IRS faced challenges in developing TCJA international tax guidance

The Internal Revenue Service had a difficult time coming out with guidance, forms and instructions for provisions of the Tax Cuts and Jobs Act like the Global Intangible Low-Taxed Income, or GILTI, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, noted that the TCJA’s international reforms included shifting the tax regime toward more of a quasi-territorial system for multinational corporations to reduce the incentive for domestic companies to shift their assets overseas, while seeking to protect the U.S. domestic tax base from tax avoidance by both domestic and foreign-based multinationals.

The TCJA includes a total of 119 provisions that are administered by the IRS and affect both domestic and international taxes. Twenty-three of the 119 tax provisions affect international taxation administration.

IRS headquarters in Washington, D.C.
IRS headquarters in Washington, D.C.

The significant new provisions include acronyms such as GILTI, FDII (Foreign-Derived Intangible Income) and BEAT (Base Erosion and Anti-Abuse Tax). GILTI aims to reduce the incentive for U.S.-based multinational corporations to shift profits out of the U.S. into low- or zero‑tax jurisdictions. FDII is income from intangible assets, including patents, trademarks and copyrights. BEAT is designed to prevent certain U.S. corporations with average annual gross receipts during a three‑year period of at least $500 million from reducing their “regular tax liability” by “base erosion payments” made to “foreign related parties.”

The report found the IRS encountered significant challenges in developing the timely guidance needed to implement international provisions. “This affected the Large Business and International Division’s ability to develop compliance plans and provide training to its employees,” said the report. “The Act required the development of new tax forms and instructions as well as significant revisions to existing tax forms that increased the reporting burden for affected taxpayers. For instance, Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, required 22 changes.”

TIGTA also found the IRS LB&I Division ran into significant challenges in terms of processing of certain electronically filed 2018 tax returns because of the compressed delivery deadlines for processing changes, the timing of the issuance of guidance, and the federal government shutdown. As a result, the LB&I Division will have less tax return information available for data analytics critical to the development and implementation of compliance plans for this year’s taxes.

In addition, the LB&I Division encountered hiring and training challenges in its implementation of the international provisions during 2018 and 2019. As a result, the LB&I Division didn’t have enough subject matter expertise to respond to taxpayers’ inquiries and develop compliance strategies to ensure that taxpayers comply with the TCJA’s filing requirements for the international provisions.

TIGTA made no recommendations in the report, but some key IRS officials reviewed the report before it was issued and agreed with its facts and conclusions, according to TIGTA.

The IRS LB&I Division is closely monitoring the impact of the international tax provisions of the TCJA going forward. “Looking ahead, we are working to understand taxpayer behavioral changes that will come about from these different provisions and the interplay between some of the provisions,” wrote Douglas W. O’Donnell, commissioner of the LB&I Division, in response to the report. “We continue to refine our compliance and enforcement strategy for TCJA, including the development of campaigns, treatment streams and taxpayer education.”

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