The IRS will be pursuing a new audit strategy known as “campaigns,” a move towards issue-based examinations. The move represents an effort to more efficiently utilize auditing resources by targeting specific issues that the IRS believes raise the risk of non-compliance.
On January 31, the Large Business and International (LB&I) division unveiled a formal document outlining a set of 13 “initial” campaign issue targets. The 13 campaigns selected in this initial rollout, as described by the IRS, are as follows:
- IRC 48C Energy Credit Campaign: This campaign ensures that only those taxpayers whose advanced energy projects were approved by the Department of Energy, and who have been allocated a credit by the IRS, are claiming the credit.
- OVDP Declines-Withdrawals Campaign: The Offshore Voluntary Disclosure Program (OVDP) allows U.S. taxpayers to voluntarily resolve past non-compliance related to unreported offshore income and failure to file foreign information returns. This campaign addresses OVDP applicants who applied for pre-clearance into the program but were either denied access to OVDP or withdrew from the program of their own accord.
- Domestic Production Activities Deduction, Multi-Channel Video Program Distributors (MVPD’s) and TV Broadcasters: Multi-channel Video Programing Distributors (MVPDs) and TV Broadcasters often claim that “groups” of channels or programs are a qualified film eligible for the IRC Section 199 deduction. Taxpayers are asserting that they are the producers of a qualified film when distributing channels and subscriptions packages that often include third-party produced content.
- Micro-Captive Insurance Campaign: This campaign addresses transactions described in Transactions of Interest Notice 2016-66, in which a taxpayer attempts to reduce aggregate taxable income using contracts treated as insurance contracts and a related company that the parties treat as a captive insurance company.
- Related Party Transactions Campaign: This campaign focuses on transactions between commonly controlled entities that provide taxpayers a means to transfer funds from the corporation to related pass through entities or shareholders.
- Deferred Variable Annuity Reserves & Life Insurance Reserves IIR Campaign: The IRS and Chief Counsel have agreed to accept the Deferred Variable Annuity Reserves and Life Insurance Reserves issues into the IIR program (pursuant to Rev. Proc. 2016-19) to develop guidance to address uncertainties on issues important to the Life Insurance Industry.
- Basket Transactions Campaign: This campaign addresses structured financial transactions described in Notices 2015-73 and 74, in which a taxpayer attempts to defer and treat ordinary income and short-term capital gain as long-term capital gain. The taxpayer treats the option or other derivative as open until a barrier event occurs, and, therefore, does not recognize or report current period gains.
- Land Developers – Completed Contract Method (CCM) Campaign: Large land developers that construct in residential communities may be improperly using the Completed Contract Method (CCM) of accounting. A developer, whose average annual gross receipts exceed $10 million, may only use the CCM under a home construction contract. In some cases, developers are improperly deferring all gain until the entire development is completed.
- TEFRA Linkage Plan Strategy Campaign: As partnerships have become larger and more complex, LB&I has regularly revised processes to assess tax on the terminal investors. Recent legal advice provides an opportunity to make significant changes to how we approach this process.
- S Corporation Losses Claimed in Excess of Basis Campaign: S corporation shareholders report income, losses and other items passed through from their corporation. The law limits losses and deductions to their basis in the corporation. LB&I has found that shareholders claim losses and deductions to which they are not entitled because they do not have sufficient stock or debt basis to absorb these items.
- Repatriation Campaign: LB&I is aware of different repatriation structures being used for purposes of tax free repatriation of funds into the U.S. in the mid-market population. It has also been determined that many of the taxpayers do not properly report repatriations as taxable events on their filed returns.
- Form 1120-F Non-Filer Campaign: Foreign companies doing business in the U.S. are often required to file Form 1120-F. LB&I has data suggesting that many of these companies are not meeting their filing obligations. In this campaign, LB&I will use various external data sources to identify these foreign companies and encourage them to file their required returns.
- Inbound Distributor Campaign: U.S. distributors of goods sourced from foreign-related parties have incurred losses or small profits on U.S. returns, which are not commensurate with the functions performed and risks assumed. In many cases, the U.S. taxpayer would be entitled to higher returns in arms-length transactions.
The myriad issues and sub-issues represented in this list of campaigns present many compliance challenges. Taxpayers should review their activities to determine whether they are sufficiently complying in these areas of heightened scrutiny.
For more information on the new initial audit campaigns, contact a member of the Barnes Dennig team by clicking here, or call 513-241-8313.