IRS Announces 11 New Enforcement Campaigns: Swiss Account Holders Beware

On November 3rd, the IRS announced the rollout of 11 Large Business and International (LB&I) enforcement campaigns. The 11 new campaigns are in addition to the 13 LB&I enforcement campaigns introduced by the IRS in January 2017 (here). According to the IRS announcement, “These 11 additional campaigns were identified through LB&I data analysis and suggestions from IRS compliance employees. 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.” Seven of the new campaigns address foreign tax issues and reflect the IRS’ continuing efforts to pursue offshore noncompliance.

Of particular interest is the Swiss Bank Program Campaign, which is targeting Americans who were or are hiding money in Swiss banks. To avoid prosecution, Swiss financial institutions agreed to turn over information on thousands of U.S. account holders to the Department of Justice. The Department of Justice received information and data on over 35,000 Swiss bank accounts. This information is being provided to the IRS for further enforcement. U.S. taxpayers who have or had undisclosed Swiss bank accounts should consider taking advantage of the IRS Offshore Voluntary Disclosure Initiative or similar program before being contacted by the IRS. Failure to properly disclose foreign bank accounts can result in significant civil penalties or criminal prosecution.

The campaigns selected for rollout are:

  1.   Form 1120-F Chapter 3 and Chapter 4 Withholding Campaign. This campaign is
        designed to verify withholding at source for 1120-Fs claiming refunds. To make a claim
        for refund of or credit to estimated tax with respect to any U.S. source income
        withheld under chapters 3 or 4, a foreign entity must file a Form 1120-F. Before a
        claim for credit (refund or credit elect) is paid, the IRS must verify that withholding
        agents have filed the required returns (Forms 1042, 1042-S, 8804, 8805, 8288
        and 8288-A). This campaign focuses upon verification of the withholding credits
        before the claim for refund or credit is allowed. The campaign will address
        noncompliance through a variety of treatment streams including, but not
        limited to, examinations.

2.    Swiss Bank Program Campaign. In 2013, the U.S. Department of Justice announced
        the Swiss Bank Program as a path for Swiss financial institutions to resolve
        potential criminal liabilities. Banks that are participating in this program provide
        information on the U.S. persons with beneficial ownership of foreign financial
        accounts. This campaign will address noncompliance of taxpayers who are,
        or may be, beneficial owners of these accounts through a variety of treatment
        streams including, but not limited to, examinations.

3.    Foreign Earned Income Exclusion Campaign. Individuals who meet
       certain requirements may qualify for the foreign earned income exclusion
       and/or the foreign housing exclusion or deduction. This campaign addresses
       taxpayers who have claimed these benefits but do not meet the requirements.
       The IRS will address noncompliance through a variety of treatment streams,
       including examination.

4.    Verification of Form 1042-S Credit Claimed on Form 1040NR. This
       campaign is intended to ensure that the amount of withholding credits or
       refund/credit elect claimed on Forms 1040NR, U.S. Nonresident Alien Tax Return,
       is verified and that the taxpayer has properly reported the income reflected on
       Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.
       Before a refund is issued or credit allowed, the IRS verifies the withholding
       credits reported on the Form 1042-S. The campaign will address noncompliance
       through a variety of treatment streams including, but not limited to, examinations.

5.    Agricultural Chemicals Security Credit Campaign. The agricultural chemicals
       security credit is claimed under IRC Section 45O and allows a 30 percent credit
       to any eligible agricultural business that paid or incurred security costs to
       safeguard agricultural chemicals. The credit is nonrefundable and is limited to
       $2 million annually on a controlled group basis with a 20-year carryforward
       provision. In addition, there is a facility limitation as outlined in Section 45O(b).
       The goal of this campaign is to ensure taxpayer compliance by verifying that
       only qualified expenses by eligible taxpayers are considered and that taxpayers
       are properly defining facilities when computing the credit. The treatment stream
       for this campaign is issue-based examinations.

