Just over two years ago, the IRS's Large Business and International (LB&I) division implemented a major restructuring intended to make better use of IRS resources. The plan involved four guiding principles:
- Cultivate an environment of continuous learning to support a flexible workforce with focused training, foundational skill sets, specialized knowledge, and dynamic tools;
- Use data analytics and examiner feedback to select better work with intended compliance outcomes;
- Employ an integrated set of tailored treatment streams to improve flexibility to address current and emerging issues and to achieve compliance outcomes; and
- Drive continual collection and analysis of data and feedback to enhance its ability to focus, plan, and execute work, and promote innovation and feedback-based improvement (see IRS LB&I FY2017 Focus Guide, available at www.irs.gov.
Following the same path many companies have taken, the LB&I restructuring plan leverages technology and data analysis to improve the division's performance by better targeting its compliance enforcement efforts. The linchpin of this plan is the new compliance campaign program. This discussion provides a short background on the compliance campaign program, followed by a short summary of each of the current compliance campaigns.
Compliance campaign program overview
In early 2017, LB&I announced the first of what are now 35 targeted compliance campaigns. These campaigns have not eliminated broad-based audits, especially with some of the largest taxpayers, but they represent a concrete move toward issue-focused examinations. LB&I believes this will enable it to improve taxpayer compliance in the most efficient and effective manner possible.
Although there is no regular schedule, LB&I has been releasing new lists of campaigns regularly, with 24 announced in 2017 and 16 announced so far in 2018. Data analysis contributes to the development of new campaigns, but LB&I also maintains an active internal portal where employees may submit recommendations for new campaigns. New ideas are evaluated, scoped, and risk assessed before they are released. The IRS says it has received hundreds of suggestions already, but it provides little other information regarding how campaigns are selected.
No standard format exists for how a campaign is structured, but the IRS has several general treatment streams it uses to address an issue in a campaign. In some cases, those treatments are aimed more toward taxpayer and tax preparer instruction than they are to punishment. These campaigns may result in the development of additional taxpayer guidance, IRS examiner guidance, or other guidance or outreach efforts on the issue.
The IRS may also choose to send "soft" letters alerting taxpayers and/or tax preparers to specific issues or asking for additional information. A campaign may also result in enforcement efforts, including updating IRS data models to better identify issues and performing targeted examinations of specific issues. Targeted examinations generally only involve an examination of the issue targeted in the campaign, but they may also be expanded into a broader taxpayer examination.
LB&I's structure has been split both geographically and by subject matter. Each campaign is aligned with one of the geographic areas (northeastern, eastern, central, and western) and/or a subject-matter area (passthrough entities, enterprise activities (corporations), cross-border activities, withholding and international individual compliance, and treaty and transfer-pricing operations). The international focus clearly identified by the subject-matter organization of LB&I carried over to the campaigns, where a large number of the campaigns target international issues.
- 48C energy credit: Use soft letters and issue-based examinations to ensure that only taxpayers with advanced energy products approved and allocated a credit by the Department of Energy are claiming the credit.
- Domestic production deduction — multi-channel video program distributors (MVPDs) and TV broadcasters: Use externally published practice unit, potential published guidance, and issue-based exams to address MVPDs and TV broadcasters that are improperly claiming the domestic production deduction.
- Microcaptive insurance: Use issue-based examinations to focus on Sec. 831(b) captive insurance transactions as identified in Notice 2016-66.
- Related-party transactions: Use issue-based examinations to identify the level of compliance with statutory and regulatory requirements for transactions among commonly controlled middle-market entities.
- Deferred variable annuity reserves and life insurance reserves: Collaborate with industry stakeholders, the Chief Counsel's Office, and Treasury to develop published guidance on these related issues.
- Basket transactions: Address structured financial transactions described in Notices 2015-73 and 2015-74 through issue-based examinations, soft letters to material advisers, and practitioner outreach.
- Land developers, completed-contract method: Through development of a practice unit, issuance of soft letters, and issue-based examinations, identify large residential land developers that are improperly using the completed-contract method of accounting.
- Energy-efficient commercial building property deduction: Use issue-based examinations to ensure taxpayer compliance with Sec. 179D for energy-efficient commercial building deduction claims.
- Costs facilitating Sec. 355 transactions: Use issue-based examinations to enforce compliance by requiring costs facilitating Sec. 355 transactions, such as spinoffs, split-offs, and split-ups, to be capitalized.
- Interest capitalization for self-constructed assets: Use issue-based examinations, educational soft letters, and taxpayer and practitioner education to ensure taxpayer compliance with Sec. 263A self-constructed asset interest capitalization rules.
- TEFRA linkage plan strategy: Focus on developing new LB&I procedures and technology to work with the revenue agent conducting the TEFRA (Tax Equity and Fiscal Responsibility Act) exam and identify, link, and assess tax on highest-risk terminal investors.
- S corporation losses: Identify S corporation shareholders claiming losses in excess of stock and debt basis through issue-based exams, issuing soft letters encouraging voluntary correction, conducting stakeholder outreach, and creating a new shareholder basis calculation form.
- Self-Employment Contributions Act tax: Identify partners who are not paying self-employment tax on their distributive share of income from a partnership to which they provide services, including limited partners and limited liability company members.
- Partnership stop filer: Identify and address issues with partnerships that have stopped filing tax returns but continue to have economic transactions that should be reported to their partners. Treatment streams include soft letters encouraging voluntary self-correction, issue-based examinations, and stakeholder outreach.
- Sale of partnership interest: Identify and address issues with taxpayers that improperly report or do not report the sale of a partnership interest through a variety of streams. Enforcement includes use of examinations, soft letters, practitioner and taxpayer outreach, software vendor outreach, and tax form and publication change suggestions.
- Income repatriation: Target high-risk foreign income repatriation transactions and improve identification of repatriation issues through examinations and improved issue-selection filters.
- Foreign corporations doing business in the United States: Identify foreign corporations required to file Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, through soft letter outreach to taxpayers.
- Corporate direct foreign tax credit: Implement issue-based examinations of corporate taxpayers in an excess credit limitation position.
- Sec. 956 avoidance: Identify taxpayers that use cash-pooling arrangements and other strategies to avoid an income inclusion when a controlled foreign corporation loans money to a U.S. parent, through issue-based examinations.
Withholding and international individual compliance
- OVDP declines and withdrawals: Use a variety of treatment streams including examinations and letters to address taxpayers who applied for preclearance into the offshore voluntary disclosure program (OVDP) but were either denied access or withdrew of their own accord.
- Form 1120-F withholding: Use examinations and other treatment streams to verify withholding at the source for Forms 1120-F claiming refunds. This includes verifying that proper returns have been filed (such as Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons; Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding; Form 8804, Annual Return for Partnership Withholding Tax; Form 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax; Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests; and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests).
- Swiss bank program: Use examinations and letters and other treatment streams to address noncompliance of U.S. taxpayers that were identified as owners of Swiss bank accounts through a joint program between the U.S. Department of Justice and Swiss financial institutions.
- Foreign earned income exclusion: Address noncompliance with foreign earned income exclusion rules through examinations and other treatment streams.
- Form 1042-S credit claimed on Form 1040NR: Use a variety of treatment streams including examinations to ensure the amount of withholding credits claimed on Form 1040NR, U.S. Nonresident Alien Tax Return, is verified and properly reported on Form 1042-S.
- Foreign trust noncompliance: Improve compliance with response to timely and accurate filing of foreign trust information returns through treatment streams including, but not limited to, examinations and penalties assessed by the IRS campus when forms are received late and/or are incomplete.
- Foreign withholding compliance: Use examinations toaddress noncompliance and errors made by U.S. withholding agents paying U.S.-source income to foreign persons, through treatment streams including examinations.
- Nonresident alien tax treaty exemptions: Increase compliance with nonresident alien treaty exemption claims through treatment streams including taxpayer outreach/education and traditional exams.
- Nonresident alien deductions: Use taxpayer outreach/education, traditional exams, and other treatment streams to increase compliance by nonresident aliens claiming deductions.
- Nonresident alien tax credits: Use taxpayer outreach/education, traditional exams, and other treatment streams to increase compliance by nonresident aliens claiming tax credits.
Treaty and transfer-pricing operations
- Inbound distributors: Use issue-based examinations to focus on identifying U.S. distributors of goods sourced from foreign countries that do not use an arm's-length transfer price.
- Agricultural chemicals security credit: Use issue-based examinations to verify that agricultural security chemical credits were claimed for qualified expenses.
- Partial disposition election for a building: Through issue-based examinations and possible changes to IRS forms, instructions, and publications, ensure compliance with the partial-disposition election for buildings enacted as part of the 2014 tangible property regulations.
- Economic development incentives: Use issue-based examinations to identify taxpayers that improperly treat incentives as nonshareholder capital contributions.
- Individual foreign tax credit: Use a variety of treatment streams including examinations to address taxpayer noncompliance with computing the individual foreign tax credit limit on Form 1116, Foreign Tax Credit.
- Deferral of cancellation of indebtedness: Use issue-based examinations to ensure taxpayer compliance with a law allowing limited deferral for recognizing cancellation-of-indebtedness income from 2009 and 2010.
The list keeps growing; as this item went to press, LB&I announced five more campaigns. Businesses that report items on their tax returns related to the various compliance campaigns will likely see increased scrutiny on those items during IRS examinations.
Howard Wagner is a partner with Crowe LLP in Louisville, Ky.
For additional information about these items, contact Mr. Wagner at 502-420-4567 or email@example.com.
Unless otherwise noted, contributors are members of or associated with Crowe LLP.