphs ABDLM*Z. See IRM 21.5.13.2.8.1, Notice and Demand Letters (Letter 3064-C), for open paragraphs (LM*) selection. It may not be necessary to use all three open paragraphs. The first open paragraph fill-in is the tax module TC 150 amount. The paragraph Z fill-in is the Accounts Management phone number (800-830-5215 Ext 708 for BMF accounts and 855-223-4017 Ext 729 for IMF accounts).

The systemic programming for issuance of the Notice and Demand letters became available in cycle 201903. Accounts processed beginning in cycle 201903 will systemically receive one of the Notice and Demand notices. See IRM 21.5.13.3.6, IRC 965 CP Notices - IMF and IRM 21.5.13.4.5, IRC 965 CP Notices - BMF .

If the IRC 965(n) election is made, the net operating loss (NOL) is determined without regard to amounts related to inclusions under IRC 965, increasing the NOL available for carryforward or carryback, and the taxable income for the year that may be reduced by carryforwards or carrybacks is also determined without regard to such amounts.

For 2017 elections must be made by attaching a statement as shown in Q and A7 to a timely-filed return (including extensions). The IRC 965(n) election, once made, is generally irrevocable. See Treas. Reg. 1.965-7(e)(2)(iii), IRM 21.5.9.5.6.4, Carryback Applications and Claims with Section 965 Involvement, for IMF and IRM 21.5.9.5.10.8.8, Carryback Applications (TENTs) with Section 965 Involvement - CARES Act, for BMF. After 2017, elections are made on Form 965.

Cases identified for acceleration will receive a Letter 6154, Notice of Intent to Terminate Your IRC Section 965(h) Payment Agreement. The letter gives the taxpayer 30 days to respond with payment, plus interest, and a statement of reasonable cause explaining why payment was not made timely. If the taxpayer does not provide reasonable cause, TC 766/263 will be reversed, and account accelerated. This work will all be completed manually in Brookhaven CSCO.

If a possible acceleration case is identified and research shows no Letter 6154 has been sent, route the case via e-Fax to 855-384-8822, Attn: Brookhaven CSCO 965 Program. If research shows a Letter 6154 has been sent, there is no need to refer the case.

Regulations under IRC 965 allow IRC 958(a) U.S. shareholders of specified foreign corporations within the meaning of IRC 958(a) to elect to make certain basis adjustments with respect to each deferred foreign income corporation (DFIC) and each earnings and profits deficit foreign corporation (EPDFC). The election allows the shareholder’s basis in the DFIC stock or applicable property to be increased up to the amount of the IRC 965 previously taxed earnings and profits of the DFIC. There is a corresponding reduction to the EPDFC stock or applicable property of the shareholder.

Subject to transition rule the election must be made by the due date (including extensions) of the income tax return.

A transition rule provides that if the due date of the return was before May 6, 2019, the election, or revocation of the election, must be made by May 6, 2019. A revocation may only be made if the election was made before February 5, 2019.

The basis election statement is attached to the taxpayer’s return or, if using the transition rule, to an amended return. The statement must note items such as shareholder’s name, taxpayer identification number, and the statements required by the regulations.

An amended tax return reporting a basis election or election revocation may contain the following terms:

If the taxpayer files an amended tax return with the above terms, then check the amended return received date.

The following Return Processing Codes (RPC) and Computer Condition Codes (CCC) are used to identify IRC 965 tax returns and initiate specific processing:

The following TC 971 Action Codes are used for original return processing and post processing adjustments:

Taxpayers were given specific IRC 965 tax return reporting instructions. For tax year 2017, these instructions were provided in the Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns. For tax year 2018 and subsequent, form instructions provide guidance about the reporting of transition tax.

IMF account with an IRC 965(i) election:

Use the Employee User Portal (EUP) to review e-filed tax returns with an income inclusion. If a paper return is filed, use IDRS command codes (such as CC TRDBV) to research the entries. It may be necessary to request the return from Files.

If a transfer agreement is identified, close the case and leave a note on AMS, make a copy of the transfer agreement and e-Fax it to 855-384-8822, Attn: Brookhaven CSCO 965 Program.

