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PLR TAM Comparison | IRS International Tax Lawyer & Attorney

The IRS Private Letter Rulings (“PLR”) and the IRS Technical Advice Memoranda (“TAM”) often get confused by non-practitioners. In this small essay, I will engage in a brief PLR TAM comparison in order to clarify the similarities and differences between both types of IRS administrative guidance.

PLR TAM Comparison: Similarities

Let’s begin our PLR TAM comparison with the similarities. The similarities are great between both types of the IRS administrative guidance; this is why so many taxpayers cannot tell the difference between PLR and TAM. Both, PLR and TAM are written determinations issued by the IRS National Office. Also, PLR and TAM both interpret and apply US tax law to a taxpayer’s specific set of facts. Finally, both PLR and TAM are written IRS determinations which are binding on the IRS only in relation to the taxpayer who requested them.

PLR TAM Comparison: Differences

The differences between PLR & TAM are more nuanced but highly important. The two main differences are: (a) the requesting party and (b) timing of the request.

PLR is requested by a taxpayer; i.e. the IRS issues its opinion to the taxpayer, based on the taxpayer’s pattern of facts and at his request. The request for TAM, however, is made by a district IRS office. Oftentimes, though, the district IRS office makes this request at the urging of a taxpayer to seek technical advice from the IRS National Office.

With respect to the timing of the request, a taxpayer requests a PLR before he files his tax return. The taxpayer wishes to know the IRS position (or he is seeking IRS permission to do something, like a late election) in order to prevent the imposition of IRS penalties by filing an incorrect or late return.

TAM, however, deals with refund claims and examination issues after a tax return has been filed. In fact, oftentimes, a TAM is issued in response to a question concerning a specific set of facts uncovered during an IRS audit.

Contact Sherayzen Law Office for Experienced US International Tax Help

If you have questions concerning US international tax law and procedure, contact Sherayzen Law Office for professional help. We are a highly experienced US international tax law firm that has helped hundreds of US taxpayers around the globe with their US international tax compliance issues, including offshore voluntary disclosures, IRS audits and various annual tax compliance issues.

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2019 Third Quarter IRS Interest Rates | MN International Tax Law Firm

On June 5, 2019, the Internal Revenue Service announced 2019 Third Quarter IRS Interest Rates. This quarter, the IRS interest rates will be reduced for the first time in years.

2019 Third Quarter IRS Interest Rates: 3rd Quarter and Interest Rates Defined

Third quarter of 2019 begins on July 1, 2019 and ends on September 30, 2019. The term “IRS interest Rates” refers to both, IRS underpayment and overpayment rates. In other words, these are the interest rates that the IRS will charge on any late tax liability; at the same time, these are also the interest rates that the IRS will pay on tax refunds (for example, if a refund results from amending a tax return).

For international tax purposes, the IRS Interest Rates also refer to the rates that the IRS will change on any PFIC tax under the default PFIC IRC Section 1291 calculations. These are also the rates that taxpayers will need to pay on any tax due as part of their offshore voluntary disclosure submissions, including Streamlined Domestic Offshore Procedures and Streamlined Foreign Offshore Procedures.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis; therefore, US taxpayers and tax professionals should refer to IRS announcements of IRS interest rates on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points

2019 Third Quarter IRS Interest Rates: How These Rates Were Determined

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis; therefore, US taxpayers and tax professionals should refer to IRS announcements of IRS interest rates on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

2019 Third Quarter IRS Interest Rates: Rate Reduction

The 2019 Third Quarter IRS Interest Rates will be reduced from those of the second quarter as follows:

five (5) percent for overpayments (four (4) percent in the case of a corporation) instead of six (6) and (5) percent respectively;
five (5) percent for underpayments from (6) percent;
seven (7) percent for large corporate underpayments from eight (8) percent; and
two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000 (it used to one and one-half (1.5) percent).

Sherayzen Law Office will continue to closely monitor the moves of the Federal Reserve regarding its interest rates in the future.

International Tax Lawyer & Attorney | April 2019 IRS Compliance Campaigns

On April 16, 2019, the IRS Large Business and International division (LB&I) announced the approval of three additional compliance campaigns. Let’s discuss in more detail these April 2019 IRS compliance campaigns.

April 2019 IRS Compliance Campaigns: Background Information

In the mid-2010s, after extensive planning, the IRS decided to move LB&I toward issue-based examinations and a compliance campaign process. The idea was to let LB&I itself decide which compliance issues presented the most risk and required a response in the form of one or multiple treatment streams to achieve compliance objectives. The IRS came to the conclusion that this was the most efficient approach that assured the best use of IRS knowledge and appropriately deployed the right resources to address specific noncompliance issues.

The first thirteen campaigns were announced by LB&I on January 13, 2017. Then, the IRS added eleven campaigns on November 3, 2017, five campaigns on March 13, 2018, six campaigns on May 21, 2018, five campaigns on July 2, 2018, five campaigns on September 10, 2018 and five campaigns on October 30, 2018. With the additional three April 2019 IRS compliance campaigns, there are fifty-three total IRS compliance campaigns outstanding as of the time of this writing.

