Foreign tax redetermination (FTR) regulations have been modified (or finalized) for 2020. A FTR generally occurs when the amount of tax finally assessed on a foreign tax return is different than the amount originally claimed as a credit on the US tax return for a particular year. This will mean more requirements to file amended returns to report the changes.

There are obviously penalties for failure to file the notification required by the IRS (normally an amended return with statement as to the changes). This can be up to 25% of the additional tax owned, in addition to interest for the late payment of the tax.

FTRs

The definition of an FTR was expanded to include changes to the amount of distributions or inclusions as the result of the FTR (resulting in changes to GILTI or Subpart F income) as well as changes that resulted in the High Tax Exception (HTE) either applying now or no longer being a way of avoiding the inclusion.

Proposed regulations expand the definition to include changing from taking a credit for foreign taxes to taking a deduction (or vice versa). There is also now a rule that will not provide a 10-year period to file an amended return for changes when the foreign taxes were deducted as there is when they were claimed as a credit.

FTRs related to 2017 and Prior Years that Impact the Transition Tax You Are Paying Over an 8 Year Period

Pre-2018 taxable years allowed for a pooling of taxes for foreign tax credit purposes under Sec. 902. A change under the 2017 TCJA changed the pooling so that each year stands on its own. Further, a change to several pre-2018 tax liabilities might result in the filing of amended tax returns for several years (a “cascading” impact).

An irrevocable election can now be made to lump all of the FTRs related to pre-2018 into a single year: 2017. This could lessen the compliance burden. But remember, 2017 was the year the Sec. 965 Transition Tax was an issue for many taxpayers. You could elect to pay the transition tax over 8 years. This change could result in a major issue for how and when to make the remaining payments (and if this is a negative change, will this accelerate the remaining time to make the payments?)! 

Notification Requirements

A transition rule was added to provide taxpayers an additional year to file required notifications with respect to FTRs occurring in 2019 for calendar year taxpayers and in years ending before the date the final regulations are published in the Federal Register (still to be done). If published by the end of 2020, then this would be only for 2019 FTRs and not for any in 2020. 

Remember that penalties can be avoided if proper (timely) notification is filed with the IRS.  Timely means by the due date of the tax return (including extensions) for the taxable year in which the FTR occurs; the amended return should be filed timely to also avoid additional interest.

If you feel any of these items may impact your particular US tax situation, you are welcome to contact your Moore Doeren Mayhew advisor or contact us to discuss these issues further.

Thank you.

Linus Ostberg, Co-Author