The IRS Large Business and International Division (LB&I) announced the expansion of its compliance campaign program by adding 11 issues, many focusing on international tax compliance. The list of audit campaigns now stands at 24, but it is possible that this list could expand or contract as the IRS re-evaluates its priorities.
The audit campaigns are part of an IRS strategy in the large- and mid-sized business arena to move toward more issue-focused examinations. The strategy arose from a recent restructuring of LB&I by the IRS in the wake of resource constraints. The campaigns are identified by the IRS through data analysis, suggestions from IRS compliance employees and feedback from the tax community. The IRS’s goal is to identify and reduce non-compliance through the campaigns by way of “treatment streams,” which will feature a mix of issue-focused examinations, externally published guidance, practitioner outreach, and soft letters. In January, the IRS released its first 13 audit campaigns
Seven of the 11 campaigns focus on international issues:
- Form 1120-F Chapters 3 and 4 Withholding: This campaign is designed to verify withholding at source for filers of a Form 1120-F claiming tax refunds by ensuring withholding agents have filed required Forms 1042, 1042-S, 8804, 8805, 8288 and 8288-A. The treatment stream for this campaign is varied and could potentially include examinations.
- Swiss Bank Program: In 2013, the Department of Justice began its Swiss Bank Program, which offered Swiss banks an opportunity to resolve potential criminal liabilities. Seventy-eight banks ultimately settled issues with the U.S. government, obligations under which included detailing account information of U.S. persons. This campaign will seek to address noncompliance of taxpayers who may be beneficial owners of those accounts, with a treatment stream that could include examinations.
- Foreign-Earned Income Exclusion: This campaign focuses on individuals who claimed the foreign-earned income exclusion and/or foreign housing exclusions or deductions, but may not necessarily be eligible for such deductions or exclusions from income. The treatment stream for this campaign could include examinations.
- Verification of Form 1042-S credit claimed on Form 1040NR: This campaign is intended to ensure the amount of withholding credits or refunds claimed on Forms 1040NR is verified and whether the taxpayer has properly reported the income reflected on Form 1042-S. The campaign will address noncompliance through a variety of treatment streams including, but not limited to, examinations.
- Corporate Direct Section 901 Foreign Tax Credit: This campaign is the first of several to come, according to the IRS, and will focus on domestic corporate taxpayers that elect to take the foreign tax credit (FTC) in lieu of a deduction. Specifically, the campaign will focus on taxpayers who are in an excess limitation position. Future campaigns may address indirect credits and Section 904(a) limitation issues.
- Individual Foreign Tax Credit (Form 1116): This campaign addresses individual taxpayer compliance in computing and claiming FTC limitations on Form 1116. Given the complexity of claiming the credit, and considering third-party reporting information, some taxpayers, according to the IRS, face the risk of claiming an incorrect FTC amount.
- Section 956 Avoidance: This campaign focuses on situations where a controlled foreign corporation makes a loan to its U.S. parent but the parent fails to make a Section 956 inclusion into income. According to the IRS, the goal of this campaign is to determine the extent to which taxpayers are utilizing cash-pooling arrangements and other strategies to avoid Section 956 inclusions. The treatment stream is issue-based examinations.
Four of the campaigns focus on domestic issues:
- Agricultural Chemicals Securities Credit: The Section 45O agricultural chemicals security credit allows a 30% credit for eligible businesses that paid or incurred certain qualifying costs to safeguard agricultural chemicals. The campaign is designed to ensure compliance by verifying qualified expenses and determining that taxpayers are properly defining facilities. The treatment stream for this campaign is issue-based examinations.
- Deferral of Cancellation of Indebtedness Income: This campaign focuses on taxpayers who incurred cancellation of indebtedness (COD) income from the re-acquisition of debt instruments at an issue price less than the adjusted issue price of the instrument in 2009 and 2010, and who elected to defer COD income to 2014. Such deferrals must include reporting of COD income ratably from 2014 through 2018. When a taxpayer defers the COD income, any related original-issue discount (OID) deductions on the new debt instrument, resulting from debt-for-debt exchanges that triggered the COD, must also be deferred ratably and in the same manner as the deferred COD income. The goal of this campaign is to verify that taxpayers who properly deferred COD income in 2009 or 2010 properly report it in subsequent years beginning in 2014, unless an accelerating event requires earlier recognition or proper deferral under Section 108. The treatment stream for this campaign is issue-based examinations. The use of soft letters is under consideration.
- Energy-Efficient Commercial Building Property: The deduction for energy-efficient commercial buildings under Section 179D allows taxpayers who own or lease commercial buildings to deduct the cost or a portion of the cost of installing energy-efficient commercial building property. The campaign is intended to ensure compliance, and the treatment stream is issue-based examinations.
- Economic Development Incentives: Taxpayers eligible to receive certain government economic incentives may receive tax benefits in the form of refundable credits, tax credits against other business taxes, nonrefundable credits, transfer of property including land, and grants including cash payments. The IRS is concerned that taxpayers may improperly treat such government incentives as non-shareholder capital contributions, exclude them from gross income and claim a tax deduction without offsetting it by the tax credit received. The goal of this campaign is to ensure taxpayer compliance. The treatment stream for this campaign is issue-based examinations.
In announcing this second tranche of audit campaigns, the IRS appears to be moving toward a more aggressive treatment stream, favoring issue-focused examinations over soft letters and administrative guidance. It is possible that the IRS may take a less aggressive approach in certain of these campaigns through the issuance of internal or external guidance and/or soft letters to taxpayers. Taxpayers who may be impacted by one or more of these campaigns should consider taking a proactive approach to be prepared for a potential examination by the IRS, which may not necessarily be limited to the specific campaign issue.
Contact David Auclair
National Managing Principal, Washington National Tax Office
+1 202 521 1515
National Managing Principal, Tax Practice Policy and Quality
+1 312 602 8810
Managing Director, Tax Practice Policy and Quality
+1 202 521 1513
Partner, International Tax, Washington National Tax Office
+1 202 861 4104
Senior Manager, Washington National Tax Office
+1 202 521 1511
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