II. Explanation of the Bill
(Sec. 5002 of the Bill and Sec. 904 of the Code)
U. S. persons may credit foreign taxes against U.S. tax on foreign source income. The
amount of foreign tax credits that can be claimed in a year is subject to a limitation that prevents
taxpayers from using foreign tax credits to offset U.S. tax on U.S. source income. Separate
foreign tax credit limitations are applied to specific categories of income.
The amount of creditable taxes paid or accrued (or deemed paid) in any taxable year which
exceeds the foreign tax credit limitation is permitted to be carried back two years and forward five
years. The amount carried over may be used as a credit in a carryover year to the extent the
taxpayer otherwise has excess foreign tax credit limitation for such year. The separate foreign tax
credit limitations apply for purposes of the carryover rules.
Reasons for Change
The Committee believes that reducing the carryback period for foreign tax credits to one
year and increasing the carryforward period to seven years will reduce some of the complexity
associated with carrybacks while continuing to address the timing differences between U.S. and
foreign tax rules.
Explanation of Provision
The bill reduces the carryback period for excess foreign tax credits from two years to one
year. The bill also extends the excess foreign tax credit carryforward period from five years to
The provision applies to foreign tax credits arising in taxable years ending after the date of
C. Clarify and Expand Mathematical Error Procedures (Sec. 5003 of the Bill and Sec.
6213(g)(2) of the Code)
Taxpayer identification numbers ("TINs")
The IRS may deny a personal exemption for a taxpayer, the taxpayer's spouse or the
taxpayer's dependents if the taxpayer fails to provide a correct TIN for each person for whom the
taxpayer claims an exemption. This TIN requirement also indirectly effects other tax benefits
currently conditioned on a taxpayer being able to claim a personal exemption for a dependent (e.g.,
head-of-household filing status and the dependent care credit). Other tax benefits, including the
adoption credit, the child tax credit, the Hope Scholarship credit and Lifetime Learning credit, and
the earned income credit also have TIN requirements. For most individuals, their TIN is their
Social Security Number ("SSN"). The mathematical and clerical error procedure currently applies
to the omission of a correct TIN for purposes of personal exemptions and all of the credits listed
above except for the adoption credit.
Mathematical or clerical errors
The IRS may summarily assess additional tax due as a result of a mathematical or clerical
error without sending the taxpayer a notice of deficiency and giving the taxpayer an opportunity to
petition the Tax Court. Where the IRS uses the summary assessment procedure for mathematical or
clerical errors, the taxpayer must be given an explanation of the asserted error and a period of 60
days to request that the IRS abate its assessment. The IRS may not proceed to collect the amount of
the assessment until the taxpayer has agreed to it or has allowed the 60-day period for objecting to
expire. If the taxpayer files a request for abatement of the assessment specified in the notice, the
IRS must abate the assessment. Any reassessment of the abated amount is subject to the ordinary
deficiency procedures. The request for abatement of the assessment is the only procedure a
taxpayer may use prior to paying the assessed amount in order to contest an assessment arising out
of a mathematical or clerical error. Once the assessment is satisfied, however, the taxpayer may file
a claim for refund if he or she believes the assessment was made in error.
Reasons for Change
The Committee believes that it is appropriate to provide additional guidance to the Internal
Revenue Service with respect to the application of the TIN requirement. It will also improve
compliance to allow the IRS to use date of birth data, from the Social Security Administration, to
determine ineligibility for the dependent care credit, the child tax credit and the earned income
credit. Once this determination is made, the Committee believes that the IRS should use the
mathematical and clerical error procedure to correctly assess the tax due with respect to affected tax
Explanation of Provision
The bill provides in the application of the mathematical and clerical error procedure that a
correct TIN is a TIN that was assigned by the Social Security Administration (or in certain limited
cases, the IRS) to the individual identified on the return. For this purpose the IRS is authorized to
determine that the individual identified on the tax return corresponds in every aspect (including,
name, age, date of birth, and SSN) to the individual to whom the TIN is issued. The IRS also is
authorized to use the mathematical and clerical error procedure to deny eligibility for the dependent
care tax credit, the child tax credit, and the earned income credit even though a correct TIN has
been supplied if the IRS determines that the statutory age restrictions for eligibility for any of the
respective credits is not satisfied (e.g., the TIN issued for the child claimed as the basis of the child
tax credit identifies the child as over the age of 17 at the end of the taxable year).
The provision is effective for taxable years ending after the date of enactment.