International Tax Issues Are A Major Focus of Newest Launch of IRS Compliance Campaigns in 2017

by M. Robinson & Company, P.C.
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M. Robinson & Company, P.C.

Earlier this year, the IRS Large Business and International division (LB&I) rolled out 13 compliance campaigns[1] to target both individual taxpayers and corporations for examinations on certain tax compliance issues. On November 3, 2017, IRS announced the identification of an additional 11 compliance campaigns to be conducted by LB&I.  The focus of these campaigns appears to be on international tax issues, although other types of tax issues are also included. The goal of these IRS campaigns is to ensure compliance by taxpayers with U.S. tax laws and may result in issue-based examinations.

November 2017 IRS New LB&I Compliance Campaigns:

  • Form 1120-F Chapter 3 and Chapter 4 Withholding Campaign

The purpose of this campaign is to verify that U.S. source income was appropriately withheld on foreign corporations filing Form 1120-F before a tax refund or credit was allowed.

  • Swiss Bank Program Campaign

Under the Swiss Bank Program, Swiss banks entered into an agreement with the U.S. Department of Justice to provide information on U.S. persons with beneficial interests in foreign financial accounts. This campaign addresses potential noncompliance by those U.S. persons identified under the program.

  • Foreign Earned Income Exclusion Campaign

The LB & I will be focusing on individuals who claim the Foreign Earned Income Exclusion (FEIE) and/or the Foreign Earned Housing Exclusion or Deduction, but are not eligible to do so. The FEIE excludes foreign source income, up to $102,100 for tax year 2017, from taxation. To be eligible, a taxpayer must timely file IRS Form 2555/2555-EZ.

Also, the taxpayer’s tax home must be in the foreign country where the income was earned and they must meet either the bona fide residence or physical presence test for that country.

  • Verification of Form 1042-S Credit Claimed on Form 1040NR

This campaign is also focused on withholding, but aims to ensure that nonresident aliens have properly reported income reflected on Form 1042-S before a refund or credit is issued.

  • Agricultural Chemicals Security Credit Campaign

Agricultural businesses that claim this non-refundable 30-percent credit may be subject to examination to ensure that only qualified expenses are used when computing this credit.

  • Deferral of Cancellation of Indebtedness Income Campaign

Certain taxpayers who incurred cancellation of indebtedness (COD) in 2009 and 2010 were permitted to make an election to defer their COD income. However, the COD income was required to be reported ratably over a period of five years beginning in 2014. This campaign is to verify that the deferred COD income was reported beginning in 2014, unless certain exceptions under Section 108(i) apply.

  • Energy Efficient Commercial Building Property Campaign

This campaign will focus on whether taxpayers are correctly claiming the Energy Efficient Commercial Building Deduction under Section 179D.

  • Corporate Direct (Section 901) Foreign Tax Credit (“FTC”)

Under this campaign, LB&I will be scrutinizing corporate returns which claim a direct Foreign Tax Credit under Section 901 and are in an excess limitation position.

  • Section 956 Avoidance

Under Section 956, loans made by a Controlled Foreign Corporation (CFC) to its U.S. parent must generally be included in income. The LB&I will be looking to identify instances of noncompliance with this campaign.

  • Economic Development Incentives Campaign

The IRS is concerned that certain taxpayers may not be properly reporting government economic incentives and claiming a tax deduction without offsetting it with the tax credit received. The LB&I will conduct examinations for this issue to ensure by taxpayer compliance.

  • Individual Foreign Tax Credit (Form 1116)

While the Foreign Tax Credit can provide relief from double taxation on foreign taxes paid on foreign source income, the IRS will address noncompliance arising from the complexity of the calculation, including third-party reporting information.

Not all taxpayers who find themselves at the center of one of these campaigns will be subjected to an examination; various “treatment streams,” such as “soft letters,” may be implemented by LB&I to enforce compliance. However, issue-based examinations are the sole enforcement tool for some campaigns. Click here for more information about all of the IRS LB&I compliance campaigns.

Also, globally mobile taxpayers may find their exposure to these campaigns magnified if they haven’t filed the appropriate IRS international disclosure forms with their tax returns. The statute of limitations (SOL)  remains open on an entire tax return when certain international forms, such as IRS Form 8938 to report certain specified foreign assets, are not timely filed. The SOL  generally stays open and runs until three years after the filing of these forms.[2]

 

[1] See Attorney Morris N. Robinson’s blog dated June 14 2017, “IRS Announces Tax Audit Targets.”

[2] See my previous June 2015 blog, “Delinquent International Information Tax Returns May Extend the Statute of Limitations on Your Entire Federal Tax Return.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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