Last week, the IRS issued new guidance that addresses “telescoping” in mutual agreement procedure (“MAP”) and advance pricing agreement (“APA”) cases. Very generally, the guidance disallows (subject to a $10 million materiality exception) telescoping for tax years starting in 2018, when the Tax Cuts and Jobs Act (“TCJA”) came into effect, while continuing to allow telescoping for pre-2018 years in appropriate cases. According to the IRS’s Advance Pricing and Mutual Agreement (“APMA”) program, the new guidance was needed to address the impact of the TCJA “and its many interlocking provisions that require careful determination (and redetermination, as needed) of a U.S. taxpayer’s taxable income and tax attributes.” The new guidance has the potential to drive up compliance costs by increasing the number of tax returns that taxpayers must file to resolve MAP and APA resolutions for post-TCJA years (and resolutions spanning both pre- and post-TCJA years).
“Telescoping” refers to an administrative accommodation through which the taxpayer and the APMA program may agree to aggregate the total adjustments resulting from a multiple-year MAP or APA resolution and implement the net result into a single tax year. For example, if a MAP or APA case involved multiple tax years—e.g., 2015, 2016, and 2017—the parties could agree that the taxpayer will recognize the results of any MAP or APA resolution in the last year of the resolution, e.g., 2017.
This administrative practice has simplified taxpayer compliance. Resolving a MAP or APA case often requires amending Federal tax returns, which may trigger the requirement to amend numerous SALT returns. In our experience, implementation of multi-year MAP or APA resolution can present a compliance burden, but telescoping can reduce the burden significantly.
The new guidance curbs the availability of telescoping for post-TCJA tax years. For the 2018 tax year and forward, the taxpayer may request telescoping only for resolutions of $10 million or less for all affected tax years. In those cases, the IRS will continue to “permit the U.S. taxpayer to reflect the aggregate change in a taxable year beyond the last year . . . covered by the case,” although “[t]he exact year in which the change will be permitted will depend upon various factors.”
If the change exceeds $10 million, however, “[t]he U.S. taxpayer will generally be instructed to amend its U.S. federal income tax returns for each of the individual years covered by its case.” (Emphasis added.) Taxpayers will not be permitted to aggregate the results of a resolution for post-TCJA years, and they will not be able to roll those results forward to a later year.
The guidance also impacts pre-TCJA tax years. If all the years at issue end before 2018, “the U.S. taxpayer may request that the change to taxable income for each year of the case be aggregated, netted, and reflected in the last of those taxable years.” Thus, telescoping pre-2018 adjustments to the current year’s original return is not allowed under the guidance. This means that taxpayers obtaining approval to telescope pre-2018 MAP or APA rollback adjustments will still need to file at least one amended federal return (plus required amended SALT returns) for the last impacted pre-2018 year, as opposed to reporting the total adjustment on the current year original return. However, for pre-2018 MAP or APA rollback resolutions resulting in a net decrease to U.S. taxable income, telescoping to a pre-2018 amended return is generally beneficial since it ensures any refund will be calculated by reference to the 35% corporate tax rate in effect for those years.