A Brief History

We have written on this topic several times in the past, especially as it related to international tax issues. In January 2017, the IRS had announced a new audit strategy for the Large Business & International Division (LB&I) known as compliance campaigns. In doing so, they essentially shifted to examinations based on compliance issues determined to present greater levels of compliance risk, thereby improving return selection.

The IRS initially selected 13 compliance issues when it rolled out this strategy. Since the initial campaign announcement, the LB&I has added, and removed, some campaigns.

Some of the international tax issues that have been on the active campaigns list includes:

• 1120-F Delinquent Returns Campaign
• Corporate Direct (Section 901) Foreign Tax Credit
• FATCA Filing Accuracy
• Foreign Earned Income Exclusion Campaign
• Forms 1042/1042-S Compliance
• Form 1120-F Chapter 3 and Chapter 4 Withholding Campaign
• Form 1120-F Non-Filer Campaign
• Inbound Distributor Campaign
• Individual Foreign Tax Credit (Form 1116)
• Individual Foreign Tax Credit Phase II
• Micro-Captive Insurance Campaign
• Nonresident Alien Schedule A and Other Deductions
• Nonresident Alien Tax Treaty Exemptions
• NRA Tax Credits
• Offshore Service Providers
• OVDP Declines-Withdrawals Campaign
• Section 956 Avoidance
• Section 965 Transition Tax
• Swiss Bank Program Campaign

As you will notice, international tax issues are a major focus of the IRS’s compliance campaign. Recently added items to the campaign may have an impact on international taxpayers, especially when doing business in the U.S. or are connected with U.S. filings.

Section 937 and IRS Forms

The most recent compliance campaigns are issues under Internal Revenue Code Section 937, as well as a couple of IRS tax forms: Form 8594, “Asset Acquisition Statement Under Section 1060” and Form 8883, “Asset Allocation Statement Under Section 338.”

Under Sec. 937(a), individuals are bona fide residents of U.S. territories, including Puerto Rico, if they:

• Are present in the territory for at least 183 days during the tax year, and
• Don’t have a tax home outside the territory or a closer connection to the U.S. or a foreign country than to the territory.

Generally, Sec. 937(b)(2) provides any income from sources within the U.S. or effectively connected with the conduct of a trade or business within the U.S. is not treated as income from sources within any U.S. possession or as effectively connected with the conduct of a trade or business within such possession.

Meanwhile, Form 8594 is used by both a seller and a purchaser of a group of assets that make up a trade or business to report:

1. Goodwill or going concern value that attaches, or could attach, to such assets, and
2. That the purchaser’s basis in the assets is determined only by the amount the purchaser paid for the assets. Form 8883 is used to report information about transactions involving the deemed sale of corporate assets under Sec. 338.

The issues the IRS will be addressing related to new items are as follows:

Puerto Rico Act 22, Individual Investors Act

 This campaign addresses taxpayers who have claimed benefits through Puerto Rico Act 22, “Act to Promote the Relocation of Individual Investors to Puerto Rico,” without meeting the requirements of Sec. 937 (that is, without being bona fide residents of Puerto Rico). As a result, these individuals may be excluding income subject to federal tax on filed U.S. income tax returns or they may have failed to file and report income subject to federal tax.

This campaign will also address individuals who have met the requirements of Sec. 937, but who may be erroneously reporting U.S. source income as Puerto Rico source income to avoid U.S. federal tax. This campaign will address noncompliance in this area through examinations, outreach and “soft letters.”

Taxable Asset Transactions — Matching Buyers and Sellers

Parties that participate in certain taxable asset transactions must report those transactions on either Form 8594 or Form 8883, which must be attached to their tax returns. This campaign addresses business entities under the LB&I’s jurisdiction that either:

• Didn’t report a transaction on Form 8594 or Form 8883, or
• Reported the transaction in a manner inconsistent with the other party’s reporting of the transaction.

The active campaigns website does not say how the LB&I will address noncompliance in this area.

Addition and Subtraction

The LB&I will likely continue to add and subtract campaigns based on its perception of compliance risk. Our international tax pros can help you understand these compliance campaigns.