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IRS Issues Transition Tax Compliance Campaign

by , and | Nov 6, 2019 | , , , ,

On November 4, 2019, the Internal Revenue Service (IRS) announced a new Large Business and International (LB&I) compliance campaign regarding Section’s 965 transition tax under the Tax Cuts and Jobs Act (TCJA). This is one of several dozen compliance campaigns that LB&I has announced since the initial 13 campaigns were identified in 2017, and is part of LB&I’s larger goals of improving return selection, identifying issues representing a risk of noncompliance and making the greatest use of limited resources. We have written at length regarding the IRS’s campaigns. Click here for prior coverage of the IRS’s campaigns. This announcement comes just over a month after the Treasury Inspector General for Tax Administration (TIGTA) issued a report questioning the effectiveness and efficiency of campaign issue selection. We wrote about the TIGTA report here. The IRS is presumably heeding TIGTA’s recommendation and is focused on Section 965 because of the substantial dollars associated with compliance. A list of all campaigns can be found here (the newest campaign is found under the tab “IRC 965”).

Section 965 was part of tax reform in the TCJA. It generally imposes a transition tax on a US shareholder’s pro rata share of accumulated earnings and profits of certain foreign corporations, as if those earnings had been repatriated to the US. The new campaign will focus examinations on US-based multinational companies’ 2017 and 2018 returns to ensure compliance with the transition tax in Section 965. The campaign will also provide technical assistance to IRS teams working on Section 965 issues, with a focus on identifying and addressing taxpayer populations with potential material compliance risk.

Practice Point: Multinational taxpayers should be mindful of this new campaign and aware of any compliance issues they may face. Taxpayers should be aware that returns selected for the transition tax campaign will also be examined for other material issues, especially those related to TCJA planning.



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Government Questions the Benefits of IRS Audit Campaigns

by and | Oct 25, 2019 | , , ,

On September 28, 2019, the Treasury Inspector General for Tax Administration (TIGTA) issued a report titled Initial Compliance Results Warrant a More Data-Driven Approach to Campaign Issue Selection.

As the name of the report describes, the TIGTA analyzed whether the Internal Revenue Service (IRS) audit campaigns were effective and efficiently administered. We have written at length regarding the IRS’s “campaign” methodology:

The report questions how the IRS selected the campaigns it has unleashed on taxpayers. Upon inspection, it appears that the IRS did not have a systematic approach to choosing which issue would become a campaign. Instead, the approach was seemingly ad hoc, and was open to employee suggestions instead of empirical analysis. The TGITA suggests that going forward the IRS use a more data-driven selection process for its campaigns. The idea would be to analyze where the IRS could get the biggest bang for its resource bucks in terms of dollars as well as compliance goals. Accordingly, the TGITA recommends the IRS adopt a formal process for selecting and prioritizing issues for campaigns, and the IRS use actionable metrics, based in part on compliance results, to select the most productive inventory.

Practice Point:  We have heard in the past that some campaigns were based on issues that revenue agents and other field personnel identified, but it was never clear whether the IRS was applying a systematic approach. We expect now that the IRS will be more mindful with its approach, focusing on issues with substantial dollars associated with them, and also where the IRS wants to ensure taxpayer compliance with the Internal Revenue Code.



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Finally the IRS Clarifies Its Position on Cryptocurrency

by and | Oct 10, 2019 | , , , ,

It took five years, but the Internal Revenue Service (IRS) has finally released some guidance on the taxation of cryptocurrencies! On October 9, 2019, the IRS released Revenue Ruling 2019-24 and several “frequently asked questions” (and answers) which deal with some (but not all) of the federal income tax issues involved with cryptocurrencies.

Over the years, we have reported on the issues involved with cryptocurrencies, including the potential controversies that have ensued because of a lack of guidance.

The new guidance is welcomed by tax professionals and taxpayers. The guidance adopts traditional tax principles to deal with some of the unique aspects of cryptocurrencies. For example, the guidance addresses the tax treatment of so-called “hard forks” and whether the value of the “fork” which is “airdropped” into the taxpayer’s wallet constitutes taxable income.

Practice Point: Cryptocurrencies are a brave new world for most of us. Having thoughtful, current guidance is helpful to tax professionals and taxpayers, and will (hopefully) lead to better and more efficient administration of our tax system.



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Weekly IRS Roundup September 16 – 20, 2019

by | Sep 23, 2019 | , , ,

Presented below is our summary of significant Internal Revenue Service (IRS) guidance and relevant tax matters for the week of September 16 – 20, 2019.

September 16, 2019: The IRS issued a news release about time-limited settlement offers made to eligible taxpayers under audit who participated in certain micro-captive insurance transactions.

