The Internal Revenue Service has issued guidance that gives large business taxpayers some insight into which parts of their tax filings will get the greatest scrutiny going forward.
The IRS’s Large Business and International Division has identified 13 “campaigns,” or issues it will target in examinations, in the coming year. The division is moving toward “issue-based examinations,” the IRS says, developing a compliance campaign process where compliance issues that present the greatest risk get priority attention, making the most efficient use of examination resources.
LB&I says it identified the 13 campaigns using “extensive data analysis,” suggestions from IRS compliance employees, and input from the tax community. “LB&I's goal is to improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources,” the IRS says.
The 13 campaigns or areas the division plans to target include:
examinations of the energy credit described in Internal Revenue Code 48C;
declines and withdrawals from the offshore voluntary disclosure program;
repatriation of income from overseas locations;
foreign companies doing business in the United States that are not filing appropriately;
transfer pricing associated with inbound distribution of goods from related parties outside the United States;
deferred variable annuity reserves and life insurance reserves;
basket transactions that seek to treat ordinary income and short-term capital gain as long-term;
micro-captive insurance contracts;
the completed contract method of accounting applied by land developers;
application of the domestic production activities deduction to certain entertainment products;
risks associated with larger, more complex pass-through partnerships; and
losses claimed in excess of basis in S corporations.
Brian Kittle, tax controversy and transfer pricing attorney at law firm Mayer Brown, says the long-awaited guidance gives a glimpse into the IRS’s examination priorities. “It does not elaborate on how issue-based campaigns will be conducted and how they will fit into the already-established IRS audit and appeals structure,” he said. The IRS had said it didn’t plan for its campaigns to completely replace or revamp the examination process, he said.
The IRS release provides little detail about how the IRS intends to approach the 13 issues, giving taxpayers little idea of what to expect, in Kittle’s view. “Taxpayers are left simply hoping that the IRS will be more transparent in the future about how this new process will actually be put into action,” he said.