The Internal Revenue Service (IRS) Large Business and International division (LB&I) has announced six additional compliance campaigns for taxpayers. A compliance campaign is a targeted directive on a particular issue; they happen when the IRS determines that there are taxpayer issues that require a response from the agency. When the IRS announces a campaign (or campaigns), it’s a signal that they will be dedicating time, resources, training, and tools towards a tax compliance goal.
Campaigns are identified through LB&I data analysis, suggestions from IRS compliance employees, and feedback from the tax community. Issues that IRS ultimately target are those which represent a risk of noncompliance that can be addressed most efficiently.
To date, LB&I has announced a total of 59 campaigns, including the following six new campaigns:
S Corporations Built-In Gains Tax. When C corporations convert to S corporations, they may be subject to the Built-in Gains (BIG) tax. The BIG tax (go ahead, giggle, I know you want to) applies if those corporations have a net unrealized built-in gain and sell assets within five years after the conversion. The tax is assessed to the S corporation, but LB&I has found that S corporations don’t always pay the tax when they sell the C corporation assets after the conversion. The goal of this campaign is to increase awareness and compliance with the law. Taxpayers can expect issue-based examinations and soft letters; the IRS will also be conducting outreach to practitioners.
Post OVDP Compliance. The IRS launched the Offshore Voluntary Disclosure Program (OVDP) in 2009 to encourage compliance with foreign asset reporting. Structured as a tax amnesty program, it allowed U.S. taxpayers to come forward and avoid criminal prosecution for not reporting foreign accounts. In 2011, in response to the Foreign Account Tax Compliance Act (FATCA), the IRS announced a new amnesty program to take the place of the 2009 program; the official title was the 2011 Offshore Voluntary Disclosure Initiative (OVDI). In 2014, the IRS modified the program yet again. At the time of the relaunch, the IRS made it clear that there would be no set deadline for taxpayers to apply for the program, and in March of 2018, the IRS announced the program would be ending. Now, the IRS is targeting taxpayers’ failure to remain compliant with their foreign income and asset reporting requirements. The IRS will address tax noncompliance through soft letters and examinations.
Expatriation. In most cases, you cannot simply abandon your U.S. tax obligations by moving out of the country – even if you plan to renounce your citizenship. Under current law, U.S. citizens and long-term residents (defined as lawful permanent residents in eight out of the last 15 taxable years) who expatriated on or after June 17, 2008, may have specific filing requirements or tax obligations. The IRS will address noncompliance through outreach, soft letters, and examination.
High Income Non-filer. Under current law, 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, forms 1099 or foreign equivalents. Taxpayers are not exempt from reporting requirements simply because they don’t receive an information form. The IRS will address noncompliance through examinations.
U.S. Territories – Erroneous Refundable Credits. Some bona fide residents of U.S. territories are erroneously claiming refundable tax credits on their individual tax returns. A refundable credit means that you can take advantage of the credit even if you do not owe any tax. Unlike with a nonrefundable credit, if you don’t have any tax liability, the “extra” credit is not lost but is instead refunded to you. The IRS will address noncompliance through outreach and traditional examinations.
Section 457A Deferred Compensation Attributable to Services Performed before January 1, 2009. Section 457 plans are non-qualified, unfunded deferred compensation plans established by state and local government and tax-exempt employers. Under rules passed in 2009, deferred compensation under a non-qualified deferred compensation plan is includible in gross income when there is no substantial risk of forfeiture of the right to receive such compensation. Most commonly, you must report when it vests. The IRS will address noncompliance through issue-based examinations.
If you feel your blood pressure rising as you read this, or have questions or concerns about your filing obligations or compliance status, check with your tax professional.