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United States taxpayers with stocks in controlled foreign corporations (CFCs) may soon see some tax relief. These individuals and entities were hit hard with recent tax reform. The Tax Cuts and Jobs Act (TCJA) resulted in a broadening of income inclusions for those with stocks in certain CFCs. As a result, they may have found themselves with an unexpected tax bill or possibly the subject of an audit if the feds decided the taxpayer failed to properly complete their tax returns.

New revenue procedures may provide some relief.

What changed?

The law defines a CFC as any foreign corporation where a United States shareholder owns more than 50% of voting power or value. The TCJA resulted in the repeal of Sec. 958(b)(4) which led to downward attribution. Downward attribution basically expands who the Internal Revenue Service (IRS) can consider an owner of CFC stock for tax purposes to include certain indirect owners.  

The repeal also broadened what the agency considers a CFC. As a result, the IRS could expect a larger number of taxpayers to report gross income amounts from these accounts.

What will the new regulations accomplish?

The IRS states the proposed rule will help ease the burden taxpayers bear to claim a foreign corporation is not a CFC for tax purposes and avoid additional tax obligations. The agency also states that in certain situations it will provide penalty relief for taxpayers who incorrectly navigate this complex area of tax law.  

This set of regulations and proposed rules is just one example of the unforeseen impacts of the TCJA. Due to these unintended consequences, taxpayers may have inadvertently erred in their tax reporting. These errors could result in a federal tax audit. Those who find themselves the subject of such an audit are wise to seek legal counsel.