Understanding IRS Form 965-D: Transfer Agreement Under Section 965(i)(2)

1. Introduction – What is Form 965-D?

IRS Form 965-D, officially titled “Transfer Agreement Under Section 965(i)(2),” is a specialized federal tax agreement issued by the Internal Revenue Service (IRS), an agency of the U.S. Department of the Treasury.

It is used when an S corporation shareholder who previously deferred their Section 965 transition tax (repatriation tax) liability under Internal Revenue Code (IRC) Section 965(i) transfers their S corporation stock. Form 965-D acts as a legally binding agreement between the transferring shareholder (transferor), the recipient (transferee), and the IRS to transfer responsibility for the deferred tax liability without triggering immediate tax assessment.

2. Purpose of the Form – Why Does Form 965-D Exist?

Under the Tax Cuts and Jobs Act (TCJA) of 2017, Section 965 required U.S. shareholders of specified foreign corporations to pay a one-time transition tax on untaxed foreign earnings. Recognizing the unique structure of S corporations, IRC Section 965(i) allowed S corporation shareholders to elect to defer payment of their net Section 965 tax liability indefinitely until a “triggering event” occurred.

Triggering events include selling or gifting S corporation stock, terminating S corporation status, or liquidating the business. Under normal rules, a triggering event accelerates the tax, making 100% of the deferred Section 965 tax due immediately on the shareholder’s tax return.

Form 965-D provides a statutory exception under Section 965(i)(2). By executing Form 965-D, the person receiving the S corporation stock formally assumes full legal responsibility for the deferred tax liability. This allows the tax deferral to remain in place or enables the recipient to elect to pay the assumed tax in eight annual installments under Section 965(h).

3. Who Needs to File This Form

Form 965-D is executed jointly by S corporation shareholders and stock recipients. You must execute and file Form 965-D if your transaction satisfies these criteria:

• Eligible Section 965(i) Transferors: S corporation shareholders who previously made a Section 965(i) deferral election and transfer their S corporation stock (via sale, gift, exchange, or inheritance) causing a triggering event.
• Eligible Section 965(i) Transferees: Individuals, trusts, or entities receiving S corporation stock who agree to assume full financial liability for the transferor’s deferred Section 965 tax obligation.
• S Corporation Reorganizations: Shareholder groups involved in corporate reorganizations or stock transfers involving deferred Section 965 liabilities as authorized by Treasury regulations.

4. Who Is Exempt / Not Required to File

You do not need to execute Form 965-D in every S corporation transaction. You are exempt or not required to file Form 965-D if any of the following apply:

• Paid-in-Full Taxpayers: S corporation shareholders who paid their Section 965 tax liability in full in prior tax years.
• No Section 965(i) Election: Shareholders who did not make a Section 965(i) deferral election during the initial transition tax year.
• C Corporation Asset Transfers: Corporate asset transfers governed by general 8-year installment rules (which require Form 965-C instead).
• Unassumed Liabilities: Stock transfers where the recipient refuses to assume the deferred tax liability. (In this scenario, no transfer agreement is filed, and the selling shareholder must pay the entire deferred tax balance immediately).

5. When to File

Form 965-D is governed by a strict statutory 30-day filing deadline following an S corporation stock transfer.

The executed Form 965-D must be mailed to the IRS within 30 days of the date on which the triggering event (stock transfer) occurs. Furthermore, both the transferor and transferee must attach a copy of the approved Form 965-D to their respective annual federal income tax returns (Form 1040 or Form 1041) for the tax year in which the stock transfer took place.

6. Where and How to File

Form 965-D is a legal contract requiring original signatures from both the transferring S corporation shareholder and the recipient. It cannot be filed through routine electronic tax filing software during initial return preparation.

The completed paper agreement must be mailed via certified mail or an approved private delivery service directly to the specific IRS office handling Section 965 transfer agreements as per instructions for Form 965-D. Do not send Form 965-D to general tax processing centers.

7. Step-by-Step Instructions to Fill the Form

Form 965-D consists of six core parts that identify the parties, describe the S corporation stock transfer, report deferred liabilities, and evaluate financial capacity. The table below outlines the core sections of the form.

Form Part	Part Name	Instruction / Description
Part I	Transferor Information	Provide the full legal name, Social Security Number (SSN) or TIN, and residential address of the transferring shareholder.
Part II	Transferee Information	Enter the legal name, SSN/EIN, and mailing address of the recipient assuming the tax debt.
Part III	S Corp & Event Details	State the S corporation’s legal name, EIN, stock percentage transferred, and exact effective date of the transfer.
Part IV	Deferred Tax Liability Report	State the exact dollar amount of the deferred Section 965(i) net tax liability being assumed by the recipient.
Part V	Transferee Financial Capacity	Answer solvency questions and confirm whether the transferee’s leverage ratio exceeds 3:1.
Part VI	Agreement Terms & Signatures	Requires binding legal declarations and authorized signatures from both transferor and transferee.

