The 10-year limitation period to file amended returns does not apply to change an election from a foreign tax credit to a deduction of foreign taxes paid

In the article “Foreign Tax Credit: When Is It Too Late to Change Your Mind” published on September 1, 2015 The Tax Adviser reminds taxpayers that while they may have 10 years to amend their tax returns to claim a foreign tax credit, the IRS has a different position with regards to amending a tax return for claiming a tax deduction for the foreign taxes paid.

The article cites three CCA’s (Chief Counsel Advice) where the IRS has stated that a change from credit to deduction is not eligible for the 10-year limitation period, and that change can be made only within the standard three-year limitation period. While a Chief Counsel Advice is not substantial authority and cannot be cited in court, it represents the IRS counsel position, so taxpayers need to consider it when planning to amend their tax returns with respect to foreign tax credit or foreign tax deductions.

 

Amended returns not allowed for cash basis taxpayers to claim a foreign tax credit on accrual basis

In CCA 201534013 released on August 21, 2015, the IRS has advised that a taxpayer claiming foreign tax credits on a cash basis cannot amend its return in a subsequent year to claim a foreign tax credit for additional foreign taxes paid in the following year. The IRS’s position is that allowing a taxpayer to file an amended tax return to claim accrued foreign taxes would mean to allow an accounting method change from cash basis to accrual basis. This change is not allowed on an amended tax return. A taxpayer should file an amended return only when foreign taxes claimed on cash basis are refunded in a subsequent year.

 

TIGTA Says IRS Allowed Millions of Improper Foreign Taxes to Be Claimed

The Treasury Inspector General for Tax Administration (TIGTA) has issued this report stating that the IRS needs to improve its efforts to identify unsupported claims for foreign tax credits (FTCs). The IRS does not have sufficient controls in place, thus taxpayers were able to file about 16,000 incorrect returns and claim nearly $2.9 million in foreign taxes as both a deduction and credit on the same foreign taxes paid. Additionally, 73% of those tax returns with improperly allowed FTCs were prepared by paid tax return preparers.

Moving forward, TIGTA has made recommendations to which the IRS agreed that include developing a compliance strategy to address the risks identified and establishing controls to ensure that the correct forms are filed when required.

 

If you have any questions, please contact Mary Vasilescu at mvasilescu@wiss.visioncreativegroup.com or 973.994.9400.