Despite budget cuts that have constrained the workforce at the IRS, enforcement of international tax compliance is at an all-time high. With its recent spate of active campaign announcements, the Large Business and International Tax Center (LB&I) is very busy looking for non-compliant taxpayers. But how?
While traditional audit techniques still reliably raise revenue, the IRS has focused its attention on artificial intelligence and data analytics. Using “big data” and the information it already has – your tax information – the IRS is quickly transitioning to automated auditing techniques. Much of this can be accomplished with a simple algorithm matching data from multiple IRS sources. Using such techniques, the IRS is quickly and easily identifying low-hanging fruit – often, unsuspecting taxpayers who simply fail to fully comprehend their tax filing obligations.
For taxpayers with international tax reporting obligations, these new compliance and enforcement efforts are particularly onerous – the applicable rules and regulations are already overly complex, tax compliance can be very expensive, and in 2017 the rules changed! Nevertheless, non-compliance is no longer an option. With these new tools at its disposal, the IRS is increasingly more effective at identifying non-compliant taxpayers. Notices are issued automatically and without much – if any – review by an actual person.
But while identification of non-compliance is seemingly more and more automated, resolution of non-compliance issues is not. In fact, tax service providers have discovered longer and longer response times on issues as simple as resolving an incorrectly issued notice. Unfortunately, the increased time required to address such notices and non-compliance issues only increases the overall compliance cost for the taxpayer.
|Active campaign||Practice area||Campaign objective|
|1120-F Delinquent Returns||Cross-Border Activities||This campaign encourages foreign entities to timely file Form 1120-F returns and address the compliance risk for delinquent 1120-F returns. This is accomplished by field examinations of compliance risk delinquent returns and external education outreach programs. The campaign addresses delinquent-filed returns, Form 1120-F U.S. Income Tax Return of a Foreign Corporation.|
|Forms 1042/1042-S Compliance||Withholding and International Individual Compliance||This campaign addresses Withholding Agents who make such payments but do not meet all their compliance duties. The Internal Revenue Service will address noncompliance and errors through a variety of treatment streams, including examination.|
|Section 956 Avoidance||Cross-Border Activities||This campaign focuses on situations where a CFC loans funds to a US Parent, but nevertheless does not include a Section 956 amount in income. The goal of this campaign is to determine to what extent taxpayers are utilizing cash pooling arrangements and other strategies to improperly avoid the tax consequences of Section 956. The treatment stream for this campaign is issue-based examinations.|
|Related Party Transactions||Enterprise Activities||This campaign focuses on transactions between commonly controlled entities that provide taxpayers a means to transfer funds from the corporation to related pass through entities or shareholders. LB&I is allocating resources to this issue to determine the level of compliance in related party transactions of taxpayers in the mid-market segment. The treatment stream for this campaign is issue-based examinations.|
|Inbound Distributors||Treaty and Transfer Pricing Operations||U.S. distributors of goods sourced from foreign-related parties have incurred losses or small profits on U.S. returns, which are not commensurate with the functions performed and risks assumed. In many cases, the U.S. taxpayer would be entitled to higher returns in arms-length transactions. LB&I has developed a comprehensive training strategy for this campaign that will aid revenue agents as they examine this IRC Section 482 issue. The treatment stream for this campaign will be issue-based examinations.|
The current LB&I active campaign list is extensive, but international tax reporting has center stage – some examples include:
- Expatriation & Repatriation
- FATCA Filing Accuracy & the Swiss Bank Program Campaign
- Forms 1042/1042-S Compliance
- Form 1120-F Non-Filers and Delinquent Returns
- Section 965 Avoidance
- Inbound Distributors
- Post OVDP Compliance
Calvetti Ferguson has successfully identified and resolved these issues for our clients. For many taxpayers, relief may be possible if non-compliance issues are identified and addressed prior to the taxpayer receiving an IRS notice. All facts and circumstances must be considered, and no two fact patterns are ever the same. One thing is for sure – these issues will not go away on their own. As the IRS continues to increase its enforcement of international tax reporting, now is the time to review and address any potential non-compliance.
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