Pass-Through Entity Initiatives
- S-Corporation Distributions
- S-Corporation Losses Claimed in Excess of Basis Campaign
- S-Corporations Built-in Gains Tax
- Sale of Partnership Interest
- Syndicated Conservation Easement Transactions
- Tax Cuts and Jobs Act (TCJA) Campaign
- U.S. Territories Self Employment Tax
- Virtual Currency
- High Income Non-filer
- Expatriation of Individuals (International Tax)
- Forms 3520/3520-A Non-Compliance and Campus Assessed Penalties
- Loose Filed Forms 5471
- Swiss Bank Program Campaign
- Micro-Captive Insurance Campaign
- Offshore Private Banking Campaign
- Post Offshore Voluntary Disclosure Program (OVDP) Compliance
- Puerto Rico Act 22, Individual Investors Act
- Research Issues
Pass-through Entity Initiatives:
S Corporations and their shareholders are required to properly report the tax consequences of distributions. We have identified three issues that are part of this campaign. The first issue occurs when an S Corporation fails to report gain upon the distribution of appreciated property to a shareholder. The second issue occurs when an S Corporation fails to determine that a distribution, whether in cash or property, is properly taxable as a dividend. The third issue occurs when a shareholder fails to report non-dividend distributions in excess of their stock basis that are subject to taxation. The treatment streams for this campaign include issue-based examinations, tax form change suggestions, and stakeholder outreach.
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. LB&I has developed technical content for this campaign that will aid revenue agents as they examine the issue. The treatment streams for this campaign will be issue-based examinations, soft letters PDF encouraging voluntary self-correction, conducting stakeholder outreach, and creating a new form for shareholders to assist in properly computing their basis.
S-Corporations Built-in Gains Tax
C corporations that convert to S corporations are subjected to the Built-in Gains tax (BIG) if they have a net unrealized built-in gain and sell assets within 5 years after the conversion. This tax is assessed to the S corporation. LB&I has found that S corporations are not always paying this tax when they sell the C corporation assets after the conversion. LB&I has developed comprehensive technical content for this campaign that will aid revenue agents as they examine the issue. The goal of this campaign is to increase awareness and compliance with the law as supported by several court decisions. Treatment streams for this campaign will be issue-based examinations, soft letters, and outreach to practitioners.
Sale of Partnership Interest
Generally, the sale of a partnership interest results in capital gain or loss. If the partner held the interest for more than one year, the long-term capital gain tax rate is usually 15 percent. If the partnership depreciates real property or has appreciated collectibles at the time of the sale or exchange, higher capital gain rates may apply. If the partnership has inventory items or unrealized receivables at the time of the sale or exchange, a portion of the gain or loss will be ordinary gain or loss.
This campaign will address taxpayers who do not report the sale or do not report the gain or loss correctly. Incorrect reporting may include the gain or loss amount or reporting the entire gain as long-term capital gain (usually 15 percent). Often, a portion of the gain is ordinary gain or taxed at the 25 percent or 28 percent long-term capital gain rates.
A variety of treatment streams will address taxpayer noncompliance, including examinations. When appropriate, the Service will issue soft letters. Additional treatment streams include practitioner and taxpayer outreach, tax software vendor outreach, and tax form and publication change suggestions.
Syndicated Conservation Easement Transactions
The IRS issued Notice 2017-10, designating specific syndicated conservation easement transactions as listed transactions, requiring disclosure statements by both investors and material advisors.
This campaign is intended to encourage taxpayer compliance and ensure consistent treatment of similarly situated taxpayers by ensuring the easement contributions meet the legal requirements for a deduction, and the fair market values are accurate.
The initial treatment stream is issue-based examinations. Other treatment streams will be considered as the campaign progresses.
Tax Cuts and Jobs Act (TCJA) Campaign
The Tax Cuts and Jobs Act (TCJA) was signed into law on December 22, 2017. Taxpayers have filed returns for 2017 and 2018 and are in the process of preparing and filing 2019 returns. In 2020, the majority of returns that will be under review by LB&I will be returns reflecting changes brought about by TCJA; and in light of that, LB&I has initiated the TCJA Campaign to closely monitor issues on a select pool of returns and share information learned throughout LB&I and the IRS. LB&I is also considering the impact of the Coronavirus Aid, Relief, and Economic Security (CARES) Act on these returns as well as any others examined. The goal of this campaign is to identify transactions, restructuring, and technical issues and better understand taxpayer behavior under the new law. The treatment streams for this campaign may include examinations, soft letters, outreach, new and improved practice units, and development of future issue-based campaigns.
U.S. Territories Self Employment Tax
This campaign addresses residents of U.S. territories—Puerto Rico, U.S. Virgin Islands (USVI), Guam, American Samoa, and Commonwealth of Northern Mariana Islands (CNMI)—who either failed to pay, or were underpaid, self-employment tax to the Internal Revenue Service (IRS). Residents of U.S. territories with net self-employment income of $400 or more are subject to U.S. self-employment tax even if they have no income tax filing obligation with the United States. Such individuals should file Form 1040SS or 1040PR if they have not already done so; those who understated their self-employment tax should amend Form 1040SS or 1040PR to properly report and pay their self-employment tax. The IRS will address continued noncompliance through a variety of treatment streams, including examination.
U.S. persons are subject to tax on worldwide income from all sources including transactions involving virtual currency. IRS Notice 2014-21 states that virtual currency is property for federal tax purposes and provides information on the U.S. federal tax implications of convertible virtual currency transactions. The Virtual Currency Compliance campaign will address noncompliance related to the use of virtual currency through multiple treatment streams including outreach and examinations. The compliance activities will follow the general tax principles applicable to all transactions in property, as outlined in Notice 2014-21. The IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts, future guidance, and development of Practice Units. Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practical. The IRS is not contemplating a voluntary disclosure program specifically to address tax non-compliance involving virtual currency.
High Income Non-filer
U.S. citizens and resident aliens are subject to tax on worldwide income. This is true whether or not taxpayers receive a Form W-2 Wage and Tax Statement, a Form 1099 (Information Return) or its foreign equivalents. Through an examination treatment stream, this campaign will concentrate on bringing into compliance those taxpayers who have not filed tax returns.
Expatriation of Individuals (international tax)
U.S. citizens and long-term residents (lawful permanent residents in eight out of the last 15 taxable years) who expatriated on or after June 17, 2008, may not have met their filing requirements or tax obligations. The Internal Revenue Service will address noncompliance through a variety of treatment streams, including outreach, soft letters, and examination.
Forms 3520/3520-A Non-Compliance and Campus Assessed Penalties
This campaign will take a multifaceted approach to improve compliance with respect to the timely and accurate filing of information returns reporting ownership of and transactions with foreign trusts. The Service will address noncompliance through a variety of treatment streams PDF including, but not limited to, examinations and penalties assessed by the campus when the forms are received late or are incomplete.
Loose Filed Forms 5471
Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, must be attached to an income tax return (or a partnership or exempt organization return, if applicable) and filed by the return’s due date including extensions. Some taxpayers are incorrectly filing Forms 5471 by sending the form to the IRS without attaching it to a tax return (or partnership or exempt organization return, if applicable).
If a Form 5471 is required to be filed and was not attached to an original return, an amended return with the Form 5471 attached should be filed. The goal of this campaign is to improve compliance with the requirement to attach Form 5471 to an income tax, partnership, or exempt organization return.
Swiss Bank Program Campaign
In 2013, the U.S. Department of Justice announced the Swiss Bank Program as a path for Swiss financial institutions to resolve potential criminal liabilities. Banks that are participating in this program provide information on the U.S. persons with beneficial ownership of foreign financial accounts. This campaign will address noncompliance, involving taxpayers who are or may be beneficial owners of these accounts, through a variety of treatment streams including, but not limited to, examinations and letters.
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. Each entity that the parties treat as an insured entity under the contracts claims deductions for insurance premiums. The manner in which the contracts are interpreted, administered, and applied is inconsistent with arm’s length transactions and sound business practices. LB&I has developed a training strategy for this campaign. The treatment stream for this campaign will be issue-based examinations.
Offshore Private Banking Campaign
On March 22, 2019, the Offshore Private Banking Campaign was announced. This campaign addresses tax noncompliance related to taxpayers’ failure to report income generated and information reporting associated with offshore banking accounts. Treatment streams under this campaign will also address individual FATCA compliance. FATCA records, including those received under intergovernmental agreements (IGAs), will be reconciled with U.S. domestic reporting. As part of this process, we will review information exchanged under Model 1 and 2 IGAs. This includes but is not limited to:
- identifying omissions (e.g. failure to disclose accounts);
- identifying account holders from records received with missing information (e.g. taxpayer identification number); and
- identifying account holders from records received from pooled reporting under Model 2 IGAs.
U.S. persons are subject to tax on worldwide income from all sources including income generated outside of the United States. It is not illegal or improper for U.S. taxpayers to own offshore structures, accounts, or assets. However, taxpayers must comply with income tax and information reporting requirements associated with these offshore activities.
The IRS is in possession of records that identify taxpayers with transactions or accounts at offshore private banks. This campaign addresses tax noncompliance and the information reporting associated with these offshore accounts. The IRS will initially address tax noncompliance through the examination and soft letter treatment streams. Additional treatment streams may be developed based on feedback received throughout the campaign.
Post Offshore Voluntary Disclosure Program (OVDP) Compliance
U.S. persons are subject to tax on worldwide income. This campaign addresses tax noncompliance related to former Offshore Voluntary Disclosure Program (OVDP) taxpayers’ failure to remain compliant with their foreign income and asset reporting requirements. The IRS will address tax noncompliance through soft letters and examinations.
Puerto Rico Act 22, Individual Investors Act
This campaign addresses taxpayers who have claimed benefits through Puerto Rico Act 22, “Act to Promote the Relocation of Individual Investors to Puerto Rico”, without meeting the requirements of IRC Section 937, Residence and Source Rules Involving Possessions. As a result, these individuals may be excluding income subject to US tax on a filed US income tax return or failing to file and report income subject to US tax. This campaign will also address those individuals who have met the requirements of IRC Section 937 but maybe erroneously report US source income as Puerto Rico source income in order to avoid US taxation. The objective of this campaign is to address non-compliance in this area through a variety of treatment streams including examinations, outreach, and soft letters.
The Research Issues Campaign will address research credit and research and experimental expenditures issues. Issues involving the research credit and research and experimental expenditures under IRC §§ 41 and 174 are some of the most prevalent tax issues within Large Businesses and International, utilizing significant examination and taxpayer resources. The campaign will employ various treatment streams including issue-based examinations, form updates, and requests for guidance. Other treatment streams will be considered as the campaign progresses. The campaign objective is to promote voluntary compliance, focus resources on the highest risk research issues and increase consistency of examinations.