10 IRS LB&I Compliance Campaigns You Should Know About
The IRS Large Business and International Division (LB&I) rolled out a campaign program in 2017 with the purpose of identifying specific tax issues that present compliance risks. This approach represents the IRS’ shift to issue-based examinations rather than focusing on entities, with a focus on those issues that have been determined to present a significant risk of noncompliance. A significant driver of the new approach was the resource challenges that the IRS was, and is, facing.
Part of this program includes developing treatment streams to address the compliance risks. Treatment streams can range from soft letters educating taxpayers about potential compliance concerns to full examinations. LB&I currently has 53 active campaigns, including three campaigns that were added in 2021: (1) Puerto Rico Act 22, Individual Investors Act; (2) Taxable Asset Transactions – Matching Buyers and Sellers; and (3) Financial Service Entities Engaged in a U.S. Trade or Business Campaign.
Here’s a quick look at 10 active LB&I campaigns, including two of the campaigns added in 2021:
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 (click here for an overview of letters the IRS is sending to crypto users with unreported transactions). The IRS urges taxpayers with unreported virtual currency transactions to correct their returns as soon as practical. The IRS has stated it is not contemplating a voluntary disclosure program to specifically address noncompliance involving virtual currency.
Recently, virtual currency reporting became a major point of discussion on Capitol Hill when a bipartisan infrastructure bill included a provision requiring crypto brokers to report virtual currency transactions to the IRS and for businesses to report cryptocurrency transactions of more than $10,000. As a result, virtual currency reporting is expected to continue to become a higher priority for the IRS and future legislative action.
Taxable Asset Transactions – Matching Buyers & Sellers
In general, parties entering into taxable asset transactions under Section 1060 or §338(h)(10) must report the transaction on either Form 8594 or Form 8883, which must be attached to their tax return. The forms disclose how the purchase price is allocated to various categories of assets or the results of a deemed asset disposition. This campaign addresses entities that either did not report a transaction on Form 8594 or Form 8883 or reported the transaction inconsistent with the other party’s reporting of the transaction.
Financial Services Entities Engaged in a U.S. Trade or Business Campaign
This campaign addresses whether foreign investors were subject to U.S. tax on effectively connected income from lending transactions engaged in through a U.S. trade or business. In general, foreign investors who only trade stocks and securities for their own account are not engaged in a U.S. trade or business under the safe harbor rule set forth in 26 U.S.C. 864(b)(2). The safe harbor rule, however, is not available to dealers in stocks or securities, entities engaged in a lending business, or foreign investors in partnerships engaged in such activities. The treatment stream for this campaign is issue-based examinations.
Tax Cuts and Jobs Act (TCJA) Campaign
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 (CARES 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.
U.S. citizens and resident aliens are subject to tax on worldwide income. This is true whether or not 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 have not filed tax returns into compliance.
Sale of Partnership Interest
In general, the sale of a partnership interest results in capital gain or loss. If the partner held the interest for more than one year, the current long-term capital gain tax rate is usually 15 percent. If the partnership depreciated real property or has appreciated collectibles at the time of the sale or exchange, higher capital gain rates may apply. If the partnership has inventory items or unrealized receivables at the time of the sale or exchange, a portion of the gain or loss will be ordinary gain or loss.
This campaign will address taxpayers who do not report the sale or do not report the gain or loss correctly. Incorrect reporting may include the gain or loss amount or reporting the entire gain as long-term capital gain (usually 15 percent). Often, a portion of the gain is ordinary gain or taxed at the 25 percent or 28 percent long-term capital gain rates.
A variety of treatment streams will address taxpayer noncompliance, including examinations. When appropriate, the IRS will issue soft letters. Additional treatment streams include practitioner and taxpayer outreach, tax software vendor outreach, and tax form and publication change suggestions.
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 issued-based examinations are the treatment stream for this campaign.
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 their stock basis that are subject to taxation.
The treatment streams for this campaign include issue-based examinations, tax form change suggestions, and stakeholder outreach.
S Corp Losses Claimed in Excess of Basis Campaign
LB&I has found that shareholders claim losses and deductions to which they are not entitled because they do not 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, conducting stakeholder outreach, and creating a new form for shareholders to assist in properly computing their basis.
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. 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 2020, the IRS Office of Chief Counsel began to settle certain cases involving abusive syndicated conservation easement transactions. The settlement required a concession of the tax benefits claimed by taxpayers and imposes penalties. The IRS continues 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. Furthermore, the current budget reconciliation bill under consideration by Congress includes a provision that would deny deductions for contributions of conservation easements by partnerships and pass-through entities if the deduction amount exceeds two-and-a-half times the sum of each partner’s basis in the partnership that relates to the donated property, with a proposed effective date retroactive to contributions made after December 23, 2016.
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 website. For help determining how specific campaigns may affect you, contact your BKD Trusted Advisor™ or submit the Contact Us form below.