The US Internal Revenue Service (IRS) has released a Practice Unit discussing when deductions and credits may be allowed for foreign corporate taxpayers that untimely filed IRS Form 1120-F (US Income Tax Return of a Foreign Corporation).
The Practice Unit, entitled "Allowance of Deductions and Credits on 1120-F Delinquent Returns" (INT-P-254), was last updated on 8 July 2022 and released on 25 July 2022.
The US Internal Revenue Code (IRC) allows foreign corporations to reduce their gross income by claiming deductions and credits only if they timely file their Form 1120-F (see Note 1). The Form 1120-F is considered timely if is filed:
- within 18 months after the return's due date under IRC section 6072; or
- by the date on which the IRS mails a notice to the foreign corporation advising the corporation that the current year tax return has not been filed and that no deductions or credits may be claimed, in a situation where the corporation failed to file a return for the preceding tax year and the year in issue is not the first year for which a return is required to be filed.
Under IRC section 882(c)(2), untimely foreign corporation filers are generally not entitled to deductions and credits and will be subject to tax under IRC section 11 on their gross income at the rate provided for the applicable year. However, Treasury Regulation 1.882-4(a)(3)(ii) permits the waiver of the filing deadline.
The practice unit explains the deadline waiver process so that foreign corporation filers may be allowed deductions and credits, despite their untimely filing. Specifically, the practice unit provides the following four steps in determining whether the deductions and credits may be allowed:
- whether the Form 1120-F is a delinquent return;
- whether there is a waiver request;
- whether the examination team recommend a waiver; and
- whether the examination team recommend a denial of waiver.
Note 1: A delinquent filer may still claim the credit provided under IRC section 33 for tax withheld at source and the deduction for charitable contributions allowed under IRC section 170, whether or not connected to effectively connected income.
Note 2: Practice Units, issued by the Large Business & International (LB&I) division of the IRS, serve as both job aids and training materials on tax issues for IRS staff. Practice Units are not official pronouncements of law or directives and thus may not be used or cited as precedent.