October 29, 2020
IRS announces plans to limit the use of 'telescoping' in APA and MAP cases
The IRS's Advance Pricing and Mutual Agreement program (APMA) has announced that it is updating the parameters that it follows in mutual agreement procedure (MAP) and advance pricing agreement (APA) cases. The updates are expected to significantly restrict the use of "telescoping" of results in MAPs and APAs.
Telescoping refers to reflecting an income tax adjustment in a year different from the year to which the adjustment relates. Taxpayers sometimes request this departure from the notion of annual accounting in a MAP or APA to relieve the administrative burden of filing multiple amended federal and state income tax returns. APMA occasionally allowed taxpayers to do this, under the authority of an income tax treaty. The Tax Cuts and Jobs Act (TCJA) changed substantive provisions of the Internal Revenue Code. Thus, different tax rates and other rules may apply to similar related-party transactions, depending on which year they occur.
Under the new APMA parameters, taxpayers must generally amend the applicable year's (or years') federal income tax return rather than reflect the changes to taxable income in a most current tax year. For cases with pre- and post-TCJA years, the IRS states that changing the US taxpayer's taxable income under a competent authority resolution is likely to impact the substantive calculation of tax. APMA's updates to the telescoping parameters are intended to promote compliance with the changes brought to US tax law by the TCJA. Many of the TCJA's interlocking provisions require careful determination of a US taxpayer's taxable income and tax attributes.
The updated parameters have three main elements:
The IRS will continue to review and update these parameters as needed to maintain balance between the interests of the US taxpayers (e.g., mitigate the administrative cost of implementing competent authority resolutions) and the needs of "sound tax administration."
Taxpayers should review their current MAP and APA cases to determine whether telescoping is allowed in their situation and whether it makes sense, given their facts. Moreover, taxpayers considering filing a MAP or APA request should be aware of the new APMA parameters, as the limitations on telescoping will change some practices to which taxpayers may have grown accustomed over the years.