February 2, 2017 LB&I announces first campaigns in new issue-based examination and compliance process The IRS Large Business and International Division (LB&I) has identified 13 campaigns to serve as its first focus areas under its new issue-based examination and compliance process. LB&I initially announced that it would be changing to a new issue-based exam selection process centered on "campaigns" in September 2015 (see Tax Alert 2015-1809). Under this new audit process, LB&I will identify and develop certain campaigns focused on specific issues and corresponding potential compliance risks. Campaign-related actions will include a variety of tools and treatment streams such as development of revenue agent training materials, practice units, published guidance, issue-based examinations, and "soft" letters. The purpose of the change is to streamline operations and improve identification of noncompliance to better utilize LB&I's limited resources. LB&I stated that the campaigns were selected based on extensive data analysis, IRS employee suggestions, and tax community feedback. It added that it will continue to take community feedback into account in identifying future campaigns. LB&I stated that it plans to identify more campaigns in the coming months. In addition to listing the subject matter of each campaign, LB&I briefly explained the issue and described the potential "treatment streams" (e.g., issue-based examinations, soft letters, published guidance), and named a lead IRS executive for each campaign. The 13 initial campaigns are described below, organized under three broad practice areas: enterprise activities, pass-through entities and international. Enterprise activities 1. Section 48C energy credit Issue: Ensure that the Section 48C energy credit is only being claimed by taxpayers whose projects were approved by the Department of Energy Treatment streams: Soft letters and issue-focused examinations 2. Domestic production activities deduction, MVPDs and TV broadcasters Issue: Address claims by multi-channel video programing distributors (MVPDs) and TV broadcasters that "groups" of channels or programs are a qualified film eligible for the Section 199 deduction (see Tax Alert 2017-0235 for additional information) Treatment streams: Development of an externally published practice unit, potential published guidance, and issue-based exams when warranted 3. Micro-captive insurance Issue: Address the new "transaction of interest" (TOI) (described in Notice 2016-66) relating to certain captive insurance companies that elect under Section 831(b) to be taxed only on taxable investment income (micro-captives) Treatment stream: Issue-based examinations 4. Related-party transactions Issue: Focus on transactions between commonly controlled entities that provide taxpayers a means to transfer funds from a corporation to related pass-through entities or shareholders Treatment stream: Issue-based examinations 5. Deferred variable annuity reserves & life insurance reserves IIR Issue: Using the Industry Issues Resolution (IIR) program, address uncertainties pertaining to deferred variable annuity reserves and life insurance reserve issues (see Revenue Procedure 2016-19) Treatment streams: Collaboration with industry stakeholders, development of published guidance 6. Basket transactions Issue: Address the structured financial transactions described in the listing notice, Notice 2015-73, and the TOI notice, Notice 2015-74, under which taxpayers attempt to defer and treat ordinary income and short-term capital gain as long-term capital gain Treatment streams: Issue-based examinations, soft letters to material advisors, and practitioner outreach 7. Land developers — completed contract method (CCM) Issue: Ensure that large land developers with average annual gross receipts over $10 million that construct in residential communities are not improperly using the Completed Contract Method (CCM) of accounting to defer all gain until the entire development is completed Treatment streams: Development of a practice unit, issuance of soft letters, and follow-up with issue-based examinations when warranted Pass-through entities 8. TEFRA linkage plan strategy Issue: Need to streamline processes for TEFRA partnership examinations Treatment streams: Develop new procedures and technology for revenue agents conducting TEFRA partnership examinations to identify, link and assess tax to terminal investors that pose the most significant compliance risk 9. S corporation losses claimed in excess of basis Issue: Ensure shareholders in S corporations are not claiming losses and deductions to which they are not entitled because they do not have sufficient stock or debt basis Treatment streams: Issue-based examinations, soft letters encouraging voluntary self-correction, stakeholder outreach and creation of a new form to assist shareholders in properly computing their basis International 10. OVDP declines-withdrawals Issue: Address Offshore Voluntary Disclosure Program (OVDP) applicants who applied for pre-clearance into the program but were either denied access to OVDP or withdrew from the program of their own accord Treatment streams: Variety of treatment streams, including examinations 11. Repatriation Issue: Address circumstances in which taxpayers are using different repatriation structures for purposes of tax-free repatriations or are not properly reporting repatriations as taxable events on their filed returns Treatment streams: Improvement of issue-selection filters while conducting examinations on identified high-risk repatriation issues 12. Form 1120-F non-filer Issue: Ensure foreign companies doing business in the US are meeting their Form 1120-F filing obligations Treatment streams: Identification of noncompliant foreign companies, soft letter outreach and examinations when warranted 13. Inbound distributors Issue: Address US distributors of goods sourced from foreign-related parties that claim losses or small profits on US returns that are not commensurate with the functions performed and risks assumed, and that would receive higher returns in arm's-length transactions Treatment stream: Issue-based examinations Implications This announcement signals the formal start of LB&I's long-anticipated move toward issue-based examinations and a campaign process that uses multiple treatment streams — including soft letters, published guidance, and issue-based examinations — to address areas of potential compliance risk. In the near term, it is likely that this campaign approach will comprise only a small part of LB&I's overall compliance program. It is anticipated, however, that the use of campaigns will become a larger portion of LB&I's compliance activity. LB&I has stated that it intends to release additional issue campaigns in the coming months. LB&I's stated goal for the use of issue campaigns is to improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources. It is expected that LB&I will release additional background materials concerning these campaigns to provide more clarity on the specific compliance concerns. Taxpayers potentially affected by any of these campaigns should consider developing strategies for how best to respond to any informal or formal inquiries from the IRS, including soft letters and issue-based examinations. Regarding LB&I's planned use of soft letters, taxpayers should have processes for ensuring such letters are properly routed within their organizations. ———————————————
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