The IRS has created each campaign after careful strategic planning, re-deployment of resources, creation of new training and tools as well as careful taxpayer population selection through metrics and feedback. The IRS has also built a supporting infrastructure inside LB&I for each specific campaign.

Three New April 2019 IRS Compliance Campaigns

Here are the new three new campaigns: Captive Services Provider Campaign, Offshore Private Banking Campaign and Loose-Filed Forms 5471. Each of these five campaigns was identified through LB&I data analysis and suggestions from IRS employees.

April 2019 IRS Compliance Campaigns: Captive Services Provider Campaign

The section 482 regulations and the OECD Transfer Pricing Guidelines provide rules for determining arm’s length pricing for transactions between controlled entities, including transactions in which a foreign captive subsidiary performs services exclusively for the parent or other members of the multinational group. The arm’s length price is determined by taking into consideration data available on companies performing functions, employing assets, and assuming risks that are comparable to those of the captive subsidiary.

Excessive pricing for these services would inappropriately shift taxable income to these foreign entities and erode the U.S. tax base. The goal of this campaign is to ensure that U.S. multinational companies are paying their captive service providers no more than arm’s length prices. The treatment streams for this campaign are issue-based examinations and soft letters.

April 2019 IRS Compliance Campaigns: Offshore Private Banking Campaign

US tax residents are subject to tax on worldwide income from all sources, including income generated outside of the United States. It is not illegal or improper for US taxpayers to own offshore structures, accounts or assets, but they must comply with income tax and information reporting requirements associated with these foreign activities.

Through FATCA, bilateral information exchange treaties, the Swiss Bank Program, offshore voluntary disclosures and audits, the IRS has accumulated a great pile of records that identify taxpayers with transactions and/or accounts at offshore private banks. This campaign addresses tax noncompliance and the information reporting associated with these offshore accounts. The IRS will initially address tax noncompliance through the examination and soft letter treatment streams. Additional treatment streams may be developed based on feedback received throughout the campaign.

April 2019 IRS Compliance Campaigns: Loose-Filed Forms 5471

Form 5471, Information Return of US Persons With Respect to Certain Foreign Corporations, must be attached to an income tax return (or a partnership or exempt organization return, if applicable) and filed by the return’s due date including extensions. Some taxpayers are incorrectly filing Forms 5471 by sending the form to the IRS without attaching it to a tax return.

If a Form 5471 is required to be filed and was not attached to an original return, an amended return with the Form 5471 attached should be filed. The goal of this campaign is to improve compliance with the requirement to attach a Form 5471 to an income tax, partnership or exempt organization return.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, you should 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!

September 2018 IRS Compliance Campaigns | International Tax Lawyer & Attorney News

On September 10, 2018, the IRS Large Business and International division (“LB&I”) announced the creation of another five compliance campaigns. Let’s explore in more depth these September 2018 IRS Compliance Campaigns.

September 2018 IRS Compliance Campaigns: Background Information

Since January of 2017, the IRS has been regularly adding more and more compliance campaigns. The compliance campaigns were created by the LB&I after extensive planning concerning the restructuring of its compliance enforcement activities. The IRS solution to the then existing enforcement problems was to move towards issue-based examinations and a compliance campaign process in which the IRS itself decides which compliance issues that present risk require a response in the form of one or multiple treatment streams to achieve compliance objectives. The idea is to concentrate the IRS resources where they are most need – i.e. where there is a substantial risk of tax noncompliance.

The new campaigns have been coming in batches. The IRS announced the initial batch of thirteen campaigns on January 31, 2017. Then, the IRS added another eleven campaigns in November of 2017, five in March of 2018, six in May of 2018 and five in July of 2018. The new campaigns announced on September 10, 2018, brings the total number of campaigns to forty five as of that date.

It is important to point out that the tax reform that passed on December 22, 2017, may impact some of these existing campaigns.

Five New September 2018 IRS Compliance Campaigns

Here are the new September 2018 IRS Compliance campaigns that should be added to the forty campaigns that were announced prior to that date: IRC Section 199 – Claims Risk Review, Syndicated Conservation Easement Transactions, Foreign Base Company Sales Income – Manufacturing Branch Rules, Form 1120-F Interest Expense & Home Office Expense and Individuals Employed by Foreign Governments & International Organizations. All of these campaigns were selected by the IRS through LB&I data analysis and suggestions from IRS employees.

September 2018 IRS Compliance Campaigns: IRC Section 199 – Claims Risk Review

Public Law 115-97 repealed the Domestic Production Activity Deduction (“DPAD”) for taxable years beginning after December 31, 2017. This campaign addresses all business entities that may file a claim for additional DPAD under IRC Section 199. The campaign objective is to ensure taxpayer compliance with the requirements of IRC Section 199 through a claim risk review assessment and issue-based examinations of claims with the greatest compliance risk.

