The Large Business and International (LB&I) division of the IRS recently announced 11 additional issues that it will be targeting as part of its “compliance campaign” audit strategy.
The IRS had previously announced 13 compliance campaigns in January of 2017. The issue-based strategy is aimed at identifying areas that represent a risk of noncompliance.
The IRS identified the additional campaigns following LB&I data analysis and suggestions from IRS compliance employees. Seven of the additional campaigns involve the following international compliance issues:
- Form 1120-F refunds. This campaign is designed to verify withholding at source for Forms 1120-F (“U.S. Income Tax Return of a Foreign Corporation”) claiming refunds. To make a claim for a refund or credit to estimated tax with respect to any U.S. source income withheld under Chapters 3 or 4 of the Internal Revenue Code, a foreign entity must file a Form 1120-F. Before a refund is paid or a credit allowed, the IRS must verify that withholding agents have filed the required returns (Forms 1042, 1042-S, 8804, 8805, 8288 and 8288-A).
- Swiss Bank Program. In 2013, the U.S. Department of Justice announced the Swiss Bank Program as a path for Swiss financial institutions to resolve potential criminal liabilities. Banks that are participating in this program provide information on the U.S. persons with beneficial ownership of foreign financial accounts. This campaign will address noncompliance involving taxpayers who are or may be beneficial owners of these accounts.
- Foreign earned income exclusion. Individuals who meet certain requirements may qualify for the foreign earned income exclusion and/or the foreign housing exclusion or deduction. This campaign addresses taxpayers who have claimed these benefits but don’t meet the requirements.
- Form 1042-S credit. This audit campaign is intended to ensure that:
- The amount of withholding credits or refund/credit elect claimed on Forms 1040NR (“U.S. Nonresident Alien Income Tax Return”) is verified, and
- The taxpayer has properly reported the income reflected on Form 1042-S (“Foreign Person’s U.S. Source Income Subject to Withholding”). The IRS verifies the withholding credits reported on the Form 1042-S before issuing a refund.
- Corporate direct foreign tax credit (FTC). Domestic corporate taxpayers may elect to take a credit for foreign taxes paid or accrued, rather than a deduction. The goal of this campaign is to improve return/issue selection and resource utilization for returns that claim a direct FTC for taxes paid to a foreign country based on realized net income. This campaign will focus on taxpayers who are in an excess limitation position.
- Section 956 avoidance. This campaign focuses on situations where a controlled foreign corporation (CFC) doesn’t include in income money it lent to a U.S. parent. The goal is to determine to what extent taxpayers are using cash pooling arrangements and other strategies to improperly avoid taxes.
- Individual foreign tax credit (FTC). Individuals file Form 1116, “Foreign Tax Credit,” to reduce their U.S. income tax liability for the amount of foreign taxes paid on foreign source income. Due to the complexity of computing the FTC and challenges associated with third-party reporting information, some taxpayers face the risk of claiming an incorrect FTC amount.
In addition, the IRS recently launched four other campaigns involving:
- Economic development incentives,
- The agricultural chemicals security credit,
- The deferral of cancellation of indebtedness income, and
- The energy efficient commercial building deduction.
These campaigns are the second wave of LB&I’s issue-based compliance work. The IRS says “more campaigns will continue to be identified, approved and launched in the coming months.” If you have one of the identified issues, consult with your tax advisor to help you prepare for the possibility of an audit.