Tax year 2022 brings more changes to international tax reporting

Authored by RSM US LLP

International tax forms & instructions released

Over the last few months, the IRS has periodically released a litany of updated forms and instructions for taxpayers with international tax (ITAX) activity. While some of these updates are still in draft form, and have yet to be finalized, there are a few noteworthy changes forthcoming. Once finalized, these forms and instructions are intended to be applicable for a taxpayer’s 2022 tax year.

Preparing for the 2022 tax filing season

With the 2022 tax filing season just a few months away, the time is now to start planning for upcoming compliance changes. Here are the latest forms, schedules and instructions recently released by the IRS by ITAX topic.

Foreign tax credit

Form 1118 (Final Rev. Dec. 2022), Foreign Tax Credit – Corporations, includes a revamped Schedule H, Apportionment of Certain Deductions. Former Part II, Interest Deductions, All Other Deductions, and Total Deductions, is now split out further into two separate and distinct parts: Part II, Deductions Allocated and Apportioned Based on Assets, and Part III, Other Deductions. While the IRS is not necessarily requesting new information, the format is new. In 2021, taxpayers were required to attach a schedule outlining all other deductions. In 2022, the IRS is standardizing this request.

Form 1118 (Schedule L) (Final Rev. Dec. 2022), Foreign Tax Redeterminations, has been updated for a handful of items. Part I now requests a “Reference ID Number for Contested Tax, if applicable” to reflect Reg. section 1.905-1(d)(4) and new Form 7204. New questions (i.e., columns) have been added to Part III to better reflect section 905(b) and (c) and Reg. section 1.905-4. Lastly, new Part V, Annual Reporting for Contested Taxes, has been developed for taxpayers to comply with the annual notice requirement described in Reg. section 1.905-1(d)(4)(iv). For each tax year following the year in which a provisional foreign tax credit (FTC) election is made on new Form 7204, up to and including the tax year in which the contest is resolved, the taxpayer must provide the information requested. While the Form 1118 instructions have not yet been issued, the forms are once again growing in size due to the IRS’s increased desire for visibility.

New Form 7204 (Draft Rev. Dec. 2022), Consent To Extend the Time To Assess Tax Related to Contested Foreign Income Taxes—Provisional Foreign Tax Credit Agreement, has been developed pursuant to Reg. section 1.905-1(d)(4) to allow taxpayers, under the conditions provided in Reg. sections 1.905-1(c)(3) and 1.905-1(d)(4), to elect to claim a provisional FTC for a contested foreign income tax liability (or a portion of it) that the taxpayer has remitted to the foreign country, before the contest has been resolved.

Form 1116 (Final Rev. 2022), Foreign Tax Credit (Individual, Estate, or Trust), has been revised to reference the final FTC regulations, T.D. 9959, and the creditability of foreign taxes under sections 901 and 903. The instructions also draw attention to Schedule K-3. In 2022, certain partnerships and S corporations are excepted from providing Schedule K-3 to partners and shareholders that might otherwise benefit from Schedule K-3 information in claiming an FTC. However, taxpayers have the right to request the Schedule K-3 from the partnership or S corporation to obtain this information.

Form 1116 (Schedule B) (Final Rev. Dec. 2022), Foreign Tax Credit Carryover Reconciliation Schedule, includes a minor revision to Line 1, “enter the amounts from the appropriate columns of line 8 of the prior year Schedule B.” In addition, the Reconciliation Worksheet (found within the instructions) “Caution” clarifies this worksheet should now only be used in cases where a taxpayer is amending their 2021 FTC within the special 10-year limitation period described in section 6511(d)(3) (or section 6511(c) if the period is extended by agreement).

Form 1116 (Schedule C) (Draft Rev. Dec. 2022), Foreign Tax Redeterminations, Part I now requests a “Reference ID Number for Contested Tax, if applicable” to reflect Reg. section 1.905-1(d)(4) and new Form 7204. Also, new Part V, Annual Reporting for Contested Taxes, has been developed for taxpayers to comply with the annual notice requirement described in Reg. section 1.905-1(d)(4)(iv). For each tax year following the year in which a FTC election is made on new Form 7204, up to and including the tax year in which the contest is resolved, the taxpayer must provide the information requested (similar to the revisions to Form 1118, Schedule L).

Controlled foreign corporations

Form 5471 (Final Rev. Dec. 2022), Information Return of U.S. Persons With Respect to Certain Foreign Corporations, includes slight revisions to Schedule G, Other Information, question six. Of note, the reference to Schedule M has been removed. This question has likely been reworded to reflect the final regulations under section 250 (similar to the revisions to Form 5472).

Form 5471 (Schedule Q) (Final Rev. Dec. 2022), CFC Income by CFC Income Groups, now includes an “Other” line for a subpart F income group. This line appears to be a “catch-all” for any subpart F income that may not necessarily fit into a specific category and/or which likely requires a supplementary explanation for both IRS and taxpayer use (i.e., those taxpayers receiving a Form 5471 attachment via schedule K-3). The Schedule also includes two new columns that request information on “loss allocation” and “net income after loss allocation.” At this time, the IRS has yet to release draft instructions for Forms 5471 and 5471 (Schedule Q) so it is difficult to comment further on the forthcoming impact.

