The tax landscape is changing again. The Biden Administration has introduced new initiatives for 2022 as part of a push to boost IRS collection efforts and increase taxpayer compliance. The effort comes as the Administration attempts to collect unpaid or past-due tax revenue as well as to target businesses that attempt to conceal taxable assets. These new efforts are in addition to ongoing IRS enforcement efforts.
Below we highlight several IRS initiatives that could affect you personally or your business.
Large Business & International Compliance Campaigns
In 2017, the Large Business and International (LB&I) Division of the IRS began to identify critical issues that presented compliance risks. The change reflects a shift in posture from one that focuses on entities (like an individual business) to one that focuses on issues. From a start of just 13 campaigns, the IRS currently has over 50 active campaigns designed to increase corporate taxpayer compliance. Let’s take a closer look at some of these key IRS campaigns.
Taxable Asset Transactions
Parties engaged in taxable asset transactions are required to report any income earned through such transactions by using either Form 8594 or Form 8383 and attaching the appropriate form to their return. The aim of the campaign is to encourage accurate reporting by businesses that might be inclined to under-report or fail to report income earned through taxable asset transactions.
Financial Service Businesses Engaged in U.S. Trade
Foreign corporate entities can earn profits by engaging in lending to U.S. companies. Profits made from such lending may be subject to IRS taxation and should be reported on annual returns. Some foreign lenders, however, may fail to report this income, which can create problems with the IRS. The current campaign seeks to determine exactly which transactions are subject to U.S. taxation, and to recover lost revenue from international lenders doing business in the U.S.
High-Income Nonfilers
U.S. citizens and aliens are subject to a tax on worldwide income from all sources, regardless of whether they file a W-2, 1099, or foreign equivalents. This includes revenue generated outside the U.S. This campaign seeks to identify taxpayers with transactions or accounts at offshore private institutions. This campaign’s main aim is to induce high-income individuals who have not filed annual returns for their global income to do so, and to bring those who do file into compliance.
Sale of Partnership Interest
Transfer of a partnership interest in a business usually results in some form of profit or loss. Profits made from changes in partnership interest are considered taxable income, and the IRS strongly encourages those who have failed to report income gained through a transfer of partnership to do so. For taxpayers and their representatives, the preparation for audits starts years earlier. Frequent sources of pass-through adjustments, such as net operating losses, research credits, interest expense, and meals and entertainment, should be verified and confirmed. Supporting documentation should be organized under the assumption that an audit is likely.
TCJA Compliance Campaign
The Tax Cuts and Jobs Act (TCJA) of 1017 seeks to address audits that are limited to specific issues (such as the business interest expense deduction, global intangible low-taxed income or foreign-derived intangible income). Once the audit begins, revenue agents are expected to have regular contact with both internal experts and national subject matter experts who relay the findings back to data specialists. For you as a taxpayer, this may mean that audits stay open longer or may require more information to close. IRS audits going forward will focus on more recent tax years and evolving issues will be pushed to the front for selection and examination.
Pass-Through Entities
Two IRS enforcement programs—the high-net-wealth initiative and the global wealth initiative—state income received from a pass-through entity is a factor in taxpayer selection for examination. Further, partnership examinations will also happen as part of the TCJA compliance campaign as well as through regular selection procedures. This increased scrutiny will likely mean an increase in partnership audits in the near future. For taxpayers and their representatives, the preparation for audits starts years earlier. Frequent sources of pass-through adjustments, such as net operating losses, research credits, interest expense, and meals and entertainment, should be verified and confirmed. Supporting documentation should be organized under the assumption that an audit is likely.
Related Party Transactions
This campaign focuses on transactions between commonly controlled entities that allow individuals to transfer funds from a corporation to related pass-through entities or shareholders. LB&I is focusing on this issue to determine the level of compliance in related-party transactions of mid-market taxpayers.
S Corp Distributions
Under current law, S Corps and their shareholders must report the tax consequences of distributions. The IRS has identified three issues that are part of this campaign:
- An S corp fails to report gain upon the distribution of appreciated property to a shareholder.
- An S corp fails to determine that a distribution is properly taxable as a dividend.
- A shareholder fails to report nondividend distributions in excess of their stock basis that are subject to taxation.
Virtual Currency
Investment in virtual currencies like Bitcoin has presented a unique set of challenges from a compliance perspective. IRS Notice 2014-21 asserts that virtual currencies are regarded as property for taxation purposes. Failure to report earnings from investment or trading in virtual currencies represents noncompliance with IRS regulations and tax laws. Failure to disclose income streams related to virtual currency can land you and your business in trouble with the IRS, so if you are a cryptocurrency investor, check that you are properly declaring all virtual currency earnings on your return.
We hope this fact sheet helps you make sound financial choices when completing your return. Have questions about the new IRS initiatives and how they could affect your business? Contact a seasoned professional! At Moskowitz LLP, we’ve built our reputation helping taxpayers like you get the most from their return while meeting all IRS compliance standards. Why risk an audit? Contact us Today!