This guide is for Australian-based US taxpayers and other individuals with US filing obligations. It separates Form 1040, the Section 965 forms, transfer agreements, IRS account records and Australian tax questions. Your own agreement, filing history and the current IRS instructions control the final treatment.
Key Takeaways
- Receiving foreign shares, assets or an IRS notice does not make you a transferee.
- Form 1040 is the return. Forms 965-A and 965-C/D carry the Section 965 history.
- Reconcile the agreement, prior filings, payments and IRS transcript before you file or respond.
- Never pay or sign anything in response to an unverified notice.
What Is an IRC 965 Transferee?
What Section 965 means
Section 965 is the transition tax on accumulated deferred foreign earnings. It applies to the foreign corporation's last taxable year beginning before January 1, 2018, and IRS guidance covers individual reporting for 2017 and 2018 inclusions.
Three obligations are easy to confuse:
- The original income inclusion
- The net tax liability, which is not the gross inclusion
- Any installment or deferral payments that follow
A transferee assumes only the remaining unpaid payment liability, and only under the prescribed agreement. The original transferor generally stays jointly and severally liable for assumed installments.
What "transferee" means in the Form 1040 context
The term can show up with an individual return because Form 1040 is the main filing vehicle. Form 965-A, the transfer documents, and IRS account records hold the liability history.
Buying, receiving as a gift, or otherwise acquiring a foreign company interest does not automatically make someone a transferee. Status depends on the election path:
- Section 965(h): The transferee must be a single US person, not a domestic pass-through entity
- Section 965(i): The transferee is an S corporation shareholder
Terms worth knowing
- Net Section 965 tax liability: Inclusion-year tax with Section 965, less tax without it.
- Section 965(h) election: Payment in eight installments.
- Section 965(i) deferral: S corporation shareholder deferral until a triggering event.
- Acceleration: The remaining installments become due immediately.
- Transferor and transferee: The party handing off the liability and the party assuming it.
Don't rely on the label alone. Review the filing year, entity type, original election, transfer date and IRS records together.
When Does IRC 965 Liability Transfer?
Situations that can create a transferee issue
Two routes matter for individuals:
- Section 965(h)(3): A covered acceleration event, such as disposing of substantially all assets, can avoid acceleration if an eligible transferee assumes the remaining installments.
- Section 965(i)(2): A qualifying agreement preserves deferral after a covered S corporation stock transfer. A partial transfer triggers only the allocable liability.
Not every transfer is a trigger. Business interests, S corporation stock, estates and reorganisations each need specialist review of the facts.
Required agreements and deadlines
| Form | Purpose | Original deadline |
|---|---|---|
| 965-C | Section 965(h) transfer agreement | 30 days from the event |
| 965-D | Section 965(i) transfer agreement | 30 days; death exception applies |
| 965-E | Shareholder consent to a separate installment election | 30 days from the triggering event |
Mail the originals to the IRS. Attach duplicates to the event-year returns; an extended return does not replace the separate event-based submission. The instructions state no extension or late-agreement relief under Regulations 301.9100-2/-3.
Before submitting, identify:
- Parties and taxpayer identification numbers
- Transfer date and unpaid balance
- Assumed liability
- Signatures and IRS consent
Reconstructing the transferred balance
Trace the liability from the original Form 965 and Form 965-A through payments, deferrals, transfers and any acceleration. Form 965-C requires the transferor's most recent Form 965-A or 965-B.
The installment schedule under Section 965(h)(1) is 8% a year for years 1 to 5, then 15%, 20% and 25% for years 6 to 8.
Hypothetical example, not a real taxpayer: On a $1,000,000 net liability, the first installment is $80,000. If the transferor paid three installments ($240,000), the transferee assumes $760,000 and pays later installments as the transferor would have.
A later notice may differ from the original inclusion. Keep the inclusion, net liability, amounts paid, amounts deferred and amounts assumed separate.
Records to gather first
- Transfer agreement and ownership documents
- The transferor's Section 965 forms
- Prior Forms 1040 and 965-A
- Payment confirmations
- IRS notices, account transcripts and correspondence
How to Report an IRC 965 Transferee on Form 1040
Form 1040 versus supporting forms
Form 1040 is not the full Section 965 workpaper package. On the 2025 forms, Schedule 2, line 20 reports the "Section 965 net tax liability installment from Form 965-A." Line 21 excludes line 20, so the installment is disclosed but not added to the line 21 total that flows to Form 1040, line 23.
Line numbers change by year. Check the exact tax-year form and your software before relying on any of them.
Form 965-A and annual tracking
Individuals and taxpayers taxed like individuals file Form 965-A with the annual return, including extensions. File it for any year with a net liability or unpaid balance, and keep filing through the year the liability is fully paid, including S corporation-deferred amounts.
It is cumulative, not one-time. Carry prior-year information forward and reconcile current payments or transfers to the last filed form.