6.    Deferral of Cancellation of Indebtedness Income Campaign. During 2009
       and 2010, taxpayers who incurred cancellation of indebtedness (COD) income
       from the reacquisition of debt instruments at an issue price less than the adjusted
       issue price of the original instrument may have elected to defer the COD income.
       Taxpayers must report the COD income ratably over five years beginning in
       2014 and running through 2018. Further, when a taxpayer defers the COD
       income, any related original issue discount (OID) deductions on the new debt
       instrument, resulting from debt-for-debt exchanges that triggered the COD,
       must also be deferred ratably and in the same manner as the deferred COD
       income. The goal of this campaign is to ensure taxpayer compliance by
       verifying that taxpayers who deferred COD income in 2009/2010 properly
       report it in subsequent years beginning in 2014, unless an accelerating
       event required earlier recognition under IRC Section 108(i); and/or properly
       defer reporting OID deductions during the deferral period under IRC
       Section 108(i)(2). The treatment stream for this campaign is issue-based
       examinations. The use of soft letters is under consideration.

7.    Energy Efficient Commercial Building Property Campaign. The Energy
       Efficient Commercial Building Deduction (Section 179D) allows taxpayers who
       own or lease a commercial building to deduct the cost or portion of the cost
       of installing energy efficient commercial building property (EECBP). If the
       equipment is installed in a government-owned building, the deduction is
       allocated to the person(s) primarily responsible for designing the EECBP.
       This goal of this campaign is to ensure taxpayer compliance with the
       section 179D deduction. The treatment stream for this campaign
       is issue-based examinations.

8.    Corporate Direct (Section 901) Foreign Tax Credit (“FTC”). Domestic
       corporate taxpayers may elect to take a credit for foreign taxes paid or accrued
       in lieu of a deduction. The goal of the Corporate Direct FTC campaign is
       to improve return/issue selection (through filters) and resource utilization
       for corporate returns that claim a direct FTC under IRC Section 901. This
       campaign will focus on taxpayers who are in an excess limitation position.
       The treatment stream for the campaign will be issue based examinations.
       This is the first of several FTC campaigns. Future FTC campaigns may
        address indirect credits and IRC Section 904(a) FTC limitation issues.

9.    Section 956 Avoidance. If a Controlled Foreign Corporation (CFC) makes a
        loan to its US parent, Section 956 generally requires an income inclusion
        equal to the amount of the loan. This campaign focuses on situations where
        a CFC loans funds to a US Parent (USP), 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.

10.   Economic Development Incentives Campaign Practice Area. Taxpayers
        may be eligible to receive a variety of government economic incentives. These
        incentives include refundable credits (refunds in excess of tax liability), tax credits
        against other business taxes (i.e. payroll tax), nonrefundable credits (refunds limited
        to tax liability), transfer of property including land, and grants including cash
        payments. Taxpayers may improperly treat government incentives as non-
        shareholder capital contributions, exclude them from gross income and claim a
        tax deduction without offsetting it by the tax credit received. The goal of this
        campaign is to ensure taxpayer compliance. The treatment stream for this
        campaign is issue based examinations.

11    Individual Foreign Tax Credit (Form 1116). Individuals file Form 1116 to claim
        a credit that reduces their U.S. income tax liability for the amount of foreign taxes
        paid on foreign source income. This campaign addresses taxpayer compliance
        with the computation of the foreign tax credit limitation on Form 1116. Due to the
        complexity of computing the Foreign Tax Credit and challenges associated with
        third-party reporting information, some taxpayers face the risk of claiming
        an incorrect Foreign Tax Credit amount. The IRS will address noncompliance
        through a variety of treatment streams including examinations.

If you have any questions related to this or any other civil tax or criminal tax-related matter, please feel free to contact Joel Crouch at (214) 749-2456 or jcrouch@meadowscollier.com.