This article applies to Large Businesses that have international activity. Specifically the IRS is adding two new compliance focus areas to its active campaign list.
Abstract: On its “Active Campaigns” website, the IRS’s Large Business & International division recently added two new compliance focus areas to its list of active campaigns and removed several others. This article provides pertinent details on the new campaigns as well as those that have been removed.
On its “Active Campaigns” website, the IRS’s Large Business & International (LB&I) division recently added two new compliance focus areas to its list of active campaigns, and it removed several others. Here are the pertinent details.
A Brief History
In January 2017, the IRS announced a new audit strategy for the LB&I known as “compliance campaigns.” In doing so, they essentially shifted to examinations based on compliance issues that the LB&I determined presented greater levels of compliance risk, thereby improving return selection.
The IRS initially selected 13 compliance issues when it rolled out this strategy. Since the initial campaign announcement, the LB&I has added additional campaigns and now it’s removed some.
Section 937 and IRS Forms
Pertinent to the most recent compliance campaigns are issues under Internal Revenue Code Section 937, as well as a couple of IRS tax forms: Form 8594, “Asset Acquisition Statement Under Section 1060” and Form 8883, “Asset Allocation Statement Under Section 338.”
Under Sec. 937(a), individuals are bona fide residents of U.S. territories, including Puerto Rico, if they:
- Are present in the territory for at least 183 days during the tax year, and
- Don’t have a tax home outside the territory or a closer connection to the United States or a foreign country than to the territory.
Generally, Sec. 937(b)(2) provides that any income from sources within the United States or effectively connected with the conduct of a trade or business within the United States isn’t treated as income from sources within any U.S. possession or as effectively connected with the conduct of a trade or business within such possession.
Meanwhile, Form 8594 is used by both a seller and a purchaser of a group of assets that make up a trade or business to report: 1) goodwill or going concern value that attaches, or could attach, to such assets, and 2) that the purchaser’s basis in the assets is determined only by the amount the purchaser paid for the assets. Form 8883 is used to report information about transactions involving the deemed sale of corporate assets under Sec. 338.
The New Campaigns
The LB&I has added the following two new campaigns to its active campaigns list:
1. Puerto Rico Act 22, Individual Investors Act. This campaign addresses taxpayers who have claimed benefits through Puerto Rico Act 22, “Act to Promote the Relocation of Individual Investors to Puerto Rico,” without meeting the requirements of Sec. 937 (that is, without being bona fide residents of Puerto Rico). As a result, these individuals may be excluding income subject to federal tax on filed U.S. income tax returns or they may have failed to file and report income subject to federal tax.
This campaign will also address individuals who have met the requirements of Sec. 937 but who may be erroneously reporting U.S. source income as Puerto Rico source income to avoid federal tax. This campaign will address noncompliance in this area through examinations, outreach and “soft letters.”
2. Taxable asset transactions — matching buyers and sellers. Parties that participate in certain taxable asset transactions must report those transactions on either Form 8594 or Form 8883, which must be attached to their tax returns. This campaign addresses business entities under the LB&I’s jurisdiction that either:
- Didn’t report a transaction on Form 8594 or Form 8883, or
- Reported the transaction in a manner inconsistent with the other party’s reporting of the transaction.
The Active Campaigns website doesn’t say how the LB&I will address noncompliance in this area.
As mentioned, the LB&I has removed a few campaigns from its website. They include:
Basket transactions. This campaign addressed structured financial transactions where the taxpayer treats an option or other derivative as open until a barrier event occurs and, therefore, doesn’t recognize or report current period gains. The gains are deferred until the contract terminates, at which time the overall net gain is reported as a long-term capital gain. The LB&I used issue-based examinations, soft letters to material advisors, and practitioner outreach to address noncompliance during this campaign.
Interest capitalization self-constructed assets. When taxpayers engage in certain production activities, they’re required to capitalize interest expense under Sec. 263A. Interest capitalization applies to interest a taxpayer pays or incurs during the production period when producing property that meets the definition of designated property.
The goal of this campaign was to ensure taxpayer compliance by verifying that interest is properly capitalized for designated property and the calculation to capitalize that interest was accurate. The LB&I used issue-based examinations, education soft letters, and taxpayer and practitioner education to encourage voluntary compliance during this campaign.
Partnership stop filer. Under a typical business partnership, partners must report income, losses and other items on their personal tax returns that are “passed through” from the partnership. Some partnerships stop filing tax returns for various reasons yet still have economic transactions that aren’t being reported to their partners. This activity is likely going unreported by the partners. The LB&I used issue-based examinations, soft letters encouraging voluntary self-correction and stakeholder outreach to address noncompliance during this campaign.
Addition and Subtraction
The LB&I will likely continue to add and subtract campaigns based on its perception of compliance risk. Contact your tax advisor for information about your situation.
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