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New 11 IRS Compliance Campaigns | International Tax Lawyer & Attorney

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On November 3, 2017, the IRS Large Business and International Division (“LB&I”) announced the rollout of additional 11 IRS Compliance Campaigns in addition to the 13 already existing campaigns. Most of these campaigns directly address the IRS concerns with respect to US international tax law compliance. Let’s explore these new 11 IRS Compliance Campaigns.

New 11 IRS Compliance Campaigns: What Does This Mean for Taxpayers?

The issue-based IRS Campaigns is the brand-new strategy of the IRS to maximize the utility of its strained resources. Unlike previous efforts, a Campaign basically focuses on a specific issue that may carry a significant non-compliance risk and, then, applies a variety of solutions (called “treatment streams”) to increase the compliance with respect to this issue. The treatment streams range from development of an externally published practice unit, potential published guidance to issue-based examinations.

From a taxpayer point of view, the new strategy means that, if the IRS announces a new campaign, US taxpayers associated with the risk issue at the heart of a new campaign are at increased audit risk.

New 11 IRS Compliance Campaigns: General Emphasis on International Tax Compliance

Seven out of total eleven campaigns are focused on international tax compliance. This means that the IRS continues to give priority to international tax enforcement. Hence, US taxpayers who own foreign assets or are involved in international business transactions are likely to be affected by the IRS campaigns and should make sure they are in full US tax compliance.

Let’s briefly describe each of the new 11 IRS Compliance Campaigns.

New 11 IRS Compliance Campaigns: 1120-F Chapter 3 and Chapter 4 Withholding

This campaign focuses upon verification of the withholding credits before the claim for refund or credit is allowed. To make a claim for refund or credit to estimated tax with respect to any U.S. source income withheld under chapters 3 or 4, a foreign entity must file a Form 1120-F. Before a claim for credit (refund or credit elect) is paid, the IRS must verify that withholding agents have filed the required returns (Forms 1042, 1042-S, 8804, 8805, 8288 and 8288-A).

In other words, this campaign is designed to verify withholding at source for 1120-Fs claiming refunds.

New 11 IRS Compliance Campaigns: Swiss Bank Program

A non-surprising new addition to campaigns that will focus on tax and FBAR noncompliance of US beneficial owners of Swiss bank and financial accounts. The IRS will draw on the materials supplied to the DOJ by Swiss Banks as part of the Swiss Bank Program.

New 11 IRS Compliance Campaigns: Foreign Earned Income Exclusion

This campaign is likely to affect US taxpayers who reside overseas. The campaign will focus on taxpayers who claimed Foreign Earned Income Exclusion, but did not meet the requirements for claiming them. The IRS will address noncompliance through a variety of treatment streams, including examination.

New 11 IRS Compliance Campaigns: Verification of Form 1042-S Credit Claimed on Form 1040NR

The campaign’s goal is to ensure the amount of withholding credits or refund/credit elect claimed on Forms 1040NR is verified and whether the taxpayer has properly reported the income reflected on Form 1042-S.

New 11 IRS Compliance Campaigns: Agricultural Chemicals Security Credit

The first of the new four domestic campaigns. The Agricultural chemicals security credit is claimed under Internal Revenue Code Section 45O and allows a 30 percent credit to any eligible agricultural business that paid or incurred security costs to safeguard agricultural chemicals. The credit is nonrefundable and is limited to $2 million annually on a controlled group basis with a 20-year carryforward provision. In addition, there is a facility limitation as outlined in Section 45O(b). The goal of this campaign is to ensure taxpayer compliance by verifying that only qualified expenses by eligible taxpayers are considered and that taxpayers are properly defining facilities when computing the credit. The treatment stream for this campaign is issue-based examinations.

