Yesterday the Internal Revenue Service’s Large Business and International Division announced that it was adding six more compliance campaigns to its previously-announced list of 29 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. On March 13, 2018, LB&I announced the addition of five more issues to the growing list of compliance campaigns.
In yesterday’s announcement, LB&I stated that is currently reviewing the tax reform legislation signed into law on December 22, 2017, “to determine which existing campaigns, if any, could be impacted as a result of a change in the controlling statutory framework.” LB&I further stated that “[i]nformation regarding any identified impact will be communicated after that analysis has been completed.”
According to LB&I, the six new campaigns were identified through data analysis and suggestions from IRS employees. The six campaigns selected for this rollout, and a description of each, are as follows:
Interest Capitalization for Self-Constructed Assets
When a taxpayer engages in certain production activities they are required to capitalize interest expense under Internal Revenue Code (IRC) Section 263A. Interest capitalization applies to interest a taxpayer pays or incurs during the production period when producing property that meets the definition of designated property. Designated property under IRC Section 263A(f) is defined as (a) any real property, or (b) tangible personal property that has: (i) a long useful life (depreciable class life of 20 years or more), or (ii) an estimated production period exceeding two years, or (iii) an estimated production period exceeding one year and an estimated cost exceeding $1,000,000.
The goal of this campaign is to ensure taxpayer compliance by verifying that interest is properly capitalized for designated property and the computation to capitalize that interest is accurate. The treatment stream for this campaign is issue-based examinations, education soft letters, and educating taxpayers and practitioners to encourage voluntary compliance
Forms 3520/3520-A Non-Compliance and Campus Assessed Penalties
This campaign will take a multifaceted approach to improving compliance with respect to the timely and accurate filing of information returns reporting ownership of and transactions with foreign trusts. The Service will address noncompliance through a variety of treatment streams including, but not limited to, examinations and penalties assessed by the campus when the forms are received late or are incomplete.
Forms 1042/1042-S Compliance
Taxpayers who make payments of certain U.S.-source income to foreign persons must comply with the related withholding, deposit, and reporting requirements. This campaign addresses Withholding Agents who make such payments but do not meet all their compliance duties. The Internal Revenue Service will address noncompliance and errors through a variety of treatment streams, including examination.
Nonresident Alien Tax Treaty Exemptions
This campaign is intended to increase compliance in nonresident alien (NRA) individual tax treaty exemption claims related to both effectively connected income and Fixed, Determinable, Annual Periodical income. Some NRA taxpayers may either misunderstand or misinterpret applicable treaty articles, provide incorrect or incomplete forms to the withholding agents or rely on incorrect information returns provided by U.S. payors to improperly claim treaty benefits and exempt U.S. source income from taxation. This campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.
Nonresident Alien Schedule A and Other Deductions
This campaign is intended to increase compliance in the proper deduction of eligible expenses by nonresident alien (NRA) individuals on Form 1040NR Schedule A. NRA taxpayers may either misunderstand or misinterpret the rules for allowable deductions under the previous and new Internal Revenue Code provisions, do not meet all the qualifications for claiming the deduction and/or do not maintain proper records to substantiate the expenses claimed. The campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.
NRA Tax Credits
This campaign is intended to increase compliance in nonresident alien individual (NRA) tax credits. NRAs who either have no qualifying earned income, do not provide substantiation/proper documentation, or do not have qualifying dependents may erroneously claim certain dependent related tax credits. In addition, some NRA taxpayers may also claim education credits (which are only available to U.S. persons) by improperly filing Form 1040 tax returns. This campaign will address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.
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