September 17, 2019: The Treasury and the IRS released a Chief Counsel Notice advising Chief Counsel attorneys about the prior Policy Statement on the Tax Regulatory Process issued by the Treasury and the IRS on March 5, 2019. We previously wrote about the Policy Statement here. The Chief Counsel Notice advises that any matter implicating any aspect of the Policy Statement must be coordinated with the Office of Associate Chief Counsel (Procedure & Administration).

September 17, 2019: The IRS issued a notice expanding the emergency housing and compliance monitoring relief that is provided in Rev. Proc. 2014-49, 2014-37 I.R.B. 535, and Rev. Proc. 2014-50, 2014-37 I.R.B. 540 to Butte, Los Angeles and Ventura counties in California due to the California wildfires.

September 17, 2019: The IRS set September 24, 2019, as the Federal Register publication date for final and proposed regulations on increase of benefit and expansion of qualifying property for additional first year depreciation deduction.

September 18, 2019: The IRS released a revenue ruling prescribing various rates for federal income tax purposes for October 2019: (1) applicable federal rates for purposes of section 1274(d); (2) adjusted applicable federal rates for purposes of section 1288(b); (3) adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f); (4) appropriate percentages for determining the low-income housing credit described in section 42(b)(1); and (5) the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.

September 19, 2019: The IRS issued final regulations amending the rules relating to hardship distributions from section 401(k) plans. The final regulations reflect statutory changes affecting section 401(k) plans, including changes made by the Bipartisan Budget Act of 2018. The regulations affect participants in, beneficiaries of, employers maintaining and administrators of plans that include cash or deferred arrangements or provide for employee or matching contributions.

September 2019: The IRS released a Statistics of Income Bulletin focusing on gift taxes. The article provides data on donors, donees, and types and amounts of gifts given during 2010 to 2016.

Special thanks to Robbie Alipour in our Chicago office for this week’s roundup.



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The Internal Revenue Service Is Expanding the 2020 Compliance Assurance Process

by and | Sep 17, 2019 | , , ,

The Large Business and International Division of the Internal Revenue Service (IRS) developed the Compliance Assurance Process (CAP) program to improve large corporate taxpayer compliance with US federal tax obligations through the use of real-time issue resolution tools and techniques.

On September 12, 2019, the IRS announced that it was accepting applications—for the first time since 2015—from new corporate taxpayers that meet the eligibility requirements for the CAP program. The application period for the 2020 CAP year begins on September 16, 2019, and ends on October 31, 2019. Generally, applicants must meet the following requirements in order to be eligible to apply for CAP: (1) applicants must have assets of $10 million or more; (2) applicants must be a US publicly traded corporation with a legal requirement to prepare and submit SEC Forms 10-K, 10-Q, and 8-K; and (3) the applicant must not be under investigation by, or in litigation with, any government agency that would otherwise limit the IRS’s access to current tax records.

Taxpayers interested in applying for the 2020 CAP year must submit an application with several forms:

  • Form 14234 – CAP Application
  • Form 14234-A – CAP Research Credit Questionnaire
  • Form 14234-B – Material Intercompany Transactions Template
  • Form 14234-C – Taxpayer Initial Issues List
  • Form 14234-D – Tax Control Framework Questionnaire

If the taxpayer also meets the eligibility and suitability criteria, the application will be forwarded for an evaluation of the application. Accepted taxpayers will be notified in writing by the Territory Manager assigned to the taxpayer.

However, acceptance is not automatic; the IRS, in its sole discretion, may reject the application when warrants by the facts and circumstances of the application or in the interest of sound tax administration. If an application is rejected, the taxpayer will be notified in writing and provided with the reasons why it was not accepted.

Further information regarding the IRS’s CAP program may be found here. Earlier coverage of the IRS’s 2018 recalibration of the CAP program can be found here.

Practice Point: The CAP program is a valued tool for many large corporate taxpayers. Eligible taxpayers that are interested in the CAP program for 2020 should prepare and submit an application as soon as possible.



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IRS Resumes Examinations of Stock Based Compensation in Cost Sharing Agreements

by , and | Aug 8, 2019 | , , ,

On July 31, 2019, the Internal Revenue Service (IRS) Large Business and International (LB&I) division formally withdrew its Directive (LB&I-04-0118-005) instructing examiners on transfer pricing selection related to stock based compensation (SBC) in Cost Sharing Arrangements (CSAS). See here for IRS Notice of Withdrawal.