September 2018 IRS Compliance Campaigns: Syndicated Conservation Easement Transactions

The IRS issued Notice 2017-10, designating specific syndicated conservation easement transactions as listed transactions requiring disclosure statements by both investors and material advisors. This campaign is intended to encourage taxpayer compliance and ensure consistent treatment of similarly situated taxpayers by ensuring the easement contributions meet the legal requirements for a deduction, and the fair market values are accurate. The initial treatment stream is issue-based examinations. Other treatment streams will be considered as the campaign progresses.

September 2018 IRS Compliance Campaigns: Manufacturing Branch Rules for Foreign Base Company Sales Income

In general, foreign base company sales income (“FBCSI”) does not include income of a controlled foreign corporation (“CFC”) derived in connection with the sale of personal property manufactured by such a corporation. There is an exception to this general rule. If a CFC manufactures property through a branch outside its country of incorporation, the manufacturing branch may be treated as a separate, wholly owned subsidiary of the CFC for the purposes of computing the CFC’s FBCSI, which may result in a subpart F inclusion to the US shareholder(s) of the CFC.

The goal of this campaign is to identify and select for examination returns of US shareholders of CFCs that may have underreported subpart F income based on certain interpretations of the manufacturing branch rules. The treatment stream for the campaign will be issue-based examinations.

September 2018 IRS Compliance Campaigns: 1120-F Interest Expense & Home Office Expense

Two of the largest deductions claimed on Form1120-F (US Income Tax Return of a Foreign Corporation) are interest expenses and home office expense. Treasury Regulation Section 1.882-5 provides a formula to determine the interest expense of a foreign corporation that is allocable to their effectively connected income. The amount of interest expense deductions determined under Treasury Regulation Section 1.882-5 can be substantial.

Similarly, Treasury Regulation Section 1.861-8 governs the amount of Home Office expense deductions allocated to effectively connected income. Through its data analyses, the IRS noted that Home Office Expense allocations have been material amounts compared to the total deductions taken by a foreign corporation.

This IRS campaign addresses both of these Form 1120–F deductions. The campaign compliance strategy includes the identification of 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 goal of this campaign is to increase taxpayer compliance with the interest expense rules of Treasury Regulation Section 1.882-5 and the Home Office expense allocation rules of Treasury Regulation Section 1.861-8. The treatment stream for this campaign is harsh – issue-based examinations only.

September 2018 IRS Compliance Campaigns: Individuals Employed by Foreign Governments & International Organizations

Foreign embassies, foreign consular offices and international organizations operating in the United States 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 Internal Revenue Service. This lack of withholding and reporting often results in unreported income, erroneous deductions and credits, and failure to pay income and Social Security taxes, because some individuals working at foreign embassies, foreign consular offices, and various international organizations may not be reporting compensation or may be reporting it incorrectly.

This campaign will focus on 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. The IRS will also address noncompliance in this area by issuing soft letters and conducting examinations.

Contact Sherayzen Law Office for Professional Tax Help

If you have been contacted by the IRS as part of any of its campaigns, you should 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!

Noncompetition Agreement Income Sourcing | International Tax Lawyer

Oftentimes, as part of their noncompetition agreement, a taxpayer may receive income for restraining from competing with another party in certain areas. An issue often arises with respect to international noncompetition agreement income sourcing rules – i.e. should the income paid as part of such a noncompetition agreement be considered US-source income or foreign-source income? Let’s explore the answer to this question in this essay.

Noncompetition Agreement Income Sourcing: General Rule

The general rule with respect to income sourcing for noncompetition agreements was settled in the distant year 1943. In that year, the Tax Court held that the source of income from a noncompetition agreement is the location of the forbearance. Korfund Co., Inc. v. Commissioner, 1 T.C. 1180, 1187 (1943). In other words, income received from an agreement not to compete is deemed to be income earned in a place where the agreement prohibits the taxpayer from competing.

The reasoning of the Tax Court is clearly laid out in its opinion. The Court stated that the rights that a party enjoys from the noncompetition agreement “were interests in property in [the] country [of forbearance]. … The situs of the right was in the United States, not elsewhere, and the income that flowed from the privileges was necessarily earned and produced here. … These rights were property of value and the income in question was derived from the use thereof in the [country of forbearance].” Id.

In 1996, in its Field Service Advice, the IRS restated its commitment to the position adopted by the Tax Court in Korfund: “income from covenants not to compete covering areas outside of the United States is foreign source income because the income from a covenant covering areas outside the United States is from the use of a property right outside the United States.” 1996 FSA LEXIS 191, *5 (I.R.S. August 30, 1996).

Noncompetition Agreement Income Sourcing: Apportionment

What if a noncompetition agreement covers both, part of the United States and a foreign country? In this case, the IRS is likely to take a position that an apportionment of some sort is necessary. In other words, only part of the income will be deemed as US-source income, while the rest will be considered foreign-source income.

Contact Sherayzen Law Office for Professional Help With Noncompetition Agreement Income Sourcing

If you are dealing with an international noncompetition agreement, you should contact Sherayzen Law Office for professional help with US international tax compliance. Our firm has helped hundreds of US taxpayers around the world with their US international tax issues. We Can Help You!

Contact Us Today to Schedule Your Confidential Consultation!