On March 13, 2018, the Internal Revenue Service’s Large Business and International Division announced that it was adding five more compliance campaigns to its previously-announced list of 24 such campaigns. The compliance campaigns signify LB&I’s move toward “issue-based examinations” premised upon pre-selected issues that present the greatest risk of non-compliance. According to LB&I, the stated goal of this effort is to “improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources.”
In January 2017, LB&I unveiled its first 13 campaigns to be implemented as part of its effort to move toward issue-based examinations of taxpayers based upon risk assessments. In November 2017, LB&I announced the identification and selection of 11 additional compliance campaigns. At the time, LB&I stated that more campaigns would continue to be identified, approved, and launched in the coming months.
LB&I noted that the newest campaigns were identified through data analysis and suggestions from IRS compliance employees. The five new campaigns are the following:
- Costs that Facilitate an IRC Section 355 Transaction
Practice Areas: Enterprise Activities
Lead Executives: Scott Ballint
Description: Costs to facilitate a tax-free corporate distribution under IRC Section 355, such as a spin-off, split-off or split-up, must be capitalized and are not currently deductible. Some taxpayers may execute a corporate distribution and improperly deduct the costs that facilitated the transaction in the year the distribution was completed. The goal of this campaign is to ensure taxpayer compliance with the requirement to capitalize, not deduct, the facilitative costs when the distribution is completed. The treatment stream for this campaign is issue-based examinations.
- Self-Employment Contributions Act (SECA) Tax
Practice Areas: Pass Through Entities and Northeastern Compliance
Lead Executives: Cliff Scherwinski and Darlena Billops-Hill
Description: Partners report income passed through from their partnerships. If the partner is an individual who renders services, the partner’s distributive share of income is subject to self-employment tax under the Self-Employment Contributions Act (SECA). Some limited partners and limited liability company (LLC) members who render services to clients on behalf of the partnership or LLC do not report flow-through income as earnings from self-employment and do not pay SECA tax. The Service’s goal in this campaign is to increase compliance with the law as supported by several recent court decisions. The treatment streams for this campaign will be issue-based examinations and outreach to practitioners, professional service provider associations, and software vendors.
- Partnership Stop Filer
Practice Areas: Pass-Through Entities and Western Compliance
Lead Executives: Cliff Scherwinski and Eric Slack
Description: Partners report income, losses, and other items passed through from their partnership. Some partnerships stop filing tax returns for various reasons yet still have economic transactions that are not being reported to their partners. That activity is likely not being reported by the partners. The treatment streams for this campaign include issue-based examinations, soft letters encouraging voluntary self-correction, and stakeholder outreach.
- Sale of Partnership Interest
Practice Areas: Pass-Through Entities and Eastern Compliance
Lead Executives: Cliff Scherwinski and Joseph Banks
Description: A partner must report the sale of a partnership interest on their tax return. This campaign will address taxpayers who do not report the sale or report the gain or loss incorrectly. Incorrect reporting includes the amount and character of the gain or loss. Taxpayers may report the entire gain as long-term capital gain (usually 15 percent) when a portion of the gain may be ordinary gain or subject to the 25 percent or 28 percent long-term capital gain rates. A variety of treatment streams will address noncompliance, including, but not limited to, examinations and soft letters.
- Partial Disposition Election for Buildings
Practice Area: Eastern Compliance
Lead Executive: Judith McNamara
Description: IRC Section168 disposition regulations (Treas. Reg. Section 1.168(i)-8), issued August 2014, provide rules for recognizing gain or loss on the disposition of MACRS property and allow taxpayers to elect to recognize partial dispositions of property. To comply with the Section168 disposition regulations and make a partial disposition election, a taxpayer must be able to substantiate that it:
1. disposed of a portion of a MACRS asset owned by the taxpayer;
2. identified the asset that was partially disposed;
3. determined the placed-in-service date of the partially disposed asset;
4. determined the adjusted basis of the disposed portion; and
5. reduced the adjusted basis of the asset by the disposed portion.
The goal of this campaign is to ensure taxpayers accurately recognize the gain or loss on the partial disposition of a building, including its structural components. The treatment stream for this campaign is issue-based examinations and potential changes to IRS forms and the supporting instructions and publications.
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