Monthly Archives: July 2018

On May 24, 2018 we posted IRS Has 6 New Compliance Campaigns Audit Strategies for LB&I where we discussed that on may 21, 2018 the irs announced the identification of 6 large business and international compliance campaigns.

Now on July 2, 2018, the IRS announced that it has identified and selected the following five additional issues: 

1. Restoration of sequestered AMT credit carryforward. This campaign targets taxpayers who improperly restore the sequestered alternative minimum tax (AMT) credit to a subsequent tax year. Refunds issued or applied to a subsequent year's tax, under Former Code Section 168(k)(4) ((which provided the election to trade depreciation benefits for a refund of otherwise-deferred AMT credits), are subject to sequestration and are a permanent loss of refundable credits. Taxpayers may not restore the sequestered amounts to their AMT credit carryforward. Initially, soft letters will be mailed to taxpayers who are identified as making improper restorations of sequestered amounts, and taxpayers will be monitored for subsequent compliance.
2. S corporation distributions. S corporations and their shareholders are required to properly report the tax consequences of distributions. This campaign focuses on three issues: (1) when an S corporation fails to report gain upon the distribution of appreciated property to a shareholder; (2) when an S corporation fails to determine that a distribution (in either cash or property) is properly taxable as a dividend; and (3) when a shareholder fails to report non-dividend distributions in excess of their stock basis that are subject to taxation. This campaign includes issue-based examinations, tax form change suggestions, and stakeholder outreach.
3. Virtual currency. U.S. persons are subject to tax on worldwide income from all sources including transactions involving virtual currency. IRS Notice 2014-21, 2014-16 IRB 938, 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. This campaign addresses noncompliance related to the use of virtual currency through multiple approaches, 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. 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. IRS is not contemplating a voluntary disclosure program specifically to address tax non-compliance involving virtual currency.
4. Repatriation via foreign triangular reorganizations. In December 2016, IRS issued Notice 2016-73, 2016-52 IRB 908, which curtails the claimed "tax-free" repatriation of basis and untaxed controlled foreign corporation (CFC) earnings following the use of certain foreign triangular reorganization transactions. This campaign will identify and challenge these transactions by educating and assisting examination teams in audits of these repatriations. and
5. Code Sec. 965 transition tax. Code Sec. 965 requires U.S. shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the U.S. Taxpayers may elect to pay the transition tax in installments over an eight-year period. For some taxpayers, some or all of the tax will be due on their 2017 income tax return. The tax is payable as of the due date of the return (without extensions). LB&I has engaged in an outreach campaign to leverage the reach of trade groups, advisors and other outside stakeholders to raise awareness of the filing and payment obligations under this provision. 

New compliance campaigns
Continuing a process that it began in January 2017, IRS Large Business and International division (LB&I) has announced the approval of five additional compliance campaigns.
Background. In January of 2017, IRS announced a new audit strategy for its LB&I division known as "campaigns" essentially, shifting its strategy toward issue-based examinations based on compliance issues that LB&I determines present greater levels of compliance risk and 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" (2/2/2017).
In November, 2017 (see "IRS adds new issues to LB&I's campaign audit strategy"); March, 2018 (see "IRS adds new issues to LB&I's campaign audit strategy"); and May, 2018 (see "IRS again adds issues to LB&I's campaign audit strategy"), IRS added to the initial January 2017 list.

New issues identified. On July 2, 2018, IRS announced that it has identified and selected the following five additional issues:
… Restoration of sequestered AMT credit carryforward. This campaign targets taxpayers who improperly restore the sequestered alternative minimum tax (AMT) credit to a subsequent tax year. Refunds issued or applied to a subsequent year's tax, under Former Code Section 168(k)(4) ((which provided the election to trade depreciation benefits for a refund of otherwise-deferred AMT credits), are subject to sequestration and are a permanent loss of refundable credits. Taxpayers may not restore the sequestered amounts to their AMT credit carryforward. Initially, soft letters will be mailed to taxpayers who are identified as making improper restorations of sequestered amounts, and taxpayers will be monitored for subsequent compliance.
… S corporation distributions. S corporations and their shareholders are required to properly report the tax consequences of distributions. This campaign focuses on three issues: (1) when an S corporation fails to report gain upon the distribution of appreciated property to a shareholder; (2) when an S corporation fails to determine that a distribution (in either cash or property) is properly taxable as a dividend; and (3) when a shareholder fails to report non-dividend distributions in excess of their stock basis that are subject to taxation. This campaign includes issue-based examinations, tax form change suggestions, and stakeholder outreach.
…Virtual currency. U.S. persons are subject to tax on worldwide income from all sources including transactions involving virtual currency. IRS Notice 2014-21, 2014-16 IRB 938, 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. This campaign addresses noncompliance related to the use of virtual currency through multiple approaches, 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. 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. IRS is not contemplating a voluntary disclosure program specifically to address tax non-compliance involving virtual currency.
… Repatriation via foreign triangular reorganizations. In December 2016, IRS issued Notice 2016-73, 2016-52 IRB 908, which curtails the claimed "tax-free" repatriation of basis and untaxed controlled foreign corporation (CFC) earnings following the use of certain foreign triangular reorganization transactions. This campaign will identify and challenge these transactions by educating and assisting examination teams in audits of these repatriations.
…Code Sec. 965 transition tax.Code Sec. 965 requires U.S. shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the U.S. Taxpayers may elect to pay the transition tax in installments over an eight-year period. For some taxpayers, some or all of the tax will be due on their 2017 income tax return. The tax is payable as of the due date of the return (without extensions). LB&I has engaged in an outreach campaign to leverage the reach of trade groups, advisors and other outside stakeholders to raise awareness of the filing and payment obligations under this provision.

