A Quick Look at 10 IRS LB&I Compliance Campaigns
In 2017, the IRS Large Business and International Division (LB&I) rolled out its “campaign” program in which LB&I identifies specific tax issues that present compliance risks and develops treatment streams to address them. Treatment streams can range from soft letters to educate taxpayers about potential compliance concerns to full examinations. The campaign program is intended to make the best use of limited IRS resources to achieve compliance objectives.
LB&I currently has 57 active campaigns, including eight campaigns added thus far in 2020: Allocation of Success-Based Fees Without Rev. Proc. 2011-29, IRC Section 807(d) – Computation of Life Insurance Reserves Campaign, FIRPTA Reporting Compliance for NRAs, IRC Section 807(d) – Re-computation of Life Insurance Reserves Campaign, Internal Revenue Code (IRC) Section 965 for Individuals, IRC 6426 Fuel Credit, Research Issues, and Tax Cuts and Jobs Act (TCJA).
Here’s a quick look at 10 active LB&I campaigns:
1. TCJA Campaign
In 2020, the majority of tax returns that will be under review by LB&I will reflect changes brought about by the TCJA. The TCJA campaign was initiated to closely monitor issues on a select pool of returns and share information learned throughout LB&I and the IRS. LB&I also is considering the effect of the Coronavirus Aid, Relief, and Economic Security Act on these returns and others that are examined. The goal of this campaign is to identify transactions, restructuring, and technical issues and better understand taxpayer behavior under the new law. The treatment streams for this campaign may include examinations, soft letters, outreach, and development of future issue-based campaigns.
2. Energy-Efficient Commercial Building Property Campaign
The Energy-Efficient Commercial Buildings Deduction under IRC §179D allows taxpayers who own or lease a commercial building to deduct the cost, or a portion of the cost, of installing energy-efficient commercial building property (EECBP). If the equipment is installed in a government-owned building, the deduction is allocated to the person(s) primarily responsible for designing the EECBP. The goal of this campaign is to ensure taxpayer compliance with the requirements of §179D. The treatment stream for this campaign is issue-based examinations.
3. Form 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 don’t meet all their compliance duties. Noncompliance and errors are addressed through a variety of treatment streams, including examination.
4. High-Income Nonfiler
U.S. citizens and resident aliens are subject to tax on worldwide income. This is true whether taxpayers receive a Form W-2 Wage and Tax Statement, a Form 1099 (information return), or its foreign equivalents. This campaign uses examinations to bring taxpayers who haven’t filed tax returns into compliance.
5. Partnership Stop Filer
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 aren’t 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.
6. Related-Party Transactions Campaign
This campaign focuses on transactions between commonly controlled entities that provide taxpayers a means to transfer funds from a corporation to related pass-through entities or shareholders. LB&I is allocating resources to this issue to determine the level of compliance in related-party transactions of midmarket taxpayers. Issue-based examinations are the treatment stream for this campaign.
7. S Corporation Distributions
S corps and their shareholders are required to properly report the tax consequences of distributions. The IRS has identified three issues that are part of this campaign:
- An S corp fails to report gain upon the distribution of appreciated property to a shareholder.
- An S corp fails to determine that a distribution, whether in cash or property, is properly taxable as a dividend.
- A shareholder fails to report nondividend distributions in excess of its stock basis that are subject to taxation.
The treatment streams for this campaign include issue-based examinations, tax form change suggestions, and stakeholder outreach.
8. S Corp Losses Claimed in Excess of Basis Campaign
LB&I has found that shareholders claim losses and deductions to which they’re not entitled because they don’t have sufficient stock or debt basis to absorb these items. LB&I has developed technical content for this campaign that will aid revenue agents as they examine the issue. The treatment streams for this campaign include issue-based examinations, soft letters encouraging voluntary self-correction, stakeholder outreach, and creating a new form for shareholders to assist in properly computing their basis.
9. Syndicated Conservation Easement Transactions
In December 2016, the IRS issued Notice 2017-10 designating specific syndicated conservation easement transactions as “listed transactions,” requiring disclosure statements by both investors and material advisors. On August 25, 2020, the Senate Finance Committee released a report on its investigation into the abuse of syndicated conservation easement transactions. The report encourages the IRS to continue taking enforcement action against syndicated use of conservation easement transactions and to take further action to preserve the integrity of the conservation easement tax deduction.
This campaign is intended to encourage taxpayer compliance and ensure consistent treatment of similarly situated taxpayers by ensuring that easement contributions meet the legal requirements for a deduction and the fair market values are accurate. The initial treatment stream is issue-based examinations.
In June 2020, the IRS Office of Chief Counsel announced an offer to settle certain cases involving abusive syndicated conservation easement transactions. The settlement requires a concession of the tax benefits claimed by taxpayers and imposes penalties. In August 2020, the IRS finalized its first settlement under this initiative when Coal Property Holdings, LLC and its partners agreed to a disallowance of the entire $155 million charitable contribution deduction claimed for an easement placed on a 3,700-acre tract of land in Tennessee.
The IRS will continue to actively identify, audit, and litigate these transactions and recommends that participants seek the advice of competent, independent advisors in considering the potential resolution of their matter.
10. Virtual Currency
U.S. persons are subject to tax on their worldwide income from all sources, including transactions involving virtual currency. IRS Notice 2014-21 states that 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 multiple treatment streams, including outreach and examinations (for an overview of letters the IRS is sending to cryptocurrency users with unreported transactions, see our recent BKD Thoughtware® article). The IRS urges taxpayers with unreported virtual currency transactions to correct their returns as soon as practical. The IRS has said it’s not contemplating a voluntary disclosure program specifically to address tax noncompliance involving virtual currency.
You can find more information about LB&I’s compliance campaign program—and a complete list of currently active campaigns—on the LB&I Compliance Campaigns webpage. For help determining how specific campaigns may affect you, reach out to your BKD Trusted Advisor™ or submit the Contact Us form below.