The Internal Revenue Service is comprised of numerous divisions, such as its Criminal Investigation Division (IRS-CI) and Civil Examination Division (CED). For large corporations and pass-through entities, one of the most significant branches of the IRS is its Large Business and International (LB&I) Division, which is responsible for enforcing tax compliance among partnerships, S corporations, and C corporations with assets exceeding a $10 million threshold. In an effort to improve tax compliance among corporations and pass-through entities – while simultaneously allocating its resources more efficiently – LB&I is rolling out five new campaigns, which the IRS announced in October 2018. While each individual campaign serves a unique purpose, the predominant focus is on corporate compliance with offshore income reporting regulations, such as the Foreign Account Tax Compliance Act (FATCA). For some entities, this could translate to an increased likelihood of increased offshore audit and enforcement actions. The international tax attorneys at the Tax Law Office of David W. Klasing discuss each of the five campaigns in greater detail.
In October 2018, the IRS announced five new LB&I compliance campaigns, which “were identified through LB&I data analysis and suggestions from IRS employees.” The five campaigns are as follows:
With a few exceptions, Form 1120-F (U.S. Income Tax Return of a Foreign Corporation) must generally be filed by foreign corporations that (1) conducted business in the United States; (2) incurred losses, earned income, or realized gains “treated as if they were effectively connected with the conduct of a U.S. trade or business”; or (3) had U.S. source income, despite not being engaged in a U.S. trade or business, depending on whether the business’ tax liabilities were resolved. (For more information on this topic, readers should refer to our discussion of how foreign corporations are taxed on U.S. source income.) In most cases, Form 1120-F may be filed up to 18 months after the due date of the return for the current tax year.
To improve compliance with this requirement, the 1120-F delinquent returns campaign will focus on “field examinations of compliance risk delinquent returns and external education outreach programs,” according to the IRS. You can learn more about field examinations, or field audits, in a previous article our tax audit lawyers prepared on types of IRS audits.
The Foreign Account Tax Compliance Act, better known simply as “FATCA,” directly impacts two groups: (1) foreign financial institutions (FFIs), such as Swiss banks, which are required to disclose information about U.S. account holders to the IRS; and (2) U.S. taxpayers in control of foreign bank accounts, who are required to report such accounts by filing Form 8938 (Statement of Specified Foreign Financial Assets) if the funds therein exceed or exceeded, in aggregate, a threshold of $50,000. The FATCA filing accuracy campaign “addresses those entities that have FATCA reporting obligations but do not meet all their compliance responsibilities.” It may be worth pointing out that in October 2018, the first taxpayer was convicted for failure to comply with FATCA regulations.
Under 26 U.S. Code § 901 (taxes of foreign countries and of possessions of United States), eligible taxpayers – including U.S. citizens and corporations, in accordance with 26 U.S. Code § 901(b)(1) – may claim a foreign tax credit, which is designed to help relieve the financial burden of double-taxation. The individual foreign tax credit campaign “will address noncompliance through a variety of treatment streams, including examination.”
This LB&I campaign targets U.S. taxpayers who worked with offshore service providers that “facilitated the creation of foreign entities and tiered structures to conceal the beneficial ownership of foreign financial accounts and assets” – in other words, foreign services that enabled offshore tax evasion.
The Work Opportunity Tax Credit (WOTC) was designed to reward employers who hire workers from “targeted groups,” which the IRS defines to include ex-felons, qualified veterans, SNAP recipients, SSI recipients, qualified long-term unemployment recipients, summer youth employees, and others. In order to qualify this tax credit, the employer must prove that the worker belongs to a targeted group, which requires the filing of Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit).
The purpose of the WOTC campaign is to “develop an LB&I directive for taxpayers experiencing late certifications and to promote consistency in the examinations of WOTC claims.” LB&I anticipates that, as a result of this initiative, fewer employers will need to file amended California or federal tax returns for years in which WOTC wages were paid to their workers.
While some of these LB&I campaigns, such as the WOTC campaign, may make life simpler for taxpayers, others, like the FATCA filing accuracy and offshore service provider campaigns, may create an increased risk of auditing – and in turn, an increased risk of penalties. If you are a business owner who is concerned about previous failures to file Form 8938 or meet other international tax requirements, the Tax Law Office of David W. Klasing can help.
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