Thoughtware

Article 09/24/2018

IRS Campaign-Based Exams: Second-Year Update

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BKD 2018 Tax Advisor

On January 31, 2017, the IRS Large Business and International (LB&I) Division announced the rollout of its first 13 compliance campaigns. These campaigns are part of LB&I’s move toward issue-based examinations and a process in which the organization decides which compliance issues require a response in the form of one or multiple “treatment streams” to achieve compliance objectives. LB&I’s goal is to improve return selection, identify issues representing a risk of noncompliance and make the greatest use of limited resources. During 2017, LB&I identified 24 compliance campaigns. You can read more about these initial campaigns in this December 2017 BKD Thoughtware® article. In this second-year update, we’ll look at 16 additional campaigns LB&I has announced so far in 2018.

Pass-Through Entity Campaigns

Self-Employment Contributions Act (SECA) Tax

This campaign focuses on whether individual partners and limited liability company (LLC) members who provide services to their partnerships or LLCs have appropriately reported and paid SECA tax on their distributive share of partnership or LLC income. The treatment streams include issue-based examinations and educational outreach to tax professionals. 

Partnership Stop Filer

Some partnerships continue to have economic transactions after they stop filing tax returns. This campaign seeks to address situations where the economic activity isn’t reported to the partners. The treatment streams include issue-based examinations, soft letters and stakeholder outreach.  

Sale of Partnership Interest

This campaign focuses on whether partners properly reported the amount and character of gain or loss from the sale of a partnership interest, and paid any taxes due at the appropriate rate, considering the holding period and the assets held by the partnership. Treatment streams include examinations, soft letters and stakeholder outreach.

International Campaigns

Section 965 Transition Tax

The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, amended Internal Revenue Code (IRC) §965 to require U.S. shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations. So far in 2018, the IRS has issued guidance in the form of frequently asked questions, news releases and other communications posted to the IRS website to help taxpayers meet their reporting, filing and payment obligations under this new provision. On August 9, 2018, the U.S. Department of the Treasury and the IRS issued proposed regulations implementing §965.

For a closer look at several key international tax provisions within the TCJA, including the §965 transition tax, check out our archived February 2018 webinar, along with Episode 10 of Simply Tax, “The International Side of Tax Reform.”

Virtual Currency

IRS Notice 2014-21 states virtual currency is property for federal tax purposes and provides information on the U.S. federal tax implications of convertible virtual currency transactions. This campaign addresses noncompliance related to the use of virtual currency through examinations and stakeholder outreach. The IRS encourages taxpayers with unreported virtual currency transactions to correct their returns as soon as is practical.

Other International Campaigns

Other campaigns rolled out in 2018 focus on withholding, international individual compliance and other cross-border activities, including:

  • Form 3520/3520-A Non-Compliance and Campus Assessed Penalties

  • Form 1042/1042-S Compliance

  • Nonresident Alien (NRA) Tax Treaty Exemptions

  • NRA Schedule A and Other Deductions

  • NRA Tax Credits

  • Repatriation via Foreign Triangular Reorganizations

The primary treatment stream for these campaigns is traditional examinations.

Other 2018 Campaign Additions

Costs That Facilitate an IRC §355 Transaction

This campaign’s goal is to help taxpayers comply with the requirement to capitalize—and not deduct—costs to facilitate a tax-free corporate distribution under IRC §355. The treatment stream is issue-based examinations.

Partial Disposition Election for Buildings

Regulations under IRC §168 allow taxpayers to elect to recognize partial dispositions of MACRS property if certain substantiation requirements are met. This campaign’s goal is to help taxpayers properly recognize gain or loss on the partial disposition of a building, including its structural components. The treatment streams include issue-based examinations and potential changes to IRS forms and the supporting instructions and publications.

Interest Capitalization for Self-Constructed Assets

Taxpayers must capitalize interest paid or incurred during the production period when producing property that meets the definition of “designated property” under IRC §263A(f). That section defines “designated property” as any real property or tangible personal property that has: (i) a depreciable class life of 20 years or more, (ii) an estimated production period exceeding two years or (iii) an estimated production period exceeding one year and an estimated cost exceeding $1 million. This campaign’s goal is to verify interest is properly capitalized for designated property and the computation to capitalize that interest is accurate. Treatment streams include issue-based examinations and soft letters.

Restoration of Sequestered AMT Credit Carryforward

This campaign focuses on taxpayers subject to sequestration with respect to the refundable portion of the alternative minimum tax (AMT) credit. The IRS’s position is that the sequestered amount is permanently lost. This campaign’s goal is to address the improper use of sequestered AMT credits through continued monitoring, use of soft letters and other taxpayer education. The IRS website provides additional information regarding the effect of sequestration on the AMT credit for corporations.

S Corporation Distributions

This campaign consists of three issues related to the tax consequences of distributions by S corps to their shareholders:

  • An entity’s failure to report gain upon the distribution of appreciated property to a shareholder

  • An entity’s failure to determine a distribution is properly taxable as a dividend

  • A shareholder’s failure to report taxable nondividend distributions in excess of basis

The treatment streams for this campaign include issue-based examinations, tax form change suggestions and stakeholder outreach.

You can find more information about LB&I’s compliance campaign process—and a list of campaigns approved to date—on the LB&I Compliance Campaigns website. For help determining how the new campaigns may affect you, contact Julia, Kim or your trusted BKD advisor.