How the other forms fit
- Form 965: Computes inclusions, deductions and elections.
- Form 965-B: For corporations and REITs, not individuals.
- Forms 965-C, D and E: Transfer agreements and consents.
- Form 5471: Information reporting on certain foreign corporations.
A corporation files Form 1120, not Form 1040.
Practical filing workflow
- Confirm whether you are the transferor or transferee.
- Obtain the signed transfer agreement.
- Reconcile the original liability and prior payments.
- Complete the applicable Section 965 forms.
- Carry the correct installment amount to the Form 1040 package.
- Pay the installment separately, designated "IRC Section 965."
- Keep proof of filing and payment.
IRS guidance requires you to pay installments separately from current-year income tax and credit them to the earlier liability year. Installment due dates also run without regard to filing extensions.
Correcting an omitted or mismatched filing
If the transferee status, the amount, the Form 965-A history or a payment was wrong or missing, decide whether an amended return, corrected form or written response fits.
First work out whether the error was yours or an IRS processing error. Preserve the notice, transcript, return, agreement, payment proof and correspondence before correcting anything.
How to Review IRS Records and Respond to Notices
Reconciling the IRS account
Compare your account transcript with the filed Form 1040, Form 965-A, agreement, payment confirmations and notice. The Internal Revenue Manual describes account indicators such as TC 971 AC 507 for a transfer agreement and TC 670 DPC 64 for a designated Section 965 payment. Even then, a customer transcript may not show every field, so keep your own payment and filing records for comparison.
Practitioners report recurring problems:
- Misapplied payments
- Unresolved deferred credits
- Incorrect balances
- Penalties or interest that don't match the payment history
The Tax Adviser's 2023 analysis walks through these processing errors using a hypothetical $1 million liability.
Responding safely to a notice
- Note the tax year and response deadline.
- Verify the amount and legal basis.
- Gather supporting documents.
- Don't sign an unreviewed agreement or send an unsupported payment.
- Respond by the channel and address on the notice.
A CP56 notice signals a Section 965 installment due. If you disagree with the amount, call the number on that notice or the IRS individual Section 965 support line on 855-223-4017, extension 729.
Form 2848 lets an authorised representative act for you, and fax is permitted under its Where To File chart.
When IRS notices arrive, VJM Global can compile supporting documents, draft responses and manage audit readiness.
Common Mistakes and When Professional Help May Be Needed
Common reporting and transfer errors
- Assuming every foreign-business transfer creates transferee liability
- Treating Form 965-A as one-time
- Filing Form 965-B instead of Form 965-A as an individual
- Dropping the prior balance when carrying forward
- Overlooking a triggering event
- Reporting a notice amount without reconciling the agreement
Payment errors are just as costly:
- Merging an installment with unrelated tax
- Missing the payment deadline
- Discarding proof of payment
- Assuming a filing extension also extends time to pay
Cross-border considerations for Australian-based filers
US filing and Australian tax are separate questions. US citizens and resident aliens abroad still report worldwide income.
Qualifying taxpayers living abroad get an automatic two-month extension to file and pay. IRS guidance confirms interest still runs on tax unpaid by the regular due date, and Section 965 installment dates ignore filing extensions.
On the treaty side, Article 22(2) excludes US tax imposed solely because of citizenship from Australia's credit rule. Transferred Section 965 tax therefore has no automatic Australian offset.
The Australian foreign income tax offset has its own conditions, including that the foreign tax be paid and the related income be assessable in Australia. If you live in Australia, own an Australian business, or have foreign taxes tied to the income, get coordinated US and Australian advice.
Where VJM Global can help
Transferee cases depend on the facts. VJM Global supports US individual Form 1040 filings and provides cross-border accounting and international tax support for Australian clients. That can include reconciling Section 965 documents and coordinating Form 1040 workpapers.
This article is general information. Advice should rest on your actual agreement, filing history, IRS records and current guidance.
Frequently Asked Questions
What does IRS section 965 mean?
Section 965 created a transition tax on certain accumulated foreign corporate earnings. The original tax is distinct from later installment, deferral and transferee issues.
Is a 1040 the same thing as a tax return?
Form 1040 is the main US individual return. "Tax return" can mean the whole package, including schedules and Section 965 forms.
Does everyone do a 1040?
No. Individuals with a US filing obligation do, based on status, income and residency. Corporations file Form 1120. A Section 965 inclusion, installment or deferral requires filing even below the usual income threshold.
Where can I find line 2a on 1040?
On the 2025 Form 1040, line 2a is tax-exempt interest, not Section 965 tax. Check the revision for your tax year.
Does the IRS still accept faxes?
Sometimes. It depends on the unit, notice and form. Use only the fax number in your current notice or official instructions, and keep confirmation. Forms 965-C, D and E require mailed originals.
