Foreign Tax Redetermination: What to Do When HMRC Refunds Tax You Credited

A foreign tax redetermination happens when the foreign tax you claimed as a US credit later changes, most often because HMRC refunds part of it. Section 905(c) of the Internal Revenue Code requires you to notify the IRS, normally by filing Form 1040-X with a revised Form 1116. If the change increases your US tax, the notice is due by the filing deadline for the year in which the refund arrived.

Most Americans in the UK claim the foreign tax credit every year. Few realise that the claim stays open after the return is filed. If your UK tax for that year later goes down, the credit was too high, and the IRS expects to hear about it. This guide explains what counts as a foreign tax redetermination, how and when to report one, and the penalty for staying silent.

What counts as a foreign tax redetermination

Section 905(c) and Treasury Regulations section 1.905-3 list the events. The IRS outlines the credit rules on its foreign tax credit page.

The three main triggers

First, a foreign tax you claimed is refunded, in whole or in part. Second, you claimed the credit on the accrual basis and the amount finally paid differs from the amount accrued. Third, you accrued a tax and did not pay it within 24 months after the end of the US tax year to which it relates. In each case, the credit on the original Form 1116 no longer matches the tax you actually bore.

How UK refunds arise

UK refunds are common and often welcome. HMRC issues a repayment after a P800 calculation shows that too much PAYE was deducted. A late claim for higher-rate pension relief reduces an earlier year's liability. So does carrying a Gift Aid donation, a trading loss or an Enterprise Investment Scheme subscription back to the previous year. GOV.UK explains the main routes on its claim a tax refund page. Our guide to EIS tax relief for US citizens shows how a carry-back claim creates this problem.

How to report a foreign tax redetermination

You report the change for the US tax year in which the credit was claimed, not the year the refund arrived.

The forms

You file Form 1040-X, the amended individual return, for the affected year. You attach a revised Form 1116 showing the reduced foreign tax, and a statement that explains the redetermination: the date, the amount in sterling and dollars, and the exchange rate used. You then pay any additional US tax. If you carried unused credits from that year into later years, those later computations may need revising as well.

When the credit only affects a carryover

Many UK residents have more credit than they can use. In that case, a smaller UK tax bill may reduce only the unused carryover and leave the US tax for every year unchanged. The regulations provide a simpler route for that situation, based on a statement with the return for the year of the redetermination instead of amended returns. However, the conditions are narrow, so confirm that the route applies before you rely on it. Our guide to the foreign tax credit carryover and Schedule B explains how carryovers are tracked.

Deadlines, penalties and interest

The rules differ depending on whether the change costs you money or saves it.

The penalty for not notifying the IRS

Section 6689 of the Internal Revenue Code imposes a penalty where you fail to notify the IRS of a foreign tax redetermination. The penalty is 5% of the resulting deficiency for each month the failure continues, up to a maximum of 25%. It does not apply if you show reasonable cause. In addition, section 905(c) allows the IRS to collect the tax on notice and demand, and the normal three-year assessment period does not protect a taxpayer who never reported the change.

A helpful interest rule

Section 905(c)(5) limits the interest. Where the extra US tax results from a foreign refund, the IRS does not charge interest for the period before you received the refund, except to the extent the foreign government paid you interest on it. Therefore, prompt reporting keeps the cost close to the tax itself.

Paid or accrued: why the method matters

Taxpayers who claim the credit on the paid basis count UK tax in the US year they pay it. They face a foreign tax redetermination mainly when HMRC refunds tax, including payments on account that proved too high. Taxpayers on the accrual basis count the UK liability for the year, so they also face a redetermination whenever the final Self Assessment figure differs from the estimate, or when tax is paid late. Our guide to the paid or accrued election compares the two methods.

Which exchange rate to use

You translate a refund at the rate used when the tax was first claimed. For tax claimed on the paid basis, that is generally the rate on the payment date. For tax accrued, it is generally the average rate for the US tax year to which the tax relates, under section 986 of the Internal Revenue Code. Any currency gain or loss on the refund itself is dealt with separately. Our US expat tax returns page covers amended returns for Americans abroad.

An illustrative case

Consider an illustrative US citizen in Birmingham who filed her 2024 Form 1040 with a foreign tax credit that exactly covered her US tax. The figures are illustrative. In August 2026 her accountant claims higher-rate relief on personal pension contributions for the 2024/25 UK tax year, and HMRC repays £2,400. Part of that UK tax was credited on her 2024 return. She has no carryovers, so the smaller credit leaves US tax due for 2024. She must file Form 1040-X for 2024, with a revised Form 1116, by the due date of her 2026 return. Under section 905(c)(5), interest runs only from the date she received the repayment.

If HMRC has repaid tax for a year you already filed in the US, book a consultation with our team. We work out whether a foreign tax redetermination has occurred and prepare the amended return.

Frequently Asked Questions

What is a foreign tax redetermination?

A foreign tax redetermination is a change in the foreign tax on which a US foreign tax credit was based. Under section 905(c) of the Internal Revenue Code it includes a refund of foreign tax, a difference between tax accrued and tax finally paid, and accrued tax that is not paid within 24 months after the end of the US tax year.

Do I have to tell the IRS about an HMRC tax refund?

Yes, if you claimed a foreign tax credit for the UK tax that was refunded. Section 905(c) of the Internal Revenue Code requires you to notify the IRS, normally by filing Form 1040-X with a revised Form 1116 for the US tax year in which the credit was claimed.

What is the deadline to report a foreign tax redetermination?

Where the change increases your US tax, Treasury Regulations section 1.905-4 require the amended return by the due date, with extensions, of your original return for the tax year in which the redetermination occurred. A refund received in 2026 is therefore reported by the due date of the 2026 return.

What is the penalty for not reporting a foreign tax refund?

Section 6689 of the Internal Revenue Code imposes a penalty of 5% of the deficiency for each month the failure to notify continues, up to a maximum of 25%. The penalty does not apply where the failure is due to reasonable cause and not wilful neglect.

Does an HMRC refund always mean more US tax?

No. If you had more UK tax than you could use as a credit, the refund may reduce only your unused carryover and leave your US tax unchanged. You still need to correct the carryover records, and the regulations set out when a statement can replace amended returns.

Can a US citizen in the UAE have a foreign tax redetermination?

Yes, although it is less common. The UAE charges no personal income tax on salaries, so there is no UAE tax to credit or refund. However, a UAE resident with UK rental income or a UK pension may claim credit for UK tax, and a later HMRC repayment of that tax is a foreign tax redetermination.