Newly-Announced IRS Audit Campaigns Continue Trend of IRS Enforcement in the Areas of International and Captive Insurance
The IRS Large Business and International (LB&I) division – which serves corporations, subchapter S corporations, and partnerships with assets greater than $10 million – has announced a new series of targeted audits, referred to as “campaigns.” Through these campaigns, the IRS is focusing its examinations on specific issues in an effort to channel the development of tax issues into the hands of those agents that have the most knