Continuing a process that it began in January 2017, IRS Large Business and International division (LB&I) has announced the approval of five additional compliance campaigns.
Background. In January of 2017, IRS announced a new audit strategy for its LB&I division known as “campaigns” essentially, shifting its strategy toward issue-based examinations based on compliance issues that LB&I determines present greater levels of compliance risk and thereby improving return selection. IRS initially selected 13 compliance issues when it rolled out this strategy (see “IRS rolls out Large Business and International campaign audit strategy” (2/2/2017).
In November, 2017 (see “IRS adds new issues to LB&I’s campaign audit strategy”); March, 2018 (see “IRS adds new issues to LB&I’s campaign audit strategy“); and May, 2018 (see “IRS again adds issues to LB&I’s campaign audit strategy”), IRS added to the initial January 2017 list.
New issues identified. On July 2, 2018, IRS announced that it has identified and selected the following five additional issues:
… Restoration of sequestered AMT credit carryforward. This campaign targets taxpayers who improperly restore the sequestered alternative minimum tax (AMT) credit to a subsequent tax year. Refunds issued or applied to a subsequent year’s tax, under Former Code Section 168(k)(4) ((which provided the election to trade depreciation benefits for a refund of otherwise-deferred AMT credits), are subject to sequestration and are a permanent loss of refundable credits. Taxpayers may not restore the sequestered amounts to their AMT credit carryforward. Initially, soft letters will be mailed to taxpayers who are identified as making improper restorations of sequestered amounts, and taxpayers will be monitored for subsequent compliance.
… S corporation distributions. S corporations and their shareholders are required to properly report the tax consequences of distributions. This campaign focuses on three issues: (1) when an S corporation fails to report gain upon the distribution of appreciated property to a shareholder; (2) when an S corporation fails to determine that a distribution (in either cash or property) is properly taxable as a dividend; and (3) when a shareholder fails to report non-dividend distributions in excess of their stock basis that are subject to taxation. This campaign includes issue-based examinations, tax form change suggestions, and stakeholder outreach.
…Virtual currency. U.S. persons are subject to tax on worldwide income from all sources including transactions involving virtual currency. IRS Notice 2014-21, 2014-16 IRB 938, states that virtual currency is property for federal tax purposes and provides information on the U.S. federal tax implications of convertible virtual currency transactions. This campaign addresses noncompliance related to the use of virtual currency through multiple approaches, including outreach and examinations. The compliance activities will follow the general tax principles applicable to all transactions in property, as outlined in Notice 2014-21. IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts, future guidance, and development of Practice Units. Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practical. IRS is not contemplating a voluntary disclosure program specifically to address tax non-compliance involving virtual currency.
… Repatriation via foreign triangular reorganizations. In December 2016, IRS issued Notice 2016-73, 2016-52 IRB 908, which curtails the claimed “tax-free” repatriation of basis and untaxed controlled foreign corporation (CFC) earnings following the use of certain foreign triangular reorganization transactions. This campaign will identify and challenge these transactions by educating and assisting examination teams in audits of these repatriations.
…Code Sec. 965 transition tax.Code Sec. 965 requires U.S. shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the U.S. Taxpayers may elect to pay the transition tax in installments over an eight-year period. For some taxpayers, some or all of the tax will be due on their 2017 income tax return. The tax is payable as of the due date of the return (without extensions). LB&I has engaged in an outreach campaign to leverage the reach of trade groups, advisors and other outside stakeholders to raise awareness of the filing and payment obligations under this provision.