The Internal Revenue Service’s Large Business and International division is launching 11 more compliance campaigns looking at various ways to ensure companies are meeting their tax obligations.
The LB&I division announced in January the rollout of its first 13 campaigns (see IRS rolls out new compliance campaigns for large businesses and international taxpayers). It’s continuing to move toward issue-based examinations and a compliance campaign process in which it decides which compliance issues present the most risks and require various types of treatment. This approach makes use of IRS knowledge and aims to deploy the appropriate resources to address those issues. The 11 additional campaigns were identified through data analysis and suggestions from IRS compliance employees with the goal of improving return selection, identifying issues representing a risk of noncompliance, and making the most use of limited resources.
The 11 campaigns selected for this rollout are:
• Form 1120-F Chapter 3 and Chapter 4 Withholding Campaign
This campaign is designed to verify withholding at source for 1120-Fs claiming refunds. To make a claim for refund or credit to estimated tax on any U.S. source income withheld under chapters 3 or 4, a foreign entity has to file a Form 1120-F. Before a claim for credit (refund or credit elect) is paid, the IRS must verify that withholding agents have filed the required returns (Forms 1042, 1042-S, 8804, 8805, 8288 and 8288-A). This campaign focuses upon verification of the withholding credits before the claim for refund or credit is allowed. The campaign will address noncompliance through different treatment streams including, but not limited to, examinations.
• Swiss Bank Program Campaign
In 2013, the Justice Department announced the Swiss Bank Program as a path for Swiss financial institutions to resolve potential criminal liabilities. Banks participating in the program supply information on U.S. taxpayers with beneficial ownership of foreign financial accounts. The campaign will address noncompliance of taxpayers who are or may be beneficial owners of these accounts, through a variety of treatment streams including, but not limited to, examinations.
• Foreign Earned Income Exclusion Campaign
People who meet certain requirements may qualify for the foreign earned income exclusion and/or the foreign housing exclusion or deduction. This campaign deals with taxpayers who have claimed those benefits but don’t meet the requirements. The IRS will address noncompliance through a variety of treatment streams, including examination.
• Verification of Form 1042-S Credit Claimed on Form 1040NR
This campaign aims to ensure the amount of withholding credits or refund/credit elect claimed on Forms 1040NR, U.S. Nonresident Alien Tax Return, is verified and whether the taxpayer has accurately reported the income reflected on Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. Before a refund is issued or credit allowed, the IRS verifies the withholding credits reported on Form 1042-S. The campaign will address noncompliance through different treatment streams including, but not limited to, examinations.
• Agricultural Chemicals Security Credit Campaign
The Agricultural chemicals security credit is claimed under Section 45O of the Tax Code and allows a 30 percent credit to any eligible agricultural business that paid or incurred security costs to safeguard agricultural chemicals. The credit is nonrefundable and is limited to $2 million a year on a controlled group basis with a 20-year carryforward provision. On top of that, there is a facility limitation outlined in Section 45O(b). The IRS will verify that only qualified expenses by eligible taxpayers are considered and that taxpayers are properly defining facilities when they’re figuring the credit. The treatment stream for this campaign is issue-based examinations.
• Deferral of Cancellation of Indebtedness Income Campaign
During 2009 and 2010, taxpayers who incurred cancellation of indebtedness income from the reacquisition of debt instruments at an issue price less than the adjusted issue price of the original instrument may have elected to defer the COD income. Taxpayers are supposed to report the COD income ratably over five years starting in 2014 and continuing through 2018. When a taxpayer defers the COD income, any related original issue discount 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 campaign will verify that taxpayers who properly deferred COD income in 2009/2010 properly report it in subsequent years starting in 2014, unless an accelerating event requires earlier recognition under Section 108(i) of the Tax Code; and/or properly defer reporting OID deductions during the deferral period under Section108(i)(2). The treatment stream for this campaign is issue-based examinations. The IRS is considering the use of so-called “soft letters” mailed to taxpayers to encourage compliance.
• Energy Efficient Commercial Building Property Campaign
The Energy Efficient Commercial Building Deduction (Section 179D of the Tax Code) permits taxpayers who own or lease a commercial building to deduct the cost or portion of the cost of installing energy efficient commercial building property. If the equipment is installed in a government-owned building, the deduction is allocated to the people primarily responsible for designing the property. The goal of the campaign is to ensure taxpayer compliance with the Section 179D deduction. The treatment stream is issue-based examinations.
• Corporate Direct (Section 901) Foreign Tax Credit
Domestic corporate taxpayers may elect to take a credit for foreign taxes paid or accrued in lieu of a deduction. The goal of the campaign is to improve return and issue selection through filters and resource utilization for corporate returns that claim a direct Foreign Tax Credit under Section 901 of the Tax Code. The campaign will focus on taxpayers who are in an excess limitation position. The treatment stream will be issue based examinations. This is the first of several FTC campaigns planned by the IRS. Future campaigns may address indirect credits and FTC limitation issues under Section 904(a).
• Section 956 Avoidance
If a Controlled Foreign Corporation makes a loan to its U.S. parent, Section 956 generally requires an income inclusion equal to the amount of the loan. This campaign focuses on situations where a controlled foreign corporation loans funds to a U.S. parent company, but doesn’t include a Section 956 amount in income. The goal of the campaign is to determine to what extent taxpayers are using cash pooling arrangements and other strategies to improperly avoid the tax consequences. The treatment stream is issue based examinations.
• Economic Development Incentives Campaign
Taxpayers can be eligible to receive various government economic incentives, such as refundable credits (refunds in excess of tax liability), tax credits against other business taxes (i.e. payroll tax), nonrefundable credits (refunds limited to tax liability), transfer of property including land, and grants including cash payments. Some taxpayers improperly treat those 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 the IRS campaign is to ensure taxpayer compliance, and the treatment stream is issue-based examinations.
• Individual Foreign Tax Credit (Form 1116)
Individuals file Form 1116 to claim a credit that reduces their U.S. income tax liability for the amount of foreign taxes paid on their income from foreign sources. The campaign addresses taxpayer compliance with the computation of the foreign tax credit limitation on Form 1116. Due to the complexity of figuring the Foreign Tax Credit and the challenges associated with third-party reporting information, some taxpayers face the risk of claiming an incorrect amount for the credit. The IRS will address noncompliance through various treatment streams including examinations.
The 11 new campaigns represent a second wave of the IRS LB&I division's issue-based compliance work, but it plans to identify, approve and launch more campaigns in the months ahead.
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