United States

The first IRS issues-based campaigns: A brief overview of each release

What are the initial 13 large business and international campaigns?

VIDEO  | 

In the fall of 2015, the IRS large business and international (LB&I) division announced a move away from traditional IRS examinations to issue-specific examinations. They refer to this as a “campaign approach” where a compliance issue is identified and then taxpayers with that issue may be selected for examination. 

The first 13 campaigns were announced at the end of January 2017 and cover three IRS practice areas: enterprise activity, pass-through entities and global. During an early February webcast, our tax controversy team provided an overview of each of the first 13 campaigns. Watch the video below to see their explanation of the campaign approach and then listen to the campaign-specific segments that may be important to your business.   


Select from the audiocasts below to hear more about each of the first 13 campaign topics:

Section 48C energy credit compliance

energy_credits.mp3

Focus area

  • Tax credits for qualified investments in advanced energy projects which support new, expanded or re-equipped domestic manufacturing facilities that produce certain types of energy

Campaign purpose

  • Ensure that only those taxpayers who were approved by the Department of Energy and who were allocated credits by the IRS are receiving the credits

Treatment streams

  • Soft letters to those who claimed the credit
  • Limited issue focused examinations for some


DPAD for video and TV program distributors

dpad_for_video_producers.mp3

Focus areas

  • Section 199 allows for a domestic production activity deduction (DPAD) equal to 9 percent of income generated from qualified production activities
  • Evaluation of whether certain film production activities qualify for the deduction  
  • Evaluation of whether multi-channel video program distributors (MVDPs) providing online access to computer software for direct customer use are eligible for the deduction

Campaign purpose

  • Ensure that MVDPs and broadcasters are not claiming DPAD allowances for certain circumstances disallowed by recent IRS technical advice

Treatment streams

  • Externally published Practice Unit
  • Potential published guidance
  • Issue focused examinations


Micro-captive insurance

microcaptive_insurance.mp3

Focus area

  • Involves a captive insurance companies claiming a partial tax exemption under section 831 and related parties claiming insurance premium deductions to reduce taxable income
  • Notice 2016-66 identifies the issue as a “transaction of interest” requiring annual disclosure on Form 8886 as a “reportable transaction”

Campaign purpose

  • Determine whether the activities constitute “insurance” under section 831 and whether deductions are properly claimed

Treatment streams

  • Deploy developed training program
  • Issue based examinations
  • Penalties for non-disclosure of the transaction on Form 8886


Related party transactions

related_party_transactions.mp3

Focus area

  • Middle market companies with transactions involving income and deductions between corporate taxpayers and related pass-through entities or shareholders

Campaign purpose

  • Determine who is the proper party to report income and claim deductions

Treatment streams

  • Issue-based examinations


Life insurance and variable annuity reserves

life_insurance.mp3

Focus area

  • Reserve calculations based on morbidity tables and assumed rates of interest, creating significant differences depending on process used

Campaign purpose

  • Minimize the disparity in taxation of annuity and life insurance reserves created by current methods
  • Collaboration between industry stakeholders, Treasury, and Chief Counsel to develop published guidance

Treatment streams

  • Industry Issue Resolution (IIR)
  • Pre-filing guidance (rather than examination)
  • Published guidance


Basket transactions

basket_transactions.mp3

Focus area

  • Transactions that use derivative contracts (generally involving cash-settled options) that entitle the holder to the net appreciation or depreciation on a “basket” of financial products acquired by the option writer (typically a bank)
  • Deferral of gain or loss and change of character controlled by the investor
  • Transactions involving cash-settled options were designated as “listed transactions” by the IRS while other basket transactions were treated as “transactions of interest,” both requiring disclosure on Form 8886

Campaign purpose

  • Clarify Form 8886 disclosures and proper capital gain or loss treatment of the elements within these transactions

Treatment streams

  • Issue-based examinations
  • Soft letters to material advisors
  • Practitioner outreach
  • Penalties 


Land developers using completed contract method of accounting

land_developers.mp3

Focus area

  • Completed contract method of accounting, which allows for deferral of income until the completion of the project
  • Limiting the method to land developers engaged in construction, though a recent IRS memorandum allowed the method for a land developer that graded land and compacted soil for future construction by a home builder

Campaign purpose

  • Ensure large land developers are not impermissibly using the completed contract method, or using a percentage of completion method that maximizes deferral of income on land development contracts when they are not engaged in construction

Treatment streams

  • Soft letters to developers using completed contract method
  • Development of a published practice unit for use by LB&I
  • Issue-based examinations where warranted


TEFRA partnership audits

tefra_linkage_for_partnerships.mp3

Focus area

  • The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) unified partnership audit procedures, creating burdens on the IRS examination function due to complexity of issues and procedures
  • Few examinations are conducted and many examinations result in “no changes” 

Campaign purpose

  • Develop new procedures and technologies to more efficiently track, process and, ultimately, collect tax on TEFRA partnership adjustments

Treatment streams

  • New procedures and improved technology to assist in TEFRA examinations


S corporation losses

s_corporations.mp3

Focus area

  • S corporations pass through net income, gains, losses and credits to shareholders who report those items on their Forms 1040
  • S corporation shareholders can only deduct losses to the extent they either have basis in their S corporation stock or in debt of the corporation owes directly to the shareholder
  • It is often impossible for the IRS to determine whether a shareholder has sufficient basis to deduct the loss

Campaign purpose

  • Ensure shareholders are not improperly deducting losses in excess of their basis.

Treatment streams

  • Soft letters to shareholders who claim S corporation losses
  • Stakeholder (tax practitioner) outreach
  • Creation of a new IRS form to compute basis
  • Issue-based examinations


Offshore voluntary disclosure program (OVDP) opt-outs

ovdp.mp3

Focus area

  • Offshore voluntary disclosure program (OVDP) allows voluntary entry into a civil settlement structure to correct prior non-compliance related to unreported offshore income and unfiled foreign information returns
  • Civil penalties may be imposed as part of the settlement structure
  • Taxpayers may opt out of the program via an irrevocable election where their case will be handled through a full scope IRS examination

Campaign purpose

  • Ensure that all individuals who have opted out or were declined from the program have become compliant

Treatment streams

  • Outreach
  • Examination
  • Penalties


Repatriation structures

repatriation.mp3

Focus area

  • Various repatriation structures implemented by middle market companies to repatriate funds into the United States tax free

Campaign purpose

  • Identify and examine transactions designed to repatriate the earnings of foreign subsidiaries on a tax-free or tax advantaged basis (i.e. “Killer B” or “Cash D” transactions)

Treatment streams

  • Identify high-risk transactions
  • Improve issue selection filters
  • Issue-based examinations


Foreign companies failing to report US income

1120_f_non_filers.mp3

Focus area

  • Lack of compliance by foreign companies doing business in the U.S. to report income from U.S. business activities through required filing of IRS Form 1120-F

Campaign purpose

  • Identify non-compliant foreign companies and encourage them to file all required returns     

Treatment streams

  • Soft-letter outreach to foreign companies
  • Examination where warranted
  • Penalties


Unreported profits of US distributors

inbound_distributors.mp3

Focus area

  • Disproportionately low profit reported on U.S. tax returns by U.S. distributors sourcing and reselling goods from foreign-related parties
  • Unrelated parties performing the same functions would show a significantly greater profit, relative to risks assumed and functions performed by the U.S. distributors (per LB&I determination)

Campaign purpose

  • Identify unreported profits and bring those U.S. distributors into compliance

Treatment streams

  • Comprehensive training strategy designed to aid revenue agents in their examination of transfer pricing issues.
  • Issue-based examinations



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