Form 965-A Instructions: Installments, Due Events, and Penalties

Form 965-A is the annual ledger individual taxpayers use to report and track the one-time Section 965 transition tax on previously untaxed foreign earnings. You attach it to your income tax return for any year in which a Section 965 liability remains unpaid, use Part I to record the original liability and any adjustments, and use Part II to log installment payments cumulatively year over year. Calendar-year individuals whose inclusion year was 2017 made their eighth and final installment in April 2025, so most no longer file. The people still filing in 2026 are mostly S corporation shareholders who deferred under Section 965(i) and have since had a triggering event, and taxpayers whose inclusion year fell later than 2017 because of a fiscal-year foreign corporation.

Form 965-A is for individuals and entities taxed like individuals, including certain trusts and estates. Corporations filing Form 1120 use Form 965-B instead.¹

Figures You Need Before You Start

Form 965-A itself doesn’t compute the tax. The calculation happens on Form 965 and its schedules, and three numbers come off that work.

The first is the gross inclusion amount, your share of the accumulated post-1986 foreign earnings of the specified foreign corporations you owned at least 10% of. Those earnings were measured on November 2, 2017, and December 31, 2017, and the larger figure was used.² Form 965, Schedule A does this calculation.

The second is the Section 965(c) deduction, which brings the effective rate down to 15.5% on cash and cash equivalents and 8% on the rest. Form 965, Schedule D sorts the cash-versus-non-cash portions.

The third is the net Section 965 tax liability. Compute your income tax twice, once with the Section 965 inclusion (after the deduction) and once without it. The difference is your net Section 965 tax liability, and that is the number that carries onto Form 965-A.

Part I: Reporting the Liability

Part I is the record of each Section 965 inclusion year, the original liability for that year, any adjustments, and the current balance. If you had inclusions in more than one tax year because you held interests in foreign corporations with different fiscal years, each year gets its own line.

Part I also captures whether you elected to pay in installments, whether the liability was transferred to or assumed from another taxpayer, and whether a triggering event has changed the payment timeline.¹

Part II: Tracking Installment Payments

Part II is cumulative. Each year you carry forward the prior-year columns and add the payment made in the current year against each Part I line.

If you elected the eight-year installment schedule, the payments are back-loaded:

Years 1 through 5: 8% of the total liability each year
Year 6: 15%
Year 7: 20%
Year 8: 25%

The election had to be made by the original (unextended) due date of the return for the inclusion year and cannot be revoked.² No interest runs on the deferred portion as long as each installment is paid on time. If you did not elect installments, the full payment goes in the first column and the rest are blank.¹

Overpayments in any year are applied to the next installment, then the one after, and so on. No refund of any Section 965 payment is available until the entire liability is satisfied.³

How and When to Pay the Installment

Each installment is due on the original due date of your income tax return for that year, without extensions. For a calendar-year individual, that is April 15. An extension gives you more time to file Form 965-A, but the installment payment deadline does not move.¹

The installment must be paid separately from your regular income tax payment. It relates to tax assessed in a prior year and has to be credited to that year, and combining it with a current-year payment causes processing errors.³ The channel determines how you label it:

EFTPS or Direct Pay: select the tax year of the original Section 965 inclusion, the correct form number, and choose “IRC 965” from the dropdown.
Wire transfer: use payment type code 09650 with your inclusion-year return information.
Check or money order: write “965 Tax” on the front, note the inclusion tax year, and mail it separately with your installment payment voucher. Without a voucher, include a written statement identifying the payment as a Section 965(h) installment, the installment number, and the tax year.

If you had Section 965 income in more than one tax year, make a separate payment for each.³

Events That Make the Whole Balance Due

Four categories of events accelerate the remaining unpaid balance under the eight-year installment plan:²

Failure to pay an installment on time. Any late-payment penalty accelerates the entire remaining balance.
Selling substantially all your assets, including sales in bankruptcy.
Ceasing business operations.
Any similar circumstance the IRS treats as equivalent.

For asset sales, there is one relief valve: if the buyer signs an agreement with the IRS accepting responsibility for the remaining installments, the sale does not trigger acceleration and the buyer takes over the schedule.

The missed-payment rule is the one to watch. A late installment in year six doesn’t just produce a penalty on the 15% due that year; the 20% and 25% still scheduled for years seven and eight become due at once.

Penalties on a Late Installment

A late installment carries the standard failure-to-pay penalty of 0.5% of the unpaid amount for each month or partial month it is late, up to 25%.⁴ Interest runs on the unpaid amount at the IRS’s standard rate. And because the penalty itself is what triggers acceleration, the amounts now owed include whatever installments were still scheduled for future years.

S Corporation Shareholders Under Section 965(i)

S corporation shareholders had a separate option beyond the eight-year plan. Under Section 965(i), a shareholder whose S corporation held stock in a specified foreign corporation could defer the entire transition tax liability indefinitely, with no installments, until a triggering event.² The triggering events are:

Loss of S corporation status, whether by converting to a C corporation or otherwise ceasing to qualify.
Liquidation or shutdown: the S corporation sells substantially all its assets, ceases business, or stops existing.
Transfer of stock, including sale, gift, or transfer at death. A partial transfer triggers the tax only on the proportional share of the liability. If the transferee signs a transfer agreement with the IRS, no triggering occurs and the transferee takes on the liability.

Once a triggering event happens, the shareholder can then elect the eight-year installment schedule for the newly due amount. This is why Form 965-A is still in use: shareholders who deferred under 965(i) and have recently had a triggering event are now beginning their eight-year payment cycles.

Adjustments and Deficiencies

If the IRS adjusts your Section 965 liability after installments have begun, whether through an audit or an amended return, the additional tax is prorated across the remaining installments. Any share allocated to an installment whose due date has already passed must be paid on notice from the IRS. The proration rule does not apply where the deficiency arose from negligence, intentional disregard of the rules, or fraud.²

Attaching the Form and When You Stop Filing

Attach Form 965-A to your income tax return for the reporting year. The filing due date is your return’s due date, including extensions, so an automatic extension via Form 4868 carries the form with it.¹ Again, the extension covers the form, not the payment.

Because Part II is cumulative, every year’s filing carries forward the previous columns and adds the new payment. Once the liability shown in Part I is fully paid and no balance remains, Form 965-A is no longer required in later years.

1
Internal Revenue Service. Instructions for Form 965-A – Individual Report of Net 965 Tax Liability
2
Office of the Law Revision Counsel. 26 USC 965 – Treatment of Deferred Foreign Income Upon Transition to Participation Exemption System of Taxation
3
Internal Revenue Service. General Section 965 Questions and Answers
4
Office of the Law Revision Counsel. 26 US Code 6651 – Failure to File Tax Return or to Pay Tax