Redetermining foreign taxes in a post-TCJA world
The foreign tax redetermination (FTR) rules under Sec. 905(c) apply to taxpayers who accrue foreign taxes and either (1) pay a different amount, (2) do not pay them within two years after the end of the tax year to which they relate, or (3) receive a refund of foreign taxes previously paid. Affected taxpayers must notify Treasury and pay any redetermined U.S. tax.
The law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, amended Sec. 905(c), removing the IRS’s authority to prescribe adjustments to pools of post1986 foreign undistributed earnings and income taxes in lieu of a redetermination of a taxpayer’s U.S. tax. Eliminating earnings and tax pooling leaves taxpayers much more susceptible to FTRs.
Since 2019, the IRS has issued a number of regulations dealing with the changes made to FTRs by the TCJA, including regulations providing a new definition of FTRs, when a redetermination of a U.S. tax liability is required if an FTR occurs, and a taxpayer’s notification requirements to the IRS when an FTR occurs and requires a redetermination of the U.S. tax liability.
Under the new regulatory scheme, administrative burdens may be higher for many taxpayers who will be more likely than previously to have FTRs that require the redetermination of U.S. tax liability and must amend returns and file detailed notification statements with the IRS or face potential penalties.