Additional Compliance Initiatives Announced by IRS
Five additional audit campaigns have been announced by the IRS Large Business and International Division (“LB&I”), bringing the total to 45 campaigns (see below for earlier articles related to previously announced campaigns). Under its recently developed and implemented audit approach, LB&I is moving toward issue-based examinations. Its goal is to improve return selection, identify issues representing a risk of non-compliance and make the greatest use of limited resources. The new audit campaigns are as follows:
IRC Section 199
This campaign addresses all business entities that may file a claim for additional domestic production activity deduction (“DPAD”) under IRC Sec. 199. Note that the Tax Cuts and Jobs Act (“TCJA”) repealed this deduction for taxable years beginning after December 31, 2017.
Syndicated Conservation Easement Transaction
The IRS issued Notice 2017-10, which designated specific syndicated conservation easement transactions as “listed transactions.” 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.
Foreign Base Company Sales Income: Manufacturing Branch Rules
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 corporation. However, 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 purposes of computing the CFC’s FBCSI, which may result in a subpart F inclusion to the U.S. shareholder(s) of the CFC. This campaign will identify and select for examination returns of U.S. shareholders of CFCs that may have underreported subpart F income based on certain interpretations of the manufacturing branch rules.
1120-F Interest Expense/Home Office Expense
This campaign addresses interest and home office expenses claimed as deductions on the U.S. income tax return of foreign corporations (Form 1120-F). Its focus 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.
Individuals Employed by Foreign Governments and International Organizations
The announcement observes that in some cases, individuals working at foreign embassies, foreign consular offices and various international organizations may not be reporting compensation or may be reporting it incorrectly. Foreign embassies, foreign consular offices and international organizations operating in the U.S. 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 IRS. This may result in unreported income, erroneous deductions and credits, and failure to pay income and Social Security taxes.
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