CC IMFOLM assists in determining the IRC 965(h) deferral payments on accounts. See IRM 2.3.51-31, Command Code IMFOL Output Display - IRC 965 Liability, for a detailed display.

On the IMFOLM screen, "TAX LIABILITIES AND INSTALLMENTS" reflects the latest TC 971 AC 114 (total net transition tax liability). "DEFERRED AMOUNT" reflects the transition tax deferred (CRN 263). The screen also provides the yearly percentage of the 8 installments based upon the TC 971 AC 114 amount, remaining tax amount, and the yearly due dates of the installments. This screen assists in determining the amount of deferral paid and the remaining amount of deferral to pay. The screen recalculates when a new TC 971 AC 114 or TC 766 /767 is input.

When a payment (TC 670 with DPC 064) is received, a TC 767 CRN 263 systemically generates with the installment due date. There is no programming that requires the computer to determine if the installment payment is late. When a module is identified with a late installment payment, manually correct the TC 767 CRN 263 posted with an incorrect date to reflect the date of payment.

If the module has a TC 606 (accruals less than $5.00) posted, no action is required.

If the module dropped from IDRS, MFREQ the account. Use CC INTSTD to verify penalty and/or interest assessments/accruals.

Use CC IMFOLM to verify payments and installment due dates.
Caution: If the TC 766/767 data on CC TXMOD is incorrect, CC IMFOLM will also be incorrect.

Reversal of the TC 767 is required to correct the module.

If a TC 706 (offset) is present due to erroneous assessed interest or penalty, the above paragraphs 4 through 6 are required prior to inputting the offset reversals.

If the input of the TC 298 results in an overpayment, send Letter 544-C, Apology for IRS Error, which explains that the refund due to the adjustment notice is being held. Use one of the following floating paragraphs along with paragraph R:

While analyzing the module, you may identify a missing installment payment. View subsequent years to determine if an installment payment erroneously posted to those modules. If you can clearly identify the posted payment was meant to be an IRC 965 installment, reverse the payment and apply it as a TC 670 DPC 064 after you have completed the guidance above.

If you identify a refund of a misapplied installment payment while analyzing the module, input a TC 767 CRN 263 for the payment amount (placing the account in debit balance) prior to following IRM 21.4.5.6, Category D Erroneous Refund Procedures.

Due to programming limitations, Failure to Pay penalty and/or interest may have been charged when a taxpayer made an IRC 965 installment payment. These can be identified as follows:

If the module dropped from IDRS and is only available on CC IMFOLT, MFREQ the module. No action is required if the interest shown on CC IMFOLT is less than $1.00 or the module has a TC 606 (accruals less than $5.00) posted.

Input a TC 290 .00 CRN 263 for the dollar amount of the posted TC 767 using HC 4, SC 4, RC 190.

Input a TC 298 .00 CRN 263 (minus) for the dollar amount of the overpayment with an interest computation date to set the transaction date of the TC 767 CRN 263 using a PDC 1, SC 4, RC’s 050 and 190. The interest computation date is the earlier of the date of payment or the due date of the installment being collected via the TC 767. Multiple TC 767’s may be required if more than one payment is present. Use HC 4 if reversing offsets or no overpayment. If the input of the TC 298 results in a credit status (refund) and the following criteria are met, then a HC 3 is required when refunding the penalty and/or interest payment.

If a TC 706 (offset) is present on the module due to money being applied to the erroneous assessed interest and/or penalty, paragraphs 3 and 4 above are required prior to inputting the reversal of offsets.

A Letter 544-C, Apology for IRS Error, is required to explain the refund since the adjustment notice is being held. Use one of the following floating paragraphs along with paragraph R:

Complex cases will need to be reviewed and more guidance provided. If the complex case is in a balance due status, input a STAUP or TC 470.

While analyzing the account you may identify that required installment payments are not present. Review all subsequent tax years to clearly identify any/all posted payments that were meant to be applied as an installment, reverse the payment so the payment will post as a TC 670 DPC 064 after you completed the guidance above.

