More Audit Campaigns Announced by the IRS Large Business and International Division
October 13, 2020
By Richard Shapiro
Since our last Alert on audit campaigns, the IRS Large Business and International Division (“LB&I”) has added 11 campaigns, bringing the total to 59 active campaigns. For an entire list of active campaigns, please consult the IRS website. These new campaigns are as follows:
This campaign addresses research credit and research and experimental expenditure issues under IRC Sec. 41 and Sec. 174, which are some of the most prevalent tax issues within LB&I. The campaign objective is to promote voluntary compliance, focus resources on the highest risk research issues and increase consistency of examinations.
Tax Cuts and Jobs Act (“TCJA”)
The goal of this campaign is to identify transactions, restructuring and technical issues resulting from the TCJA and the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and to better understand taxpayer behavior under the new law.
Allocation of Success-Based Fees Without Revenue Procedure 2011-29
Success-based fees paid in transactions under Treas. Reg. Sec. 1.263(a)-5(a) are presumed facilitative and must be capitalized. These fees may instead be allocated to non-facilitative activities, and currently deducted, if the taxpayer meets the documentation requirements under Treas. Reg. Sec. 1.263(a)-5(f). Revenue Procedure 2011-29 allows a safe harbor election for allocating success-based fees paid in covered transactions under Treas. Reg. Sec. 1.263(a)-5(e)(3) without meeting the above documentation requirements so long as 70% of these fees are allocated as non-facilitative and 30% are allocated as facilitative. The goal of this campaign is to ensure taxpayer compliance with current law.
Limitations on Consolidated Net Operating Loss Carryovers
Limitations on consolidated net operating loss (“CNOL”) carryovers apply single entity treatment to the members of a consolidated group. Separate return limitation year (“SRLY”) rules, consolidated IRC Sec. 382 rules and loss apportionment rules limit CNOLs that are carried over to reduce consolidated taxable income or produce a refund. Limitations on CNOL carryovers generally apply where there has been an acquisition or disposition of a member of a consolidated group.
This campaign addresses noncompliance with the two limitations on a group that acquires a member with an NOL carryover (SRLY and consolidated IRC Sec. 382), as well as the limitation on a group with a CNOL or CNOL carryover that disposes of a member to which a portion of the CNOL is attributable (loss apportionment). The goal of this campaign is to ensure taxpayer compliance with current law.
FIRPTA Reporting Compliance for Nonresident Aliens
FIRPTA taxes foreign persons on the disposition of their U.S. real property interests. Generally the buyer/transferee is the withholding agent and is required to withhold 15% of the amount realized on the sale, file the required forms and remit the tax to the IRS. The campaign is intended to increase FIRPTA voluntary compliance.
Nonresident Alien Rental Income from U.S. Property
Nonresident aliens who receive rental income from U.S. real property must comply with all tax reporting and filing requirements. This campaign addresses noncompliance with these requirements.
IRC Sec. 965 Treatment of Deferred Income Upon Transition to Participation Exemption System of Taxation
IRC Sec. 965 requires certain 10% or greater “United States shareholders” 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. IRC Sec. 965 applies with respect to the last taxable year of the relevant specified foreign corporations that begins before January 1, 2018, and the amount included in income under IRC Sec. 965 is includible in the United States shareholder’s year in which or with which such a specified foreign corporation’s year ends. Most of the IRC Sec. 965 liability arises on taxpayer returns for 2017 and 2018. The goal of this campaign is to promote compliance with IRC Sec. 965. There is also a campaign specifically with respect to IRC Sec. 965 for individuals.
IRC Sec. 6426 Fuel Credit
This campaign is directed to taxpayers who received fuel mixture credits under IRC Sec. 6426, but did not treat the credits as a reduction in their excise tax liability under IRC Sec. 4081. The goal of this campaign is to bring taxpayers who maintain that the credits are merely refundable credits, which do not affect the deduction for any excise tax liability, into compliance.
IRC Sec. 807(d) – Computation of Life Insurance Reserves
The TCJA amended IRC Sec. 807(d) to provide a new method for computing life insurance reserves, effective for tax years beginning after December 31, 2017. The TCJA provided a transition rule that requires any difference between (i) the amount of life insurance reserves with respect to any contract as of the close of the taxable year preceding the first taxable beginning after December 31, 2017, computed using the method prescribed by the TCJA and (ii) the amount of such reserves computed using the method applied prior to the TCJA amendment, to be taken into account ratably over the eight succeeding taxable years. The goal of this campaign is to examine Forms 1120-L filed by life insurance companies for their 2017 and/or 2018 taxable years (and any related and subsequent year returns) to understand how taxpayers implemented the TCJA change, to ensure compliance and to identify compliant and non-compliant technical issues.
IRC Sec. 807(d) – Re-Computation of Life Insurance Reserves
As just noted, IRC Sec. 807(d) provides rules for computing the amount of life insurance reserves. On June 27, 2019, the IRS Office of Chief Counsel issued a Chief Counsel Advice (“CCA”) which addressed the making of a certain election under former IRC Sec. 807(d)(4)(A)(ii). That CCA concluded that a taxpayer could not make that election on an amended return and also precluded a taxpayer from making the election on an originally filed 2017 return with respect to contracts issued five or more years prior to 2017.
The goal of this campaign is to examine original and amended Forms 1120-L filed by life insurance companies for their 2017 and/or 2018 taxable years (and any related and subsequent year returns) to ensure compliance, and to identify compliant and non-compliant technical issues.
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