New 11 IRS Compliance Campaigns: Deferral of Cancellation of Indebtedness Income

This is an interesting addition and a correct one to the campaigns; I also believe that this area suffers from high rate of noncompliance. This issue stems from the Great Recession of 2008; in 2009 and 2010, a lot of US taxpayers elected to defer their cancellation of indebtedness (“COD”) income incurred as a result of reacquisition of debt instruments at an issue price less than the adjusted issue price of the original instrument. Such taxpayers should have reported their COD income ratably over a period of five years beginning in 2014 through 2018.

Furthermore, whenever a taxpayer defers his COD income, any related original issue discount (OID) deductions on the new debt instrument, resulting from debt-for-debt exchanges that triggered the original COD must also be deferred ratably and in the same manner as the deferred COD income.

The goal of this campaign is to ensure taxpayer compliance by verifying that taxpayers (who properly deferred COD income in 2009 and 2010) actually properly reported it in subsequent years beginning in 2014. The campaign will also look at situations where an accelerating event occurred and required earlier recognition of income under IRC § 108(i). The treatment stream for this campaign is issue-based examinations. The use of soft letters is under consideration.

New 11 IRS Compliance Campaigns: Energy Efficient Commercial Building Property

The goal of this campaign is to ensure taxpayer compliance with the section 179D (Energy Efficient Commercial Building Deduction). Section 179D allows taxpayers who own or lease a commercial building to deduct the cost or portion of the cost of installing energy efficient commercial building property (EECBP). If the equipment is installed in a government-owned building, the deduction is allocated to the person(s) primarily responsible for designing the EECBP. The treatment stream for this campaign is issue-based examinations.

New 11 IRS Compliance Campaigns: Economic Development Incentives Campaign

The goal of this campaign is to ensure taxpayer compliance with respect to a variety of government economic incentives. These incentives include refundable credits (refunds in excess of tax liability), tax credits against other business taxes (for example, payroll tax), nonrefundable credits (refunds limited to tax liability), transfer of property and grants. The common problems targeted by this campaign are situation where taxpayers improperly treat government incentives as non-shareholder capital contributions, exclude them from gross income and claim a tax deduction without offsetting it by the tax credit received. The treatment stream for this campaign is issue-based examinations.

New 11 IRS Compliance Campaigns: Section 956 Avoidance

This campaign focuses on situations where a CFC loans funds to a US Parent (USP), but nevertheless does not include a Section 956 amount in income. The goal of this campaign is to determine to what extent taxpayers are utilizing cash pooling arrangements and other strategies to improperly avoid the tax consequences of Section 956. The treatment stream for this campaign is issue-based examinations.

New 11 IRS Compliance Campaigns: Corporate Direct (Section 901) Foreign Tax Credit

Domestic corporate taxpayers may elect to take a credit for foreign taxes paid or accrued in lieu of a deduction. The goal of the Corporate Direct Foreign Tax Credit (“FTC”) campaign is to improve return/issue selection (through filters) and resource utilization for corporate returns that claim a direct FTC under IRC section 901. This campaign will focus on taxpayers who are in an excess limitation position. The treatment stream for the campaign will be issue-based examinations. The IRS emphasized that this is just the first of several FTC campaigns. The IRS further specified that future FTC campaigns may address indirect credits and IRC 904(a) FTC limitation issues.

New 11 IRS Compliance Campaigns: Individual Foreign Tax Credit (Form 1116)

This campaign addresses taxpayer compliance with the computation of the foreign tax credit (“FTC”) limitation on Form 1116. Due to the complexity of computing the FTC and challenges associated with third-party reporting information, some taxpayers face the risk of claiming an incorrect FTC amount. The IRS will address noncompliance through a variety of treatment streams including examinations.

Serious Illness as Reasonable Cause | International Tax Lawyer

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We are continuing our series of articles on Reasonable Cause. Today, we will discuss whether a serious illness can establish a reasonable cause for abatement of the IRS penalties. It is important to note that this discussion of serious illness as a reasonable cause is equally applicable to death and unavoidable absence of the taxpayer (in fact, the Internal Revenue Manual (IRM) discusses all three circumstances – death, serious illness and unavoidable absence of taxpayer – at the same time in providing guidance on reasonable cause).