The Directive was issued January 12, 2018, after the Tax Court’s opinion in Altera which invalidated Treasury Regulation § 1.482-7A(d)(2). The IRS appealed Altera and issued Directive LB&I-04-0118-005, which we previously discussed here. The Directive instructed examiners to “[s]top opening issues related to stock-based compensation (SBC) included in cost-sharing arrangements (CSAS) intangible development costs (IDCs) until the Ninth Circuit issues an opinion in the Altera case on appeal.” At the time, the IRS indicated that it would issue further guidance once Altera was finally decided. On June 7, 2019, the Ninth Circuit reversed the Tax Court’s decision. (more…)



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More IRS “Campaigns?! IRS Announces Six More Examination Campaigns

by and | Jul 23, 2019 | , , ,

On July 19, 2019, the Internal Revenue Service (IRS) Large Business & International (LB&I) division announced the approval of six new campaigns. As in the past, the IRS stated that “LB&I’s goal is to improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources.” This brings the total number of campaigns to 59! LB&I’s campaign announcements and approved campaigns are available on the IRS’s website.

The six new LB&I campaigns are listed below, verbatim by title and description.

S Corporations Built in Gains Tax
C corporations that convert to S corporations are subjected to the Built-in Gains tax (BIG) if they have a net unrealized built-in gain and sell assets within 5 years after the conversion. This tax is assessed to the S corporation. LB&I has found that S corporations are not always paying this tax when they sell the C corporation assets after the conversion. LB&I has developed comprehensive technical content for this campaign that will aid revenue agents as they examine the issue. The goal of this campaign is to increase awareness and compliance with the law as supported by several court decisions. Treatment streams for this campaign will be issue-based examinations, soft letters, and outreach to practitioners. (more…)



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Is an Increase in LB&I Assertion of Penalties on the Horizon?

by | Jun 5, 2019 | , , ,

On May 31, 2019, the Treasury Inspector General for Tax Administration (TIGTA) released a report indicating that changes may be in the works regarding assertion of accuracy-related penalties in examinations handled by the IRS Large Business & International (LB&I) Division.

The TIGTA report reviewed the results of closed LB&I examinations for the fiscal years 2015 through 2017 and concluded that the IRS assessed accuracy-related penalties upon only 6% of the 4,600 examined returns with additional tax assessments of $10,000 or more. In comparison, the IRS Small Business / Self Employed (SB/SE) Division assessed accuracy-related penalties upon 25% of its examined returns with additional tax assessments of $10,000 or more. (more…)



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Taxpayers Should Prepare for the Next Penalty Battleground

by , and | May 31, 2019 | , , ,

The IRS is using a new tool from its arsenal to enforce compliance for tax refund and credit claims: the Internal Revenue Code Section 6676 penalty. Taxpayers and their advisers need to be aware of the mechanics of this penalty and how best to avoid it being sustained.

Andrew R. Roberson, Kevin Spencer and Evan Walters authored a comprehensive article on IRC Section 6676. They discuss:

  • The origins of IRC Section 6676
  • How to contest the penalty and privilege concerns
  • What taxpayers who are considering filing—or have already filed—refund claims should keep in mind now that the penalty is the IRS’s favorite new compliance tool

Read the article here.



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IRS LB&I Sharpens Its Risk Analysis, Announces Large Corporate Compliance (LCC) Program

by | May 24, 2019 | , ,

Last week, the IRS unveiled a major change in how it identifies its biggest and most complex large corporations for examination. The move is part of the IRS’s broader efforts toward “portfolio management”—maximizing and modernizing its resources to focus upon areas of highest tax compliance risk.

The IRS’s Large Business and International Division (LB&I) has just begun greater use of data analytics to identify the population of its largest and most complex corporate taxpayers. This new Large Corporate Compliance (LCC) program replaces the Coordinated Industry Case (CIC) program and covers compliance oversight for LB&I’s largest corporate taxpayers. LCC is one of LB&I’s portfolio of compliance programs.

In a change from the prior system, which identified large cases on a manual and regional basis, LCC will automatically apply large case pointing criteria to select the LCC population. Pointing criteria include such items as gross assets and gross receipts.  According to the IRS press release announcing the change, LB&I believes that automatic pointing will allow “a more objective determination of the taxpayers that should be part of the population.” Further, LB&I expects that use of data analytics will allow it to select returns that “pose the highest compliance risk.”

Practice point: LB&I’s change to the LCC program and heightened use of data analytics are only the most recent developments in the Service’s recent plan to do more with less, deploying staff time to its highest compliance priorities. It is still uncertain whether and how CIC-specific procedures, like the availability of taxpayer disclosures under Rev. Proc. 94-69, will continue under the LCC program. Taxpayers subject to the former CIC regime would do well to monitor developments under the new LCC program closely.



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