The Internal Revenue Service’s Large Business and International Division has approved five more compliance campaigns in areas including virtual currencies, S corporation distributions, repatriation, the Section 965 transition tax, and sequestered Alternative Minimum Tax credit carryforwards.
The division rolled out its first 13 compliance campaigns in January of last year, followed by another 11 last November, five in March, and six more campaigns in May.
However, the tax reform law that Congress passed last December could put a halt to some of them. The division is trying to determine which of the existing campaigns, if any, could be affected as a result of the extensive changes in the Tax Code.
Meanwhile, the LB&I Division has been moving toward issue-based examinations and a compliance campaign process in which it decides which compliance issues present enough of a risk to require a response in the form of one or multiple treatment streams to achieve tax compliance objectives.
The five new campaigns announced Monday were identified through data analysis and suggestions from IRS employees. The goal is to improve return selection, identify issues representing a risk of non-compliance, and make the best use of the division’s limited resources.
With the Virtual Currency Compliance campaign, the IRS aims to use various means, including agency outreach and examinations to address noncompliance related to the use of virtual currencies. “Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practical,” said the IRS. “The IRS is not contemplating a voluntary disclosure program specifically to address tax non-compliance involving virtual currency.”
As part of the S corporation distribution campaign, the IRS noted that S corps and their shareholders are supposed to properly report the tax consequences of distributions. The service has targeted three issues as part of this campaign:
- When an S corporation fails to report gain upon the distribution of appreciated property to a shareholder.
- When an S corporation fails to determine that a distribution, whether in cash or property, is properly taxable as a dividend; and,
- When a shareholder fails to report non-dividend distributions in excess of their stock basis that are subject to taxation.
For this campaign, the IRS plans to conduct issue-based examinations, suggest changes to tax form, and conduct stakeholder outreach.
In the repatriation area, the IRS is looking at foreign triangular reorganizations. In December 2016, the IRS issued Notice 2016-73, which curtails the claimed “tax-free” repatriation of basis and untaxed controlled foreign corporation earnings following the use of certain foreign triangular reorganization transactions. The goal of the campaign is to identify and challenge these transactions by educating and assisting examination teams in audits of repatriations.
For the campaign involving the Section 965 transition tax, the IRS noted that Section 965 requires U.S. shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the U.S. Taxpayers can elect to pay the transition tax in installments over an eight-year period. For some taxpayers, some or all of the tax will be due on their 2017 income tax return. The tax is payable as of the due date of the return, without extensions.
In the campaign involving restoration of sequestered AMT credit carryforwards, the LB&I Division is initiating a campaign for taxpayers who have been improperly restoring the sequestered AMT credit to the subsequent tax year. Refunds issued or applied to a subsequent year’s tax are subject to sequestration and are a permanent loss of refundable credits. Taxpayers aren’t supposed to restore the sequestered amounts to their AMT credit carryforward. The IRS will mail soft letters to taxpayers who are identified as making improper restorations of sequestered amounts, and they will be monitored for subsequent compliance. The goal of the campaign is to educate taxpayers about the proper treatment of sequestered AMT credits and ask them to self-correct.