Serious Illness Can Constitute a Reasonable Cause

IRM 20.1.1.3.2.2.1 (11-25-2011) expressly states that serious illness can be used as a Reasonable Cause Exception: “death, serious illness, or unavoidable absence of the taxpayer, or a death or serious illness in the taxpayer’s immediate family, may establish reasonable cause for filing, paying, or depositing late… .” In this context, “immediate family” means spouse, siblings, parents, grandparents, or children.

In the business context, a reasonable cause may be established if death, serious illness or other unavoidable absence occurred with respect to a taxpayer (or his immediate family) who had the sole authority to execute the return, make the deposit, or pay the tax. The same rule applies to corporations, partnerships, estates, trusts and other legal vehicles for conducting business.

Taxpayer Has the Burden of Proof to Establish that Serious Illness Constitutes Reasonable Cause for His Prior Tax Noncompliance

Stating that a serious illness can constitute a reasonable cause for abatement of the IRS penalties with respect to prior tax noncompliance is not equivalent to stating that serious illness automatically establishes a reasonable cause.

On the contrary, the taxpayer has the burden of proof to establish that serious illness did indeed constitute reasonable cause with respect to his prior tax noncompliance. In other words, serious illness may not be sufficient to establish reasonable cause for various reasons (for example, in cases where it was not actually related to tax noncompliance).

Factors Relevant to Determination of Whether Serious Illness Is Sufficient to Establish Reasonable Cause Exception

IRM 20.1.1.3.2.2.1 (11-25-2011) provides a list of recommended factors to consider in evaluating a taxpayer’s request for abatement of penalties based on serious illness, death or unavoidable absence. I somewhat modified the list to fit in all factors expressly mentioned in the IRM. Here is the non-exclusive list of factors expressly referenced in the IRM:

1. the relationship of the taxpayer to the other parties involved;

2. the dates, duration, and severity of illness (in case of death, the date of death; in case of unavoidable absence, the dates and reasons for absence);

3. how the event prevented tax compliance;

4. how the event impaired other obligations (including business obligations);

5. if tax duties were attended to promptly when the illness passed (or within a reasonable period of time after a death or absence);

6. (in a business setting) in a situation where someone other than responsible person or the taxpayer was responsible for meeting the infringed business tax obligation, and why that person was unable to meet the obligation;

7. (in a business setting) if only one person was authorized to meet the tax obligation, whether such an arrangement was consistent with ordinary business care and prudence.

This is not an all-inclusive list of factors. The IRM foresees the possibility that any other relevant factors may be considered in the analysis of whether a Reasonable Cause Exception was established based on serious illness, death or unavoidable absence.

Contact Sherayzen Law Office for Experienced Help With Establishing A Reasonable Cause Defense, Including Based on Serious Illness

There is always a risk that the IRS may reject a taxpayer’s reasonable cause argument, often simply because the argument was never properly elaborated by the taxpayer. This is why it is important to maximize your chance of success by timely securing professional legal help.

Sherayzen Law Office is a highly experienced tax law firm that has helped its clients around the world to establish various reasonable cause defenses against IRS domestic and international tax penalties. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

US Continental Shelf Definition of the United States | US Tax Attorney

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The US continental shelf presents a unique problem to the tax definition of the United States. It is governed by a special tax provision that sets it apart from any other tax definition. If fact, the US continental shelf is only considered to be part of the United States with respect to specific taxpayers who are engaged in a particular activity on or over the continental shelf. In this article, I will explore certain features of the US continental shelf definition of the United States that distinguishes it from any other tax provision in the Internal Revenue Code (IRC).

Definition of the US Continental Shelf

For the purposes of the US income tax, the IRC § 638(1) states that the United States “when used in a geographical sense includes the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the United States and over which the United States has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources.” The opening clause of IRC § 638 specifically states that this definition of the United States applies only to the activities “with respect to mines, oil and gas wells, and other natural deposits.”

