IRS Large Business and International division (LB&I) announces the approval of six additional compliance campaigns

IRS’s Large Business and International division (LB&I) has announced six new compliance campaigns. The new compliance campaigns target: S corporation built-in gains tax; post offshore voluntary disclosure compliance and expatriates; high-income nonfilers; erroneous refundable credits of U.S. possession filers; and deferred compensation.

Background. In January 2017, IRS announced a new audit strategy for LB&I known as “campaigns”. With the new campaigns, LB&I essentially shifted to examinations based on compliance issues that LB&I had determined present greater levels of compliance risk thereby improving return selection. IRS initially selected 13 compliance issues when it rolled out this strategy. (See IRS rolls out Large Business and International campaign audit strategy)

New issues identified. LB&I announced that it has identified and selected the following six new issues for compliance campaigns.

  • S corporation built-in gains (BIG) tax. An S corporation that used to be a C corporation is subject to the built-in gains (BIG) tax when
    1. The S corporation has a net unrealized built-in gain on the C corporation’s assets; and
    2. The S corporation sells those assets within five years after the conversion from C corporation to S corporation. (Code Sec. 1374(a))

    The goal of the campaign is to increase awareness and compliance, so the campaign will consist of issue-based examinations, soft letters (generally, warning letters intended to encourage self-correction and voluntary compliance) and outreach to practitioners.

  • Offshore Voluntary Disclosure Program (OVDP) compliance. The IRS ran several OVDP compliance campaigns that were aimed at getting U.S. taxpayers residing abroad into compliance with their U.S. worldwide income and asset reporting obligations. The OVDPs permitted U.S. taxpayers with unreported foreign accounts to avoid criminal charges and pay reduce civil penalties by making a voluntary disclosure to IRS. The first OVDP opened on Mar. 26, 2009. The last OVDP closed on Sept. 28, 2018. (See Offshore voluntary disclosure program ends Sept. 28, 2018) The new LB&I campaign will address tax noncompliance issues related to former OVDP participants’ failure to remain compliant with their foreign income and asset reporting requirements through soft letters and examinations.
  • Expatriation. A U.S. citizen who gives up his U.S. citizenship or a long-term U.S. resident who gives up his residency status on or after June 17, 2008, and who is a covered expatriate, is subject to an “exit tax”. (Code Sec. 877A(g)(1)(A)) The compliance campaign will address the issue through outreach, soft letters and examinations.
  • High-income nonfilers. U.S. citizens and resident aliens are taxed on their worldwide income whether they receive a Form W-2, Wage and Tax Statement, a Form 1099 information return, or a foreign equivalent. The LB&I campaign will concentrate on bringing into compliance those taxpayers who have not filed tax returns.
  • Erroneous refundable credits of U.S. territories’ filers. IRS has determined that some bona fide residents of U.S. territories are erroneously claiming refundable tax credits on Form 1040. The new campaign will address noncompliance through outreach and traditional examinations.
  • Deferred compensation for services performed before Jan. 1, 2009. Generally, Code Sec. 457A requires that any compensation deferred under a nonqualified deferred compensation plan is includible in gross income when there is no substantial risk of forfeiture to the rights to such compensation. (Code Sec. 457A) The goal of the campaign is to verify taxpayer compliance with the requirements of Code Sec. 457A through issue-based examinations.

Reference: For how the IRS finds deficiencies and underpayments, see FTC 2d/FIN ¶T-1000.

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