Tax Alert: IRS Adds Five New Issues to Audit Campaign
July 19, 2018
Last week, the IRS Large Business and International division (LB&I) announced five additional audit campaigns. The LB&I division serves corporations, Subchapter S corporations, and partnerships with assets in excess of $10 million. The targeting of these five new areas continues the IRS' shift of its audit strategy for the LB&I division to issue-based examinations. Since adopting this strategy in January 2017 with an initial list of 13 campaigns, the IRS has continued to add campaigns during 2017 and 2018. The additional targeted issues announced by the IRS last week are:
Restoration of Sequestered AMT Credit Carryforward: Refunds attributable to an election to exchange depreciation benefits for a refund of deferred AMT credits are required to be "sequestered" and may not be restored as part of the AMT credit carryforward. This campaign targets taxpayers that the IRS determines have restored sequestered credits and will be administered initially through correspondence with those taxpayers followed by monitoring of subsequent compliance.
Subchapter S Corporation Distributions: This campaign targets three issues regarding S corporation distributions: (1) failure to report gain on the distribution of appreciated property to a shareholder (2) failure to determine that a shareholder distribution should be treated as a taxable dividend and (3) failure to report a non-dividend distribution in excess of stock basis as taxable capital gain. The campaign will be administered through various methods including issue-based audits and potential tax form updates.
Virtual Currency: This campaign targets taxpayers that have failed to report virtual currency transactions. It will be administered through correspondence and examinations. Taxpayers that have failed to report these transactions are encouraged to correct applicable tax returns as soon as possible.
Internal Revenue Code (IRC) Section 965 Repatriation Tax: IRC Section 965 requires U.S. shareholders of certain foreign corporations to pay a "transition" tax on the corporation's unrepatriated earnings and profits (See Whitley Penn Tax Alert: Deemed Repatriation Tax - February 13, 2018). Generally, the tax is reportable on 2017 returns although many taxpayers took advantage of the election to pay the tax in eight installments. The IRS is administering this campaign through an outreach program with tax professionals, trade groups and taxpayers designed to raise awareness of the requirement to report and pay the transition tax.
Repatriation Using Foreign Triangular Reorganizations: This campaign will identify and challenge transactions designed to allow the tax free repatriation of a foreign corporation's tax basis and earnings and profits. The campaign will focus on educating examination teams to identify and challenge applicable transactions.
Given the increased IRS scrutiny of these issues, we recommend that you contact your Whitley Penn tax advisor if you have any concerns regarding the new campaigns.