Detailed Filling Steps

1. Complete Shareholder & Recipient Information (Parts I & II): Fill in legal names, residential addresses, and taxpayer identification numbers (SSN or EIN) for both parties.
2. Detail S Corporation Stock Transfer (Part III): Enter the official business name and EIN of the S corporation. Record the exact number of shares transferred, total shares owned, and the precise closing date of the transaction.
3. Report Deferred 965 Tax Liability (Part IV): Enter the exact dollar amount of the deferred Section 965(i) net tax liability associated with the transferred shares, as reported on prior Form 965-A filings.
4. Evaluate Transferee Solvency (Part V): Confirm that the recipient has sufficient financial assets to satisfy future tax liabilities. State whether the recipient’s leverage ratio exceeds 3:1, attaching balance sheet support if necessary.
5. Execute Signatures (Part VI): Both the transferring shareholder and the recipient must sign, date, and enter their legal capacity to bind the agreement.

8. Required Documents/Information Needed Before Filling

Before completing Form 965-D, gather the following legal and financial records:

• Taxpayer Identification Numbers: SSNs or EINs for the transferor, transferee, and the underlying S corporation.
• Stock Transfer Agreements: Executed stock purchase contracts, gift deeds, or corporate stock ledgers verifying the exact date of transfer.
• Prior Year Form 965-A Filings: Part III of the transferor’s prior Form 965-A confirming the exact balance of deferred Section 965(i) tax liability.
• Transferee Financial Documentation: Financial statements proving the recipient’s financial solvency and leverage ratio.
• Form 2848 (Power of Attorney): Required if a CPA or tax attorney is signing on behalf of either party.

9. Common Mistakes to Avoid

Errors on Form 965-D can cause the IRS to reject the transfer, leading to immediate tax bills for the seller. Watch out for these frequent mistakes:

• Missing the 30-Day Window: Failing to submit Form 965-D to the IRS within 30 days of the stock transfer date.
• Single-Party Signatures: Submitting the agreement with only one signature instead of signatures from both the shareholder and recipient.
• Inaccurate Deferred Tax Figures: Entering total original transition tax amounts rather than the specific deferred Section 965(i) balance tied to the transferred shares.
• Confusing Form 965-D with Form 965-C: Using Form 965-D for non-S corporation corporate transactions (which require Form 965-C).
• Omitting Return Attachments: Forgetting to attach a copy of the approved Form 965-D to annual Form 1040 returns.

10. Penalties for Non-Filing or Errors

If Form 965-D is not submitted within 30 days or is rejected by the IRS, severe tax consequences apply immediately:

• Invalidation of Agreement: The transfer agreement becomes legally void under Treasury regulations.
• Immediate Tax Acceleration: The triggering event rules take effect, causing 100% of the deferred Section 965 tax liability to become due immediately on the transferring shareholder’s tax return.
• Accrued Interest & Failure-to-Pay Penalties: Late payment penalties (0.5% per month up to 25%) and compound daily interest accrue from the triggering event date until paid in full.

11. Related Forms or Schedules

S corporation shareholders managing Form 965-D frequently interact with these related federal tax forms:

• Form 965: Inclusion of Deferred Foreign Income Upon Transition to Participation Exemption System.
• Form 965-A: Individual Report of Net 965 Tax Liability.
• Form 965-C: Transfer Agreement Under Section 965(h)(3).
• Form 965-E: Consent Agreement Under Section 965(i)(4)(D).
• Form 1040: U.S. Individual Income Tax Return.
• Form 1120-S: U.S. Income Tax Return for an S Corporation (Schedule K-1).

12. Frequently Asked Questions

1. What is the main purpose of IRS Form 965-D?

Form 965-D allows a recipient of S corporation stock to assume the selling or gifting shareholder’s deferred Section 965 transition tax liability, preventing immediate tax acceleration upon a stock transfer.

2. What is an S corporation triggering event?

A triggering event is an action that terminates a Section 965(i) tax deferral, such as selling S corporation stock, gifting shares, terminating S corporation status, or liquidating the business.

3. What is the filing deadline for Form 965-D?

Form 965-D must be mailed to the IRS within 30 days of the date the stock transfer or triggering event occurs.

4. How does Form 965-D differ from Form 965-C?

Form 965-D applies specifically to Section 965(i) S corporation tax deferrals, while Form 965-C applies to Section 965(h) 8-year installment payment transfers for corporations and general taxpayers.

5. What happens if Form 965-D is filed late?

If filed past the 30-day deadline, the agreement is invalid, and the transferring shareholder must pay the full deferred transition tax immediately.

6. Can Form 965-D be filed electronically?

No. Form 965-D requires original signatures from both parties and must be mailed via paper mail directly to the designated IRS Section 965 unit.

13. Conclusion – Key Takeaways

IRS Form 965-D is a vital tax planning agreement for S corporation shareholders and buyers participating in stock transfers involving deferred Section 965 transition tax liabilities. Executing Form 965-D allows the recipient to step into the shoes of the transferring shareholder, preserving the tax deferral or transitioning to an 8-year installment schedule under Section 965(h). To avoid unexpected tax bills and immediate tax acceleration, act quickly when transferring S corporation shares: complete all financial capacity sections, obtain signatures from both parties, and mail Form 965-D to the IRS within the strict 30-day window.