On July 2, 2018, the Large Business and International (LB&I) Division of the IRS released five additional Compliance Campaigns. Initially announced in January 2017, LB&I’s Compliance Campaigns are designed as an issue-based approach to address areas of tax that the Service has identified as having a high risk of compliance issues. This determination is based on extensive data analyses as well as suggestions from IRS employees and other members of the tax community. Additionally, the Service has notified taxpayers and practitioners that they will be reviewing all campaigns in light of changes imposed by tax reform.
Of the five campaigns announced on July 2, the virtual currency campaign is perhaps the most notable. The remaining campaigns include Restoration of Sequestered Alternative Minimum Tax (AMT), S Corporation Distributions, repatriation via foreign triangular reorganizations, and application of the section 965 transition tax.
In line with the recent speculation of practitioners, LB&I has formally initiated a campaign focused on virtual currency compliance. This campaign is aimed at addressing noncompliance related to the use of virtual currency in light of the IRS position on such currency outlined in Notice 2014-21. This Notice states that the IRS will treat virtual currency as property. The campaign announcement also explains that the Service is not contemplating a voluntary disclosure program at this time. Additionally, the announcement welcomed and encouraged continued feedback from taxpayers and practitioners on education efforts, future guidance, and development of Practice Units. It should be noted that many issues continue to exist in this area that warrant further elucidation by the IRS in guidance.
As for the campaign on the restoration of sequestered Alternative Minimum Tax (AMT) credit carry forward the IRS aims to educate taxpayers on the proper treatment of these credits. Under IRC section 168(k)(4), refunds issued or applied to a subsequent year’s tax are subject to sequestration and are treated as permanent losses of refundable credits. The Service intends to increase compliance in this area by mailing soft letters to taxpayers who are identified as making these improper restorations. Taxpayers will also be monitored for subsequent compliance.
The third campaign focuses on distributions made by S corporations. The Service has identified three main issues: (1) failure to report gain on distribution of appreciated property; (2) improper tax treatment of distributions; and (3) shareholders’ failure to report non-dividend distributions in excess of stock basis. Thus, S Corporation advisors and shareholders should pay close attention to identifying and reporting taxable transactions as required by the rules.
The last two campaigns focus on repatriation issues. The first issue addresses repatriation of basis and untaxed controlled foreign corporation earnings through certain foreign triangular reorganization transactions. The second looks to the mandatory transition tax under IRC section 965. Primarily, the Service intends to curtail the claimed “tax-free” repatriation by educating its audit teams, and thereby easing the identification and subsequent challenge of these transactions.
In addition to understanding foreign triangular reorganization transactions, LB&I’s section 965 transition tax campaign aims to continue to raise awareness of the underlying filing and payment obligations of this tax. Enacted as part of the Tax Cuts and Jobs Act, section 965 acts as a transition from the US worldwide tax system to a modified territorial system. Taxpayers subject to section 965 must pay a tax as if they had repatriated certain CFC items of earnings and profits. Although this tax may be paid in installments, taxpayers were required to pay the initial installment on 2017 tax returns. LB&I will be monitoring compliance and will be directing audit resources to achieve its compliance objectives in this area.
Previously, the Service announced Campaigns on January 31, 2017, November 3, 2017, March 31, 2018, and May 21, 2018. Including this most recent round of campaigns, LB&I has now announced 40 total areas for enforcement. The releases continue to narrow the focus of issues being scrutinized, so taxpayers believing that they may be affected by one of these campaigns would be well served to consult with a tax professional. Should you have any questions regarding LB&I’s campaigns, or any other complex tax issue, please contact me at Steven.Miller@alliantgroup.com.