March 16, 2018 IRS announces five new LB&I campaigns On March 13, 2018, the IRS Large Business and International Division (LB&I) identified five new campaigns that expand its focus areas under its issue-based examination and compliance process, with a particular emphasis on passthrough entity issues. LB&I announced its first 13 campaigns on January 31, 2017 (see Tax Alert 2017-0234) and an additional 11 campaigns on November 3, 2017 (see Tax Alert 2017-1876) Campaigns are designed to select returns with identified potential compliance risks. As before, LB&I plans to address noncompliance through a variety of "treatment streams," although all five of the new campaigns identify issue-based examinations as a treatment stream. Other treatment streams could include outreach efforts, changes to IRS forms and publications, and "soft" letters. The announcement noted that the five new campaigns, like previously announced campaigns, were identified through LB&I data analysis and suggestions from IRS compliance employees. LB&I's stated goal is to improve return selection, identify issues representing a risk of non-compliance and make the greatest use of limited resources. In the new announcement, LB&I briefly explained the issue underlying each campaign, described the potential treatment streams, and named the lead LB&I executive and practice area. The five new campaigns are described below, organized into three passthrough-entity campaigns and two other campaigns. Passthrough entity campaigns SECA tax Issue: Partners in a partnership that render services are subject to self-employment tax under the Self-Employment Contributions Act (SECA) on their distributive share of the partnership's income. However, some limited partners and limited liability company (LLC) members that render services on behalf of their partnership or LLC do not report flow-through income as earnings from self-employment subject to SECA tax. This campaign aims to increase compliance with SECA "as supported by several recent court decisions." Treatment streams: issue-based examinations and outreach to practitioners, professional service provider associations and software vendors Partnership stop filer Issue: Some partnerships continue to have economic transactions after they have stopped filing tax returns for various reasons. These transactions are often not being reported to the partners. This campaign aims to address this non-reporting issue. Treatment streams: issue-based examinations, soft letters encouraging voluntary self-correction and stakeholder outreach Sale of partnership interest Issue: Partners must report the sale of partnership interests on their tax return. However, some partners do not report such sales or else incorrectly report the associated gains or losses. This campaign aims to ensure such gains are being reported correctly — with regard to both their amount and character. Treatment streams: variety, including but not limited to examinations and soft letters Other campaigns Costs that facilitate a Section 355 transaction Issue: Costs to facilitate tax-free corporate distributions under Section 355 must be capitalized, but some taxpayers improperly deduct such costs in the year the distribution was completed. This campaign is aimed at ensuring the costs to facilitate such distributions are capitalized, not currently deducted. Treatment streams: issue-based examinations Partial disposition election for buildings Issue: Section 168 disposition regulations include rules for recognizing gain or loss on the disposition of MACRS property and allow taxpayers to elect to recognize partial dispositions of property. This campaign aims to ensure taxpayers accurately recognize gain or loss on the partial disposition of a building, including its structural components. Treatment streams: issue-based examinations and potential changes to IRS forms and supporting instructions and publications Implications This announcement continues LB&I's expansion of the scope of its campaign program. These five new campaigns confirm LB&I's intent to incrementally move to an issue-based program. LB&I executives have previously stated that the ultimate goal is to have campaigns account for more than 50% of LB&I's compliance program. These new campaigns show a focus by LB&I on the passthrough area. In addition,LB&I included geographic executive leads, along with practice area executive leads, for four of the five new campaigns, potentially indicating that some campaigns could be focused in a certain geography at least initially.Also of note is the expanded use of alternate treatment streams, including soft letters. Taxpayers that may be affected by a campaign should consider developing strategies to effectively respond to any formal or informal inquiries from the IRS (i.e., issue-based examinations or "soft" letters). For soft letters, taxpayers should ensure that there are processes in place to route the letters to the proper personnel in their organization. ———————————————
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