Form 8992 (Final Rev. Dec. 2022), U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), includes minor revisions. A new sentence has been added to Part II, Line 5 of the form: “If zero or less, enter -0-.” This is merely a clarification and is consistent with previous instructions. Regarding Forms 8992 (Schedule A) (Final Rev. Dec. 2022) and 8992 (Schedule B) (Final Rev. Dec. 2022), if a controlled foreign corporation (CFC) has an employer identification number (EIN), the taxpayer must enter that EIN. Taxpayers will no longer have the option to enter “APPLIED FOR” in lieu of an EIN. If the CFC does not have an EIN, the taxpayer must enter a reference ID number that uniquely identifies the CFC. Taxpayers will no longer have the option to enter “FOREIGNUS” in lieu of a reference ID number. Also, if the taxpayer has filed or will be filing a Form 5471 with respect to the CFC, the reference ID number for that CFC must be the same as reported on Form 5471, as applicable.

Form 8990 (Draft Rev. Dec. 2022), Limitation on Business Interest Expense Under Section 163(j), has been revised to include new informational questions geared towards foreign entities. In addition, the form has been revised for the delayed provisions of the Tax Cuts and Jobs Act of 2017 (TCJA). For tax years beginning after 2021, the computation for adjusted taxable income (ATI) is computed with the deductions for depreciation, amortization and depletion. The add-back for these deductions has been eliminated. Lastly, a new worksheet has been added to the draft instructions. Worksheet C will be used to determine eligibility for the safe-harbor election under Reg. section 1.163(j)-7(h) (i.e., the stand-alone applicable CFC/CFC group safe harbor election).

Form 1042 series

Form 1042-S (Final Rev. 2022), Foreign Person’s U.S. Source Income Subject to Withholding, has been updated for various new codes. Income code 56 was added to address section 871(m) transactions resulting from combining transactions under Reg. section 1.871-15(n). Income code 57 was added for use by brokers that are required to report or withhold on the transfer of interests in publicly traded partnerships (PTPs), including distributions made by PTPs. New chapter 3 status code 38 has been added to report a payment to or from a PTP. Lastly, new limitation on benefits (LOB) code 12 has been added to report that there is no LOB article in the applicable tax treaty.

Partnership withholding

Form 8804 (Final Rev. Nov. 2022), Annual Return for Partnership Withholding Tax (Section 1446), is now termed a continuous-use form. Both the form and instructions will be updated as needed as opposed to on an annual basis. Going forward, taxpayers will be required to use the latest version of the form, and applicable instructions, as opposed to a form, and set of instructions, that relate to a specific tax year for filing purposes. Form 8804 also includes new lines for the partnership to report tax withheld under section 1446(f)(1) on the transfer of an interest in a partnership engaged in a trade or business in the United States.

Form 8288 (Final Rev. Jan. 2023), U.S. Withholding Tax Return for Certain Dispositions by Foreign Persons, now incorporates reporting for a transferee of a non-PTP interest required to withhold under section 1446(f)(1) on the amount realized from the transfer. The form has also been updated to include reporting for partnership withholding under section 1446(f)(4) on distributions to a transferee that failed to withhold under section 1446(f)(1). The draft instructions indicate that updated Forms 8288 and 8288-A and a new Form 8288-C are being released to reflect the withholding and reporting requirements under sections 1446(f)(1) and (f)(4), applicable to transfers occurring on or after Jan. 1, 2023, as well.

Schedule K-2 and K-3

The IRS released updated final Schedules K-2 and K-3 and instructions for the Forms 1065, 1120-S and 8865 versions of these schedules. The instructions include various updates, including a significant change to the domestic exception that was available in tax year 2021. See RSM’s previous tax alert, Schedules K-2 and K-3 draft instructions for tax year 2022, for additional information.

Other

Form 5472 (Final Rev. Dec. 2022), Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, Part VIII, lines 41a through 41d have been reworded to reflect the final regulations under section 250. Part VIII, lines 48b and 48c have a new attachment requirement when an election described in Reg. section 1.482-7(d)(3)(iii) (B) or Notice 2005-99 is made according to the draft instructions.

Form 8865 (Draft Rev. 2022), Return of U.S. Persons With Respect to Certain Foreign Partnerships, Item H, Question 12, has been reworded. Of note, the reference to Schedule N has been removed. This question has likely been reworded to reflect the final regulations under section 250 (similar to the revisions to Form 5472). At this time, the IRS has yet to release draft instructions for Form 8865 as to potential further enhancements.

Form 8898 (Final Rev. Oct. 2022), Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession, includes a new line for the taxpayer’s worldwide gross income for the tax year associated with the move.

Form 2555 (Final Rev. 2022), Foreign Earned Income, increases the maximum exclusion amount to $112,000.

Status of ITAX forms

Action items

Taxpayers and tax return preparers alike can continue to monitor the status of various forms, schedules, and instructions by reviewing the IRS website, Draft Tax Forms, Forms, Instructions and Publications, and Prior Year Forms and Instructions, for additional information.

For more information, please consult with your tax advisor.

This article was written by Ayana Martinez, Mandy Kompanowski and originally appeared on 2023-01-12.
2022 RSM US LLP. All rights reserved.
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