IRS to Perform Mandatory Audits of Foreign Earnings Repatriation

By Eileen Sherr, CPA, M. Tax., AICPA Technical Manager—Taxation, Washington, DC

The IRS Large and Mid-Size Business Division (LMSB) has identified foreign earnings repatriation as a Tier 1 compliance issue, making it a mandatory examination item for those U.S. taxpayers selected for audit that have elected to repatriate foreign earnings under Sec. 965.

The Service issued an industry directive, providing guidelines to IRS field agents for planning and completing an examination of U.S. companies that have made the election under Sec. 965 to repatriate earnings from their controlled foreign corporations (CFCs) at a reduced rate (see Industry Directive #1 on Section 965 Foreign Earnings Repatriation—IDR Questions).

The LMSB also issued a memorandum on the subject for IRS industry directors (LMSB-04-0907-063, Tier I Issue—Section 965 Foreign Earnings Repatriation Directive #1).

At a minimum, the IRS plans to use the following audit techniques on each case that involves a Sec. 965 foreign earnings repatriation issue:

  • Review Form 8895, One-Time Dividends Received Deduction for Certain Cash Dividends from Controlled Foreign Corporations, Form 1118, Foreign Tax Credit—Corporations, and other tax return information for consistency and accuracy;
  • Review the domestic reinvestment plan to ensure that it meets the requirements of the law and the published guidance;
  • Verify that the dividends were cash dividends; and
  • Review the supporting computations to ensure that the base period information, allowable dividend, related-party indebtedness, and related foreign tax credits were properly computed.

For more information on this issue, contact Eileen Sherr at (202) 434-9256 or esherr@aicpa.org.

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