The IRS Large Business & International Division (LB&I) is launching eleven compliance campaigns to target potential tax issues at the nearly 300,000 taxpayers within its jurisdiction. When a regulator announces that it will spend resources for investigation and enforcement in a particular area, it can be a good signal that it will look carefully at any credible whistleblower tips.
About 16 months ago, we covered the reorganization of the LB&I to focus on issue-based examinations. At that time, we noted three areas of focus: inbound distributions (repatriation of foreign cash), basket options (hedge fund conversion of short-term gains to long-term gains), and captive insurance (the insurance of remote risks as a tax shelter).
In January 2017, the IRS announced the identification and selection of 13 more campaigns. The were declared the “first wave” of issue-based compliance work in the official IRS announcement. The announcement of another eleven areas this month represents a substantial increase in the focused investigations of the division and a good sign that the IRS is having success with its new issue-based examinations model.
Here are the 24 areas of investigation that have been announced by LB&I, starting with the January issues and then turning to the November announcement:
IRC 48C Energy Credits: These advanced energy projects must be pre-approved for tax credits by the DOE and have been allocated a credit by the IRS.
OVDP Declines-Withdrawals: This examination will look at taxpayers who sought to voluntarily resolve non-compliance through the Offshore Voluntary Disclosure Program but were either denied access to the program or withdrew on their own initiative.
Domestic Production Activities Deduction: This relates to the IRC Section 199 deduction for qualified films. These examinations likely claim that gross receipts from either subscription packages of groups of channels or third-party produced content are not qualified films.
Micro-Captive Insurance: The improper reduction of aggregate taxable income through insurance contracts inconsistent with arm’s length transactions and sound business practices.
Related Party Transactions: This examination will look at transactions between commonly controlled entities that are transferring funds.
Deferred Variable Annuity Reserves & Life Insurance Reserves: The IRS is going to develop guidance to reduce uncertainty on the taxation of the life insurance industry, including tax reserves for life insurance contracts and deferred variable annuities with Guaranteed Minimum Benefits.
Basket Transactions: These are structured financial transactions used to defer taxes by treating ordinary income and short-term capital gain as long-term capital gain.
Land Developers – Completed Contract Method (CCM): Some large land developers with average annual gross receipts exceeding $10 million are improperly using the CCM accounting method to defer gains until the development is completed.
TEFRA Linkage Plan Strategy: The IRS will be developing new procedures to identify, link and assess tax on the terminal investors in a TEFRA partnership audit. TEFRA stands for the Tax Equity and Fiscal Responsibility Act of 1982, which consolidated examination, processing and judicial procedures for the tax treatment of partnerships.
S Corporation Losses Claimed in Excess of Basis: Shareholders in S corporations are only allowed to take pass through losses when they have sufficient stock or debt basis to absorb the claimed losses and deductions.
Repatriation: Many taxpayers are not properly reporting repatriations as taxable events on their filed returns.
Form 1120-F Non-Filer: Many foreign companies are not filing the required Form 1120-F when doing business in the United States.
Inbound Distribution: This involves transfer pricing issues where U.S. distributors of goods sourced from foreign-related parties do not have profits commensurate with their risks and the U.S. taxpayer would have higher returns in an arms-length transaction.
Form 1120-F Chapter 3 and Chapter 4 Withholding: This campaign will verify that withholding agents have filed the required Forms 1042, 1042-S, 8804, 8805, 288 and 8288-A before allowing refunds or credits to foreign entities filing Form 1120-F.
Swiss Bank Program: This will address noncompliance in the Swiss Bank Program, which helps Swiss financial institutions resolve their potential criminal liabilities by, in part, providing information on U.S. persons with beneficial ownership of foreign financial accounts.
Foreign Earned Income Exclusion: The IRS will conduct examinations and other efforts to address taxpayers who have claimed the foreign earned income exclusion but do not meet the requirements.
Verification of Form 1042-S Credit Claimed on Form 1040NR: This campaign will verify the withholding credits on Form 1042-S of a foreign person with U.S. source income subject to withholding before a refund is issued or a credit allowed.
Agricultural Chemicals Security Credit: This credit allows a 30 percent credit to any eligible agricultural business that pair or incurred security costs to safeguard agricultural chemicals. The IRS will be seeking to ensure that only qualified expenses by eligible taxpayers are considered and that those computing the credit are properly defining the term facilities to entitle them to the credit.
Deferral of Cancellation of Indebtedness Income: This will examine whether taxpayers who properly deferred cancellation of indebtedness (COD) income in 2009/2010 from the reacquisition of debt instruments report it properly beginning in 2014 (unless the law requires other reporting in their circumstances).
Energy Efficient Commercial Building Property: This campaign will ensure taxpayer compliance with the section 179D deduction for taxpayers who own or lease a commercial building and deduct the cost or portion of the cost of installing energy efficient commercial building property (EECBP).
Corporate Direct (Section 901) Foreign Tax Credit: This campaign will attempt to improve the IRS return examination process for domestic corporate taxpayers electing to take a credit for foreign taxes paid or accrued in lieu of a deduction. The IRS announcement noted that future FTC campaigns may address indirect credits and IRC 904(a) FTC limitation issues.
Section 956 Avoidance: This campaign will explore the use of cash pooling arrangements to improperly avoid the tax consequences of Section 956 when a Controlled Foreign Corporation (CFC) makes a loan to a US parent.
Economic Development Incentives: This campaign will look at the treatment of government economic incentives as non-shareholder capital contributions, allowing them to exclude it from gross income and claim a tax deduction without offsetting it by the tax credit received.
Individual Foreign Tax Credit (Form 1116): Examinations will look at taxpayers improperly calculating the Foreign Tax Credit amount on Form 1116. This credit is used to reduce U.S. income tax liability for the amount of foreign taxes paid on foreign source income.
Although some of the above issues seem to be efforts to improve internal procedures or clarify areas of the law where there has been some uncertainty by taxpayers, others could very well be the basis for a successful IRS whistleblower tip under section 7623(b) where more than $2 million is at issue.
The announcement of the additional 11 examination issues comes at the same time that there is a lot going on at the IRS. The U.S. House of Representatives is debating President Trump’s tax reform proposal and the Trump administration has appointed David Kautter as interim head of the IRS. Kautter temporarily replaces controversial IRS Commissioner John Koskinen, whose term came to an end yesterday. Koskinen was the 48th IRS Commissioner and has been serving in the role since he was sworn in at the end of 2013.