IRS Announces New international campaigns
On November 3, 2017, the IRS announced an additional 11 compliance campaigns as areas of focus for the Large Business & International Division (“Announcement”). The 11 newly identified campaigns focus primarily on international issues, with seven international campaigns and four domestic campaigns. In January 2017, the IRS launched its campaign initiative with an initial 13 compliance campaigns and subsequently conducted webinars to discuss the specific campaigns and campaign process.
Similar to the initial campaigns, the 11 new campaigns were identified based upon data analysis and IRS employee suggestions. The primary treatment stream for the majority of the new campaigns is issue-focused examinations, but the Announcement notes that other treatment streams may also be utilized. The IRS’ goal for campaigns is to move towards issue-focused examinations and effectively allocate resources to identified areas of compliance risk.
The newly announced campaigns are as follows, by practice area:
- Withholding & International Individual Compliance:
- Form 1120F Chapter 3 and Chapter 4 Withholding
- Swiss Bank Program
- Foreign Earned Income Exclusion
- Verification of Form 1042-S Claimed on Form 1040NR
- Cross Border Activities:
- Corporate Direct (Section 901) Foreign Tax Credit
- Section 956 Avoidance
- Enterprise Activities:
- Energy Efficient Commercial Building Property
- Geographic Practice Area:
- Eastern: Agricultural Chemicals Security Credit
- Northeastern: Deferral of Cancellation of Indebtedness Income
- Western: Economic Development Incentives
- Western: Individual Foreign Tax Credit (Form 1116)
Several of the newly identified international campaigns are extensions of current programs or policies. Both the Form 1120F Chapter 3 and Chapter 4 Withholding Campaign and Verification of Form 1042-S Claimed on Form 1040NR Campaign are designed to verify withholding for refunds claimed by non-resident taxpayers. In early 2016, the IRS implemented policy of systematic review of withholding documentation, such as Forms 1042-S, Foreign Person US Source Income Subject to Withholding, and Forms 8805, Foreign Partner’s Information Statement of Section 1446 Withholding Tax, for taxpayers filing a Form 1120-F or Form 1040NR requesting a refund. This recent policy can delay the issuance of refunds up to six months. See Internal Revenue Manual Section 21.8.1 and 21.8.2.
Further, the Swiss Bank Program Campaign, is a continuation of a US Department of Justice initiative to identify potential reportable activity, and corresponding income, through communications with Swiss financial institutions. This campaign will be focused on identifying US persons with beneficial ownership of foreign financial accounts, which could impact both income tax filings and filings under 31 CFR 1010.350 requiring disclosure of foreign financial accounts on FinCEN Form 114 (commonly known as FBARs). Recently, John Cardone, director (withholding and international compliance), IRS Large Business and International Division speaking at the annual institute on current issues in International Taxation noted the IRS plans to send approximately 100 letters to US clients of financial institutions that participated in the US Department of Justice initiative to ask about data not reflected on tax filings.
In addition, the Corporate Direct (Section 901) Foreign Tax Credit (“FTC”) Campaign and Individual Foreign Tax Credit (Form 1116) Campaign focus on the foreign tax credit. The corporate FTC campaign specifically relates to taxpayers claiming an FTC under Section 901 that are in an excess limitation position. The Announcement notes this campaign is only the first of several campaigns targeted on FTCs, and subsequent campaigns could address indirect credits and Section 904(a) FTC limitations. The individual FTC campaign is focused on evaluating whether the taxpayers have properly computed the limitations on the Form 1116 due to the complexities.
Other international campaigns will focus on whether taxpayers have properly included certain items of foreign income. The Section 956 Avoidance Campaign is designed to evaluate whether taxpayers are utilizing mechanisms, such as cash pooling or other arrangements, to mitigate Section 956 impacts. This provision generally requires an income inclusion in instances of a loan between a controlled foreign corporation and US parent entity. Additionally, the Foreign Earned Income Exclusion Campaign will examine whether individual taxpayers have properly excluded income under Section 911.