July 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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On July 2, 2018, the IRS announced the creation of another five compliance campaigns. Let’s discuss these July 2018 IRS Compliance Campaigns in more detail.

July 2018 IRS Compliance Campaigns: Background Information

The IRS compliance campaigns is the end result of a long period of planning by the IRS Large Business and International division (“LB&I”). The idea behind the IRS compliance campaigns is to concentrate the LB&I resources in a way that deals with the potential noncompliance area in the most efficient way. The first campaigns were announced by the IRS on January 31, 2017. Then, the IRS rapidly added new campaigns in November of 2017, March of 2018 and May of 2018. As of July 1, 2018, there were 35 campaigns outstanding.

Five New July 2018 IRS Compliance Campaigns

Here are the new July 2018 IRS Compliance campaigns that should be added to the already existing thirty-five campaigns: Restoration of Sequestered AMT Credit Carryforward, S Corporation Distributions, Virtual Currency, Repatriation via Foreign Triangular Reorganizations and Section 965 Transition Tax.

Each of these campaigns was identified by the IRS through LB&I data analysis and suggestions from IRS employees.

July 2018 IRS Compliance Campaigns: Restoration of Sequestered AMT Credit Carryforward

This campaign deals with the complex issues concerning sequestered Alternative Minimum Tax (“AMT”) credit. Refunds issued or applied to a subsequent year’s tax, pursuant to IRC Section 168(k)(4), are subject to sequestration and are a permanent loss of refundable credits. Taxpayers may not restore the sequestered amounts to their AMT credit carryforward, but some are doing so in any case.

Given the complexity of the issues involved, the IRS decided to make soft letters as the primary treatment stream for this campaign. Soft letters will be mailed to taxpayers who are identified as making improper restorations of sequestered amounts. The IRS will then monitor these taxpayers to make sure that they correct the problem and stay in compliance. The idea is to educate taxpayers on the proper treatment of sequestered AMT credits so that they self-correct all problems.

July 2018 IRS Compliance Campaigns: S Corporation Distributions

This is a very important campaign that will affect a very large number of small business owners. It will focus on three major problem areas. The first issue is failure to report gain upon the distribution of appreciated property to a shareholder. The second issue is the proper classification of a corporate distribution (of cash and property) as a taxable dividend. Finally, the third issue concerns non-dividend distributions to shareholders in excess of their stock basis; such distributions are taxable. The IRS adopted a more severe approach to this campaign. The treatment streams for this campaign include issue-based examinations, tax form change suggestions and stakeholder outreach.

July 2018 IRS Compliance Campaigns: Virtual Currency

This campaign is the IRS attempt to catch up with modern technology and properly tax transactions that involve virtual currencies. IRS Notice 2014-21 classifies virtual currency as “property” for federal tax purposes. Hence, any sales or exchanges that involve virtual currencies will be taxable in the United States.

The fact that these transactions take place outside of the United States would not affect the taxability of foreign currencies as long as a US tax resident is involved in these transactions. As Sherayzen Law Office has pointed out numerous times in the past, US tax residents are subject to taxation on their worldwide income. This rule includes virtual currencies.

This campaign involves highly complex issues and requires flexible approach to compliance enforcement. This is why the IRS will address noncompliance related to the use of virtual currency through multiple treatment streams including outreach and examinations.

The IRS has expressly stated that its compliance enforcement activities will follow the general tax principles applicable to all transactions in property as outlined in Notice 2014-21. The IRS will also continue to consider and solicit taxpayer and practitioner feedback in education efforts, future guidance and development of Practice Units.

Interestingly enough, the IRS stated that it will not create a voluntary disclosure program specifically to address tax non-compliance involving virtual currency. Instead, the IRS urges taxpayers with unreported virtual currency transactions to self-correct their returns as soon as practical.

July 2018 IRS Compliance Campaigns: Repatriation via Foreign Triangular Reorganizations

This campaign focuses on enforcement of Notice 2016-73 (“the Notice”) which the IRS issued in December of 2016. The Notice curtails the claimed “tax-free” repatriation of basis and untaxed CFC earnings following the use of certain foreign triangular reorganization transactions. The goal of the campaign is to identify and challenge these transactions by educating and assisting examination teams in audits of these repatriations.

July 2018 IRS Compliance Campaigns: Section 965 Transition Tax

This is a highly important campaign that focuses on the issue that will continue to plague US taxpayers for a long time – 965 transition tax. IRC Section 965 requires US shareholders (a term of art) to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Taxpayers may elect to pay the transition tax as a lump-sum payment or in installments over an eight-year period. This means that some (and probably most) of these US shareholders should have paid some or all of the tax on their 2017 income tax return.

The LB&I already engaged in an outreach campaign in 2018 to reach trade groups, advisors and other outside stakeholders to raise awareness of filing and payment obligations concerning the 965 transition tax. The IRS even circulated an external communication on this subject through stakeholder channels in April of 2018.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their US tax compliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

IRS Large Corporate Compliance Program | IRS Lawyer & Attorney

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On May 16, 2019, the IRS Large Business and International Division (“LB&I”) announced the creation of a new compliance program for the large corporations – Large Corporate Compliance program.

The Large Corporate Compliance program will cover the oversight of the LB&I’s largest corporate taxpayers. It replaces the existing Coordinated Industry Case program.

The replacement of the Coordinated Industry Case program is not unexpected. Ever since the IRS announced that it would switch to compliance campaigns for case selection purposes, the future of the old program was in doubt. Moreover, the Coordinated Industry Case program used criteria that did not incorporate many of the advancements made by the IRS in the area of data analysis. Hence, it is not surprising that the May 16 announcement came right after the LB&I began on May 15, 2019 a new application of data analytics for determining the population of its largest and most complex corporate taxpayers.

The IRS stated that the Large Corporate Compliance program will determine on a different, automatic basis who should be covered by the program. In fact, the program employs automatic application of the large case pointing criteria to determine the LCC population. For example, pointing criteria include such items as gross assets and gross receipts. In the past, this was done on a manual, localized basis. Automated pointing allows a more objective determination of the taxpayers that should be part of the population.

After the population is determined, data analytics is used to identify the returns that pose the highest compliance risk. The Large Corporate Compliance program further improves LB&I’s ability to efficiently focus its resources on noncompliance.

The Large Corporate Compliance program will coordinate its work with the LB&I agents and examiners who apply their experience and expertise in undertaking compliance actions and determining compliance treatment streams of the biggest and most-complex corporate taxpayers. The IRS happily stated that each enhances the other.

The IRS further shared that the program includes continuous improvement using an agile model principle to continually monitor and improve based on feedback from stakeholders including field teams, practice networks, and data scientists.

Sherayzen Law Office carefully watches the new IRS moves with respect to its compliance programs to determine their impact on the firm’s clients.

May 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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On May 21, 2018, the IRS announced the creation of another six compliance campaigns. Let’s explore these May 2018 IRS Compliance Campaigns in more detail.

May 2018 IRS Compliance Campaigns: Background Information

After a long period of planning, the IRS Large Business and International division (“LB&I”) finalized its new restructuring plan in 2017. Under the new plan, LB&I decided to switch to issue-based examinations and IRS campaigns.

The idea behind the IRS compliance campaigns is to concentrate the LB&I limited resources where they are most needed – i.e. where there is the highest risk of noncompliance. The first campaigns were announced by the IRS on January 31, 2017. Then, the IRS introduced additional campaigns in November of 2017 and March of 2018. As of March 13, 2018, there were a total of twenty-nine campaigns outstanding.

Six New May 2018 IRS Compliance Campaigns

On May 21, 2018, the LB&I introduced the following new campaigns: Interest Capitalization for Self-Constructed Assets; Forms 3520/3520-A Non-Compliance and Campus Assessed Penalties; Forms 1042/1042-S Compliance; Nonresident Alien Tax Treaty Exemptions; Nonresident Alien Schedule A and Other Deductions; and NRA Tax Credits. Each of these campaigns was selected by the IRS through the analysis of the LB&I data as well as from suggestions made by IRS employees.

It is also important to point out that each of these campaigns as well as the twenty-nine previous campaigns were reviewed by the IRS in light of the 2017 Tax Reform (which was enacted on December 22, 2017).

May 2018 IRS Compliance Campaigns: Interest Capitalization for Self-Constructed Assets

The first campaign focused on the Internal Revenue Code (“IRC”) Section 263A. Under this provision if a taxpayer engaged in certain production activities with respect to “designated property”, he is required to capitalize the interest that he incurs or pays during the production period with respect to this property.

IRC Section 263A(f) defined “designated property” as: (a) any real property, or (b) tangible personal property that has: (i) a long useful life (depreciable class life of 20 years or more), or (ii) an estimated production period exceeding two years, or (iii) an estimated production period exceeding one year and an estimated cost exceeding $1,000,000.

The IRS created this campaign with the goal of ensuring taxpayer compliance by verifying that interest is properly capitalized for designated property and the computation to capitalize that interest is accurate. Construction companies are likely to be the most immediate target of this campaign. Given the fact that Section 263A is not well-known, the IRS adopted varous treatment streams for this campaign, including issue-based examinations, education soft letters, and educating taxpayers and practitioners to encourage voluntary compliance.

May 2018 IRS Compliance Campaigns: Form 3520/3520-A Non-Compliance and Campus Assessed Penalties

This campaign reflects the increasing attention of the IRS to foreign trusts. This is a highly complex area of law. In order to deal with this complexity, the IRS stated that it will adopt a multifaceted approach to improving Form 3520 and Form 3520-A compliance. The treatment streams will include (but not limited to) examinations and penalties assessed by the campus when the forms are received late or are incomplete. The IRS will also use Letter 6076 to inform the trusts about their potential Form 3520-A obligations.

May 2018 IRS Compliance Campaigns: Form 1042/1042-S Compliance

Taxpayers who make payments of certain US-source income to foreign persons must comply with the related withholding, deposit and reporting requirements. This campaign targets Withholding Agents who make such payments but do not meet all of their compliance duties. The IRS will address noncompliance and errors through a variety of treatment streams, including examination.

May 2018 IRS Compliance Campaigns: Nonresident Alien Tax Treaty Exemptions

This campaign is intended to increase compliance in nonresident alien (NRA) individual tax treaty exemption claims related to both effectively connected income and Fixed, Determinable, Annual Periodical (“FDAP”) income. Some NRA taxpayers may either misunderstand or misinterpret applicable treaty articles, provide incorrect or incomplete forms to the withholding agents or rely on incorrect information returns provided by US payors to improperly claim treaty benefits and exempt US-source income from taxation. This campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

May 2018 IRS Compliance Campaigns: Nonresident Alien Schedule A and Other Deductions

This is another campaign that targets NRAs. In this case, the IRS focuses on the Form 1040NR Schedule A itemized deductions. NRA taxpayers may either misunderstand or misinterpret the rules for allowable deductions under the previous and new IRC provisions, do not meet all the qualifications for claiming the deduction and/or do not maintain proper records to substantiate the expenses claimed. The campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

May 2018 IRS Compliance Campaigns: NRA Tax Credits

This is yet another (third) campaign that targets NRAs; this time it concerns tax credits claimed by the NRAs. The IRS here targets NRAs who erroneously claim a dependent tax credit and who either have no qualifying earned income, do not provide substantiation/proper documentation, or do not have qualifying dependents. Furthermore, the IRS also wants to target NRAs who claim education credits (which are only available to U.S. persons) by improperly filing Form 1040 tax returns. This campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, please contact Sherayzen Law Office for professional help. We have helped hundreds of US taxpayers around the world with their US tax compliance issues, and we can help you!

Contact Us Today to Schedule Your Confidential Consultation!

FDII Export Incentive | Foreign Business Income Tax Lawyer & Attorney

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The 2017 Tax Cuts and Jobs Act (the “2017 tax reform” or “TCJA”) enacted a highly-lucrative incentive for US corporations to export directly from the United States – the Foreign-Derived Intangible Income (“FDII”) regime. In this article, I would like to introduce the readers in a general manner to the FDII export incentive contained in the TCJA.

FDII Export Incentive: TCJA

The creation of the participation exemption system posed a problem for the drafters of the TCJA – how does one stop US corporations from running all of their foreign business through a foreign corporation since foreign corporate profits may actually be transferred to the United States tax-free? Among other provisions of this complex law, the drafters utilized two powerful incentives for US corporations to export directly overseas.

The first one was a “stick” – the Global Intangible Low-Taxed Income or GILTI. The GILTI regime established what can be best described as a global minimum tax on the earnings of foreign subsidiaries of a US business entity.

The second approach was a “carrot” – the FDII export incentive. The FDII regime creates a powerful incentive for US corporations to export goods and services from the United States by creating a deemed deduction of a large percentage of corporate export income. In other words, the effective corporate tax rate is reduced through the FDII regime because a portion of a corporation’s export income is being deducted and never subject to US taxation.

FDII Export Incentive: General Description of the Deemed Deduction

The deemed deduction applies only to a US corporation’s FDII. FDII is basically a certain portion of corporate income from foreign sources determined by a formula established by Congress.

The formula requires a multi-step process. The first steps involve the determination of the Deduction-Eligible Income (DEI), Qualified Business Asset Investment (“QBAI”), Foreign-Derived Deduction-Eligible Income (“FDDEI”). Once all of these items are calculated, then the Deemed Intangible Income (“DII”) is figured out.

FDII is calculated last. The basic formula for FDII is: DII times the ratio of FDDEI over DEI.

The last step is to calculate the tax liability which involves the reduction of FDII by 37.5%. Thus, the effective tax rate for a corporate taxpayer (assuming the current 21% corporate tax rate stays the same) with respect to its FDII is only 13.125%.

It should be mentioned that the current deemed deduction will stay at 37.5% only through December 31, 2025. For the years after December 31, 2025, the deemed deduction will go down to 21.875%. This means that the effective tax rate on FDII will be 16.406%. Unless the law changes (which is possible), non-FDII corporate income will continue to be taxed at 21%.

FDII Export Incentive: Net Impact of the Deemed Deduction

Based on even just this general analysis of FDII, we can understand why the FDII export incentive is such an important part of the US corporate tax law. First, in most cases, the FDII deduction is a disincentive to shift foreign-source income from a US corporation to a controlled foreign corporation (“CFC”). A CFC may be subject to taxation under two different anti-deferral regimes, Subpart F or GILTI tax. Subpart F income will just force the recognition of foreign income by the CFC right away without any deemed deduction (i.e. this would be the worst-case scenario).

If the Subpart F rules do not apply, then the corporation may be subject to the GILTI tax. It is true that the effective corporate tax rate for GILTI, after its current 50% deemed reduction is only 10.5%. Nevertheless, FDII”s effective tax rate of 13.125% significantly reduces the difference from that what it would have been otherwise (i.e. between 10.5% and 21%). Moreover, when one factors in the additional administrative, US tax compliance and local tax compliance expenses, this difference may become nonexistent.

Second, the FDII deemed deduction makes US corporations more competitive worldwide, because they may now realize a higher profit margin even if they lower the prices for their products and services sold overseas.

Contact Sherayzen Law Office for Professional Help With FDII Calculations and International Business Tax Planning

If your business engages in selling products or services overseas, there are opportunities for international business tax planning from US perspective. Contact Sherayzen Law Office to take advantage of these opportunities through professional, creative and ethical tax help.

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2019 IRS Hiring Spree Targets US International Tax Compliance

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On May 11, 2019, the IRS Commissioner Chuck Rettig stated that the IRS is rapidly increasing the number of agents in certain divisions. US international tax compliance is the primary target of this 2019 IRS hiring spree.

2019 IRS Hiring Spree: Affected IRS Divisions

The Commissioner announced this news while speaking at the American Bar Association’s Section of Taxation conference in Washington, D.C. He stated that the Large Business and International (“LB&I), Small Business/Self-Employed (“SB/SE”) and Criminal Investigation (“CI”) divisions are the ones that form the core of the 2019 IRS hiring spree. Additionally, the Office of Chief Counsel and the Modernization and Information Technology Division are also beefing up their staff.

2019 IRS Hiring Spree: Why the IRS is Hiring New Agents

The Commissioner expressly mentioned two reasons for the 2019 IRS hiring spree – reducing the tax gap and assuring international compliance. Interestingly, he also mentioned that he will not allow the illegal tax shelter scandals, like the ones that happened in the 1980s, 1990s and 2000s, to happen on his watch.

The Commissioner went on to identify certain problematic areas where he wants the new hires to focus. He specifically listed: digital economy, transfer pricing, syndicated conservation easements, employment tax and cash-intensive businesses.

Finally, the Commissioner stated that he wants to expand the IRS message to the taxpayers who speak English as a second language. He said: “I’m from Los Angeles. In the grocery store in line there are more than six languages being spoken. This is 2019. We need to have our information available to every American trying to get it right.” He also shared that he was surprised when he found out that the IRS printed tax returns in only six languages.

The Commissioner emphasized that the IRS should not just print the returns in more languages, but also to provide IRS guidance in more languages. Also, he stated that the quality of translation services can be further improved. Undoubtedly, this will be the job of some of the new hires.

2019 IRS Hiring Spree: Consequences for Noncompliant Taxpayers with Foreign Assets and Foreign Income

The new IRS hiring spree means that there will be more audits and investigations of noncompliant taxpayers, including those who own foreign assets and receive foreign income. The fact that the Commissioner specifically mentioned illegal tax shelters and international tax compliance is a direct confirmation that taxpayers with offshore assets will soon be at an even higher risk of the IRS discovery of their tax noncompliance.

Furthermore, with more agents available, the IRS can expand the scope of its international tax audits. We can anticipate that there will be more audits with respect to Forms 3520/3520A (owners and beneficiaries of foreign trusts), 5471 (owners of a foreign corporation), 8621 (PFICs) and 8865 (owners of an ownership interest in a foreign partnership).

The IRS will also able to better utilize the piles of data it receives from foreign financial institutions under the Foreign Account Tax Compliance Act (“FATCA”) and bilateral automatic information exchange treaties. In other words, the IRS will be able to identify more noncompliant taxpayers.

Contact Sherayzen Law Office for Professional Help With Your Undisclosed Foreign Assets and Foreign Income

If you have undisclosed foreign assets and foreign income, you need to contact Sherayzen Law Office for professional help as soon as possible. Within just a few months, the IRS ability to locate you will expand much further than ever. If the IRS audits you or even just commences an investigation of your foreign assets, you may not be able to utilize the offshore voluntary disclosure options to reduce your FBAR and other IRS penalties.

Contact Us Today to Schedule Your Confidential Consultation!