Despite pouring nearly $380 million into a new tax enforcement initiative, the U.S. government took “limited or no action’’ in its campaign to battle secretive offshore holdings used to dodge taxes, according to a new report by a federal watchdog.

The Treasury Inspector General for Tax Administration (TIGTA) report paints a bleak picture of the agency’s ability to enforce a landmark Obama-era law meant to reign in shady offshore holdings by collecting information on foreign accounts directly from banks and other financial institutions.

Instead of ushering in a new era of tough scrutiny on offshore hideaways, the report says the new law produced a mountain of error-laden paperwork that the Internal Revenue Service (IRS) is struggling to validate, while some of the most important aspects of the agency’s responsibilities under the law have languished.

Known as the Foreign Account Tax Compliance Act, or FATCA, the offshore tax law was passed by Congress in 2010 in response to the proliferation of secret offshore activity. The law requires foreign financial institutions to identify their American clients and turn information regarding those clients over to the IRS. The IRS hoped U.S. taxpayers hiding money abroad would declare their assets for fear of being ratted out by their agents.

And, after the law’s original passage, the rate of Americans renouncing their citizenship, and thus no longer subject to FATCA’s tax provisions, accelerated after the law’s passage, according to Bloomberg News. But such extremes measures may have been unnecessary.

Responding to the TIGTA’s report, the IRS said that the roadmap was “not intended to be a comprehensive compliance plan” and that the planning document “could not envision future policy changes.” The IRS said the “report leaves the reader with the incorrect impression that FATCA is not being enforced.”

Despite this, the IRS did agree to adopt four of the report’s six recommendations for improving its FATCA enforcement. Central to the law is the enforcement of a 30 percent withholding tax that Americans must often pay on income flowing into a foreign account. The report’s authors claimed the IRS hadn’t used the new law in a single enforcement action on the withholding tax until they provided to the agency with feedback. 
 

 

The law’s proper implementation rests on the IRS receiving accurate information from the financial institutions that provide details on foreign accounts. Yet, the report states that the related paperwork the IRS has received is rife with faulty taxpayer identification numbers. Among TIGTA’s recommendations that the IRS agreed to adopt is a pledge to address errors in paperwork.

In recent years, large staffing cuts have plagued the IRS’s efforts to collect taxes it is owed. In an interview with ICIJ in December, John Koskinen, the recently-departed commissioner of the IRS said:  

“The Cuts in the IRS Budget Have Ramifications... I’m Concerned That the Resource Constraints Make Us Less Effective and Ultimately People Are Going to Worry about Whether the Tax System Is Fair.”

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The tax authorities of the UK, US, Australia, Canada and Netherlands have set up a joint committee to improve international enforcement against tax crime and money laundering. The first meeting of the so-called J5 Group (Joint Chiefs of Global Tax Enforcement) was held during July 2018 where plans where developed to detect cyber criminals and enablers of offshore tax crime. The threat of virtual currencies to tax administrations is a particular priority. 
The Joint Chiefs of Global Tax Enforcement (known as the J5) are committed to combatting transnational tax crime through increased enforcement collaboration. The J% will work together to gather information, share intelligence, conduct operations and build the capacity of tax crime enforcement officials.

The J5 is comprised of:

1. The Australian Criminal Intelligence Commission (ACIC) and Australian Taxation Office (ATO),
2. The Canada Revenue Agency (CRA),
3. The Fiscale Inlichtingen- en Opsporingsdienst (FIOD),
4. HM Revenue & Customs (HMRC), and
5. Internal Revenue Service Criminal Investigation (IRS-CI).

The J5 is convinced that offshore structures and financial instruments, where used to commit tax crime and money laundering, are detrimental to the economic, fiscal, and social interests of our countries. We will work together to investigate those who enable transnational  tax crime and money laundering and those who benefit from it. We will also collaborate internationally to reduce the growing threat to tax administrations posed by cryptocurrencies and cybercrime and to make the most of data and technology.

What the J5 Does

To actively bring about change, the J5 will:

• Develop shared strategies to gather information and intelligence that will strengthen operational cooperation in matters of mutual interest, and target those who seek to commit transnational tax crime,  cybercrime and launder the proceeds of crime
   
• Drive strategies and procedures to conduct joint investigations and disrupt the activity of those who commit transnational tax crime, cybercrime, and also those who enable and assist money laundering
   
• Collaborate on effective communications that reinforce that J5 is working together  to tackle transnational tax crime, cybercrime and money laundering. 

Results The outcome of this active collaboration will see the J5: Enhance existing investigation and intelligence programs Identify significant targets for new investigations Improve the tactical intelligence threat picture now and into the future Lead the wider community in developing its strategic understanding of the methods, weaknesses and risks from offshore tax crime and cybercrime Raise international awareness that the J5 is working together to reduce transnational tax crime, cybercrime and money laundering, and create uncertainty for those who seek to commit such offenses. The J5 was formed in response to the OECD’s call to action for countries to do more to tackle the enablers of tax crime. The J5 works collaboratively with the OECD and other countries and organizations where appropriate.    Have Undeclared Income from an Offshore Account?   Want to Know if the OVDP Program is Right for You? Program Ends September 28th!     Contact the Tax Lawyers at  Marini& Associates, P.A.      for a FREE Tax Consultation Contact us at:  www.TaxAid.com or www.OVDPLaw.com or Toll Free at 888-8TaxAid (888) 882-9243   

A district court has approved IRS's levy on taxpayers' principal residence, noting that:

1) IRS established that there were no reasonable alternatives for collection;
2) IRS's determination that the taxpayers were ineligible for an offer in compromise was correct; and 3) taxpayers' pending installment agreements didn't prohibit the levy.

(Gower, (DC FL 7/10/2018) 122 AFTR 2d ¶ 2018-5033).