September 14, 2018 IRS announces five new LB&I campaigns On September 10, 2018, the IRS Large Business and International Division (LB&I) identified five new campaigns that expand the focus areas under its issue-based examination program. These campaigns are in addition to the 13 campaigns announced on January 31, 2017 (see Tax Alert 2017-0234), the 11 campaigns announced on November 3, 2017 (see Tax Alert 2017-1876) the five campaigns announced on March 13, 2018 (see Tax Alert 2018-0577), the six campaigns announced on May 21, 2018 (Tax Alert 2018-1112), and the five campaigns announced on July 2, 2018. The IRS has now announced 45 total campaigns. 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," including issue-based examinations, outreach/education, and other approaches. LB&I stated that the five campaigns were identified through LB&I data analysis and suggestions from IRS compliance employees. LB&I's stated goal for its campaigns is to improve return selection, identify issues representing a risk of non-compliance and make the greatest use of limited resources. In the announcement, LB&I briefly explains each issue, describes the planned treatment streams, and names the lead LB&I executive and practice area. 1. IRC Section 199 — claims risk review This campaign will focus on business entities that file Domestic Production Activity Deduction (DPAD) claims under Section 199. In this respect, the IRS notes that the Tax Cuts and Jobs Act repealed the DPAD for tax years beginning after December 31, 2017. For this campaign, the IRS aims to ensure taxpayer compliance through a claim risk review assessment and issue-based examinations of claims with the greatest compliance risk. 2. Syndicated conservation easement transactions This campaign seeks to ensure that easement contributions meet legal requirements for deductions and that fair market values are accurate. The IRS also notes that Notice 2017-10 designated specific syndicated conservation easement transactions as listed transactions, requiring disclosure statements by both investors and material advisors. This campaign will use an initial treatment stream of issue-based examinations, with other treatment streams to be considered as the campaign progresses. 3. Foreign base company sales income: manufacturing branch rules This campaign will identify and select for examination returns of US shareholders of controlled foreign corporations (CFCs) that may have underreported subpart F income based on certain interpretations of the manufacturing branch rules. The IRS explained that, in general, foreign base company sales income (FBCSI) does not include income of a CFC derived in connection with the sale of personal property manufactured by that corporation. If a CFC manufactures property through a branch outside its country of incorporation, however, the manufacturing branch may be treated as a separate, wholly-owned subsidiary of the CFC for purposes of computing the CFC's FBCSI, which may result in a subpart F inclusion to the CFC's US shareholder(s). 4. 1120F Interest expense/home office expense This campaign addresses compliance with what the IRS states are two of the largest deductions claimed on Form 1120F, U.S. Income Tax Return of a Foreign Corporation: (1) interest expense deductions under Reg. Section 1.882-5 allocable to a foreign corporations' effectively connected income, and (2) home office expense deductions allocated to effectively connected income. In this campaign, the IRS will seek to identify aggressive positions in these areas, such as the use of apportionment factors that may not attribute the proper amount of expenses to the calculation of effectively connected income. The treatment stream for this campaign is issue-based examinations 5. Individuals employed by foreign governments & international organizations This campaign will focus on tax compliance of individuals who are employees of foreign embassies, foreign consular offices and various international organizations. The IRS notes that such entities are not required to withhold federal income and social security taxes from their employees' compensation, nor are they required to file information reports with the IRS. The IRS believes this lack of withholding and reporting, combined with employee lack of knowledge of tax obligations, results in unreported income, erroneous deductions and credits, and failure to pay taxes. The treatment streams for this campaign will include outreach and education by partnering with the Department of State's Office of Foreign Missions to inform employees of foreign embassies, consular offices and international organizations of their filing obligations. The IRS will also issue soft letters and conduct examinations. Implications With the addition of these five new campaigns, the IRS has now announced 45 campaigns in total demonstrating the continued LB&I transition to an issue-based examination program for which a return is selected for audit based on an identified campaign issue. LB&I has previously stated that its goal is to have campaigns account for more than 50% of its examination program. 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). ———————————————
———————————————
| ||||||||||||||||||||||||
| ||||||||||||||||||||||||
