IRS Business International Audit Campaign Cancellation Indebtedness Withholding Credits

Published: Dec 4, 2017
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Earlier this year, we reported on the IRS Large Business and International (“LB&I”) division’s announcement of its initial set of 13 campaigns under its new audit approach. At that time, we noted that additional campaigns would be announced in the near future. Accordingly, on November 3, the IRS identified 11 additional campaigns (with more to come). They are as follows:

Form 1120-F Chapter 3 and Chapter 4 Withholding Campaign. This campaign is designed to verify withholding at source for Form 1120-Fs claiming refunds. Before a claim for credit (refund or credit elect) is paid, the IRS must verify that withholding agents have filed the required forms (i.e., Forms 1042, 1042-S, 8804, 8805, 8288 and 8288-A). The campaign focuses on verification of the withholding credits before the claim for refund or credit is allowed.
Swiss Bank Program Campaign. In 2013, the “Swiss Bank Program” was established as a path for Swiss financial institutions to resolve potential criminal liabilities. Banks participating in this program provide information on U.S. persons with beneficial ownership of foreign financial accounts. The campaign addresses noncompliance, involving taxpayers who are or may be beneficial owners of these accounts.
Foreign Earned Income Exclusion Campaign. Individuals who meet certain requirements may qualify for the foreign earned income exclusion and/or the foreign housing exclusion or deduction. This campaign addresses taxpayers who have claimed these benefits but do not meet the requirements.
Verification of Form 1042-S Credit Claimed on Form 1040NR. This campaign’s intent is to ensure the amount of withholding credits or refund/credit elect claimed on Forms 1040NR (U.S. Nonresident Alien Tax Return) is verified and whether the taxpayer has properly reported the income reflected on Form 1042-S (Foreign Person’s U.S. Income Subject to Withholding).
Agricultural Chemicals Security Credit Campaign. The agricultural chemicals security credit is claimed under IRC Sec. 450 and provides for a 30% credit to any eligible agricultural business that is paid or incurred security costs to safeguard agricultural chemicals. This campaign is intended 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.
Deferral of Cancellation of Indebtedness Income Campaign. During 2009 and 2010, taxpayers who incurred cancellation of indebtedness (“COD”) income from the reacquisition of debt instruments at an issue price less than the adjusted issue price of the original instrument may have elected to defer the COD income. The law provides that taxpayers must report the COD income ratably over five years beginning in 2014 and running through 2018. Also, when a taxpayer defers the COD income, any related original issue discount (“OID”) deductions on the new debt instrument resulting from debt-for-debt exchanges that triggered the COD must also be deferred ratably and in the same manner as the deferred COD income. The campaign is intended to ensure taxpayer compliance by verifying that taxpayers who properly deferred COD income in 2009/2010 properly reported it in subsequent years beginning in 2014, unless an accelerating event requires earlier recognition under IRC Sec. 108(i); and/or properly defer reporting OID deductions during the deferral period under IRC Sec. 108(i)(2).
Energy Efficient Commercial Building Property Campaign. The Energy Efficient Commercial Building Deduction (IRC Sec. 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”). The deduction is allocated to the person(s) primarily responsible for designing an EECBP if the equipment is installed in a government-owned building. The campaign’s goal is to ensure taxpayer compliance with IRC Sec. 179D.
Corporate Direct (IRC Sec. 901) Foreign Tax Credit (“FTC”). Domestic corporate taxpayers may elect to take a credit for foreign taxes paid or accrued in lieu of a deduction. This campaign’s goal is to improve return/issue selection and resource utilization for corporation returns that claim a direct FTC under IRC Sec. 901. The focus will be on taxpayers who are in an excess limitation position. (Future FTC campaigns may address indirect credits and IRC Sec. 904(a) FTC limitation issues.)
Section 956 Avoidance. If a controlled foreign corporation (“CFC”) makes a loan to its U.S. parent, IRC Sec. 956 generally requires an income exclusion equal to the amount of the loan. In this campaign, the focus is on situations where a CFC loans funds to a U.S. parent but does not include an IRC Sec. 956 amount in income. The goal is to determine to what extent taxpayers are utilizing cash pooling arrangements and other strategies to improperly avoid the application of IRC Sec. 956. The impact of tax reform on Section 956 – either through modification or elimination – will likely impact this particular campaign.
Economic Development Incentives Campaign. Taxpayers may be eligible to receive a variety of government economic incentives that have differing tax consequences. Taxpayers may 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 goal is to ensure taxpayer compliance and discourage abuse.
Individual Foreign Tax Credit (Form 1116). This campaign addresses taxpayer compliance with the computation of the foreign tax credit limitation on Form 1116, taking into account the complexity of the computation and challenges associated with third-party reporting information.