On October 30, 2018, the IRS announced that it has selected five new Large Business and International (LB&I) compliance campaigns, bringing to 50 the total number of LB&I compliance campaigns announced since passage of the Tax Cuts and Jobs Act (TCJA). The IRS describes the five new campaigns as pertaining to: (1) phase 2 of the individual foreign tax credit; (2) offshore service providers; (3) FATCA filing accuracy; (4) the Section 1120-F delinquent returns campaign; and (5) the work opportunity tax credit.

These new campaigns are in addition to: 13 campaigns announced on January 31, 2017 (see Tax Alert 2017-0234); 11 campaigns announced on November 3, 2017 (Tax Alert 2017-1876); 5 campaigns announced on March 13, 2018 (Tax Alert 2018-0577); 6 campaigns announced on May 21, 2018 (Tax Alert 2018-1112); 5 campaigns announced on July 2, 2018; and 5 campaigns announced on September 10, 2018 (Tax Alert 2018-1823).

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 states 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. Individual foreign tax credit phase II

This campaign addresses taxpayers who have claimed the Section 901 credit against US tax on foreign-sourced income but do not meet the requirements for claiming the credit. Section 901 allows a dollar-for-dollar credit against US tax on foreign-sourced income for foreign taxes paid on this income. The IRS plans to address noncompliance through various treatment streams, including examinations.

2. Offshore service providers

This campaign addresses US taxpayers who hired offshore service providers to help create foreign entities and tiered structures to conceal the beneficial ownership of foreign financial accounts and assets to avoid or evade tax. The IRS intends to handle this campaign through issue-based examinations.

3. FATCA filing accuracy

This campaign addresses entities that fail to meet their reporting obligations under the Foreign Account Tax Compliance Act (FATCA). Generally, FATCA requires foreign financial institutions and some non-financial foreign entities to report foreign assets held by their US account holders and substantial US owners. The IRS plans to address this noncompliance through various treatment streams, including terminating FATCA status.

4. 1120-F delinquent returns campaign

This campaign is intended to encourage foreign entities to timely file Form 1120-F returns and to address compliance risks for delinquent 1120-F returns. The IRS plans to accomplish this goal through field examinations of delinquent returns and educational outreach programs.

5. Work opportunity tax credit

This campaign addresses the consequences of work opportunity tax credit (WOTC) certification delays and the burden of filing amended returns. Delays associated with the WOTC certification process often result in taxpayers' being required to amend multiple years of federal and state returns to claim the WOTC in the year that qualified WOTC wages were paid. The IRS notes that this "requirement, coupled with any resulting examinations of this issue, is an inefficient use of both taxpayer and IRS resources." The IRS agreed to accept the WOTC year-of-credit eligibility issue into the Industry Issue Resolution (IIR) program "to provide remedies to reduce taxpayer burden, promote consistency, and decrease examination time to most effectively use IRS resources."

The IRS's objective in the campaign is to collaborate with industry stakeholders, IRS Chief Counsel, and Treasury to develop an LB&I directive for taxpayers experiencing late WOTC certifications and to promote consistency in examinations of WOTC claims.

Implications

The addition of these five new campaigns shows LB&I's continued efforts to move toward an issue-based examination program in which selection of tax returns for audits will be based on identified campaign issues. These new campaigns primarily focus on additional international and withholding campaign issues that complement several of the earlier campaigns targeting international individual and withholding issues. 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). In addition, the entire list of 50 campaign issues can be used as source for assessing potential tax controversy risks and in the preparation of IRS audit-ready files.

Of note, the IRS intends to accomplish the goals of the WOTC campaign through its IIR program, unlike the four other LB&I campaigns announced on October 30. As more fully described in Revenue Procedure 2016-19, the IIR Program "is intended to be a collaborative effort that fosters constructive dialogue in an attempt to address issues in a manner that enhances good tax administration."

The WOTC year-of-credit eligibility issue has resulted in a significant burden on taxpayers in the form of lengthy examinations and the annual exercise of amending multiple years of federal and state returns. Given the intent of the IIR Program and its collaborative nature, it is encouraging that the IRS has agreed to engage with industry stakeholders on the WOTC issue in this format. As stated in the announcement, the IRS recognizes the burden of requiring taxpayers to amend multiple years of federal and state returns in order to claim the WOTC and intends to provide remedies to reduce that burden. Therefore, it is possible that the WOTC campaign could result in favorable guidance providing taxpayers with an alternative option related to the timing of reporting the WOTC benefit, in addition to promoting consistency among and streamlining IRS examinations.

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