Analysis of the Definition of the US Continental Shelf

Two aspects need to be noted with respect to the definition above. First, the reference to international tax law means that the US government considers 200 miles of land underneath the ocean as its territory (the so-called “Exclusive Economic Zone” or “EEZ”). An interesting assumption that underlies IRC § 638 is that the continental shelf and the EEZ are the same.

Second, I want to emphasize that this is the definition that is tied to land only, not the water above the land – even more precisely, to certain activities on the ocean’s floor rather than in the water. This is a highly important aspect of IRC § 638, because it produces interesting results.

On the one hand, anyone (including foreign vessels and foreign contractors) drilling or exploring oil in the US continental shelf is considered to be engaged in a trade or business in the United States, which subjects these individuals and companies to US income tax. This also means that US tax withholding needs to be done with respect to foreign contractors. Moreover, even personal property (located over the US continental shelf) of a taxpayer engaged in the drilling or the exploration of the US continental shelf would most likely be classified as US personal property within the meaning of IRC § 956.

On the other hand, fishing in a boat in the same zone will not be considered as an activity within the United States, because it is not linked to mines, oil and gas wells, and other natural deposits.

This means that the application of the US Continental Shelf’s definition of the United States depends on the activity of the taxpayer, not just his location.

US Continental Shelf Rules and Foreign Countries

There is one more interesting aspect of the US continental shelf definition of the United States: its application to foreign countries. The first part of IRC § 638(2) states that the same definition of the continental shelf will also apply to foreign countries – i.e. the seabed and subsoil adjacent to the foreign country or possession and over which the country has EEZ rights.

At the end, however, IRC § 638(2) contains an interesting limitation: “ but this paragraph shall apply in the case of a foreign country only if it exercises, directly or indirectly, taxing jurisdiction with respect to such exploration or exploitation.” In other words, if a foreign country exercises its taxing jurisdiction over the continental shelf, then it is considered to be part of a foreign country. Otherwise, it will be considered as “international waters” (since it is also outside of the US continental shelf).

Contact Sherayzen Law Office for Professional Help with US Tax Issues

The definition of the United States in the context of the US continental shelf is just one of many examples of the enormous complexity of US tax laws. While even US citizens with domestic assets only have to struggle with these issues, the complexity of US tax laws is multiplied numerous times when one deals with a foreign individual/company or even US taxpayers with foreign assets. It is just too easy to get yourself into trouble.

This is why you need the help of the professional international tax law firm of Sherayzen Law Office. Our firm specializes in helping US and foreign taxpayers with their annual tax compliance, tax planning and dealing with past US tax noncompliance.

Contact Sherayzen Law Office Today to Schedule Your Confidential Consultation!

Tax Definition of the United States | US Tax Lawyers

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The tax definition of the United States is highly important for US tax purposes; in fact, it plays a key role in identifying many aspects of US-source income, US tax residency, foreign assets, foreign income, application of certain provisions of tax treaties, et cetera. While it is usually not difficult to figure out whether a person is operating in the United States, there are some complications associated with the tax definition of the United States that I wish to discuss in this article.

Tax Definition of the United States is Not Uniform Throughout the Internal Revenue Code; Three-Step Analysis is Necessary

From the outset, it is important to understand that the tax definition of the United States is not uniform. Different sections of the Internal Revenue Code (“IRC”) may have different definitions of what “United States” means.

Therefore, one needs to engage in a three-step process to make sure that the right definition of the United States is used. First, the geographical location of the taxpayer must be identified. Second, one needs to determine the activity in which the taxpayer is engaged. Finally, it is necessary to find the right IRC provision governing the taxation of that taxpayer engaged in the identified specific activity in that specific location; then, look up the tax definition of the United States with respect to this specific IRC provision.

General Tax Definition of the United States

Generally, for tax purposes, the United States is comprised of the 50 states and the District of Columbia plus the territorial waters (along the US coastline). See IRC § 7701(a)(9). The territorial waters up to 12 nautical miles from the US shoreline are also included in the term United States.