If you identify a refund of a misapplied installment payment while analyzing the module, you must input a TC 767 CRN 263 for the payment amount (placing the account in debit balance) prior to following IRM 21.4.5.6, Category D Erroneous Refund Procedures.

While analyzing the module, if you determine it meets acceleration criteria see IRM 21.5.13.2.10 IRC Acceleration Letters.

The following CP notices were created for IRC 965 processing:

An individual taxpayer (or taxpayer taxed as an individual) must complete Form 965-A, Individual Report of Net 965 Tax Liability, for every year for which the taxpayer has any net 965 tax liability outstanding and not fully paid at any point during the tax year, including deferred liabilities with respect to an S corporation. Form 965 - A is intended to be a cumulative report of a taxpayer’s net 965 tax liabilities through payment in full. Form 965 - A is used by individual taxpayers and entities taxed like individuals (for example, certain trusts and estates). The Form 965 - A is filed with the income tax return of the taxpayer by the due date (including extensions).

Review the tax module to ensure the IRC 965 transactions have posted to the account and make any necessary corrections.

The following Return Processing Codes (RPC) and Computer Condition Codes (CCC) are used to identify IRC 965 tax returns and to initiate specific processing:

The following Transaction Codes (TC) are used for IRC 965 pipeline processing and for post-processing adjustments:

Use the Employee User Portal (EUP) for identification of e-filed tax returns with income inclusions under IRC 965. The taxpayer is required to report the net tax liability under IRC 965 and any deferred amount on specific income tax return lines. If a paper tax return is filed by the taxpayer, attempt to use IDRS Command Codes (e.g., TRDBV) to research the entries. It may be necessary to request the tax return manually from Files.

Taxpayers were given specific IRC 965 transition tax return reporting instructions. For 2017, these instructions were provided in the Questions and Answers about Reporting Related to Section 965 on 2017 Tax Returns. For 2018, specific IRC 965 forms and instructions (Form 965) were created to facilitate IRC 965 transition tax reporting.

A BMF account with an IRC 965(h) election:

A BMF account with an IRC 965(i) election:

A transfer agreement is identified by an unreversed TC 971 AC 507 on the transferor account with a cross-reference to the transferee account and tax period. For more information, see IRM 3.17.277.2.4.20, Internal Revenue Code 965 (IRC 965) Payment (including IRC 965 Transferee Payment).

If a transfer agreement is identified, close the case and leave a note on AMS. Make a copy of the transfer agreement and e-Fax it to 855-384-8822, Attn: Brookhaven - CSCO 965 Program.

Command Code BMFOL with Definer M was created to assist in identifying the IRC 965(h) deferral payments on the account.

The amount listed under the title “Tax Liabilities and Installments” reflects the latest TC 971 AC 114 (Total Net Tax Liability under IRC 965) reported by the taxpayer.

The amount listed under the title “Deferred Amount” reflects the latest TC 766 CRN 263 remaining deferred amount.

The remainder of the screen display reflects the yearly percentage of the 8 installments based on the latest TC 971 AC 114 and the remaining installment amounts due based on the latest TC 766 CRN 263, along with the yearly due dates of the installments.

BMFOLM will assist in determining the amount of the IRC 965 deferral amount paid, as well as the remaining deferral amount still owed. It will determine if an installment amount was paid, overpaid with the overpayment being credited to the next installment or if the installment was underpaid.

BMFOLM will recalculate with the input of a new TC 971 AC 114 and/or a new TC 766/767 CRN 263 amount.

To expedite the processing of carryback cases involving IRC 965 that are being referred to CAT-A, select Carryback/Carryforward as the primary referral reason from the drop-down listing in CII. Select the correct secondary referral reason specific to the case and include remarks if necessary.

The following CP notices were created for IRC 965 processing:

Any corporate taxpayer who meets any of the following conditions must file Form 965 - B:

The Form 965 - B is filed with the income tax return of the taxpayer. If the taxpayer files the income tax return electronically, the Form 965 - B is filed with the electronic income tax return.