General Tax Definition of the United States Can Be Replaced by Alternative Definitions

As it was pointed out above, this general definition is often modified by the specific IRC provisions. The statutory reason why this is the case is the opening clause of IRC § 7701(a) which specifically allows for the general definition to be replaced by alternative definitions of the United States: “when used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof … .”

Hence, instead of relying on the general tax definition of the United States in IRC § 7701(a), one needs to look for alternative definitions specific to the IRC provision that is being analyzed. Moreover, the fact that there is no express alternative definition is not always sufficient, because one may have to determine the intent (most likely from the legislative history of an IRS provision) behind the analyzed IRC provision to see if an alternative tax definition of the United States should be used.

General Tax Definition and Possessions of the United States

While the object of this small article does not include a detailed discussion of the alternative tax definitions of the United States, it is important to note that the Possessions of the United States (“Possessions”) are not included within the general tax definition of the United States. They are not mentioned in IRC § 7701(a)(9); IRC 1441(e) even states that any noncitizen resident of Puerto Rico is a nonresident alien for tax withholding purposes. Similarly, IRC § 865(i)(3) defines Possessions as foreign countries for the purposes of sourcing income from sale of personal property.

On the other hand, Possessions may be included within some of the alternative tax definitions of the United States. For example, for the purposes of the Foreign Earned Income Exclusion, Possessions are treated as part of the United States.

Thus, it is very important for tax practitioners and their clients who reside in Possessions to look at the specific IRS provisions and determine whether an alternative definition applies to Possessions in their specific situations.

Contact Sherayzen Law Office for Professional Tax Help

If you need professional tax help, contact the international tax law firm of Sherayzen Law Office Ltd. Our legal team is highly experienced in US domestic and international tax law. We have helped hundreds of US taxpayers to resolve their tax issues and We can help You!

Contact Sherayzen Law Office Today to Schedule Your Confidential Consultation!

Hapoalim Prepares for Settlement with DOJ | FATCA Tax Attorney

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On October 6, 2016, Israeli bank Hapoalim Ltd. announced that, in order to cover the costs of a future settlement with the US Department of Justice (DOJ), it will add a $70 million charge to an existing $50 million provision in its third-quarter results. The expected settlement will cover Hapoalim’s role in helping US tax residents to evade their US tax obligations.

In its news release, Hapoalim stated that its representatives held an initial discussion with the DOJ on September 30, 2016, to discuss the future settlement. The bank did not indicate whether $120 million in charges that it booked to date is the actual amount that Hapoalim will pay under its settlement with the DOJ. Rather, the news release emphasizes the uncertainty that still exists with respect to the actual amount.

The issue of the DOJ investigation dates back to the year 2011. In its recent (June 30, 2016) financial statements Hapoalim confirmed that its Swiss subsidiary Bank Hapoalim (Switzerland) Ltd. had been notified by Swiss authorities in 2011 that it was being investigated by the US government as a result of the DOJ’s suspicions that the bank had assisted US clients in evading federal taxes. The Swiss subsidiary could not resolve this issue in 2013 in the DOJ’s Swiss Bank Program due to the fact that it could not be classified as a Category 2 bank.

It is important to remember that the DOJ is not the only institution that is going after Hapoalim. The State of New York is conducting its own review. In its news release, Hapoalim indicated that the $120 million charge is not related to the New York investigation.

While all of this legal uncertainty makes it difficult for Hapoalim to assess its future liability under any deferred prosecution agreement, one can compare its situation with Bank Leumi. In 2014, Bank Leumi Group entered into a Deferred Prosecution Agreement with the DOJ under which it paid $270 million ($157 million of this penalty was allocated to Bank Leumi’s Swiss accounts held by US taxpayers).

If we rely on this precedent, it appears that Hapoalim is greatly underestimating its penalty, because Bank Leumi and Hapoalim are fairly similar in size as well as their actions in soliciting US clients. One also must not forget about the possible future indictments of Hapoalim’s employees (at least in the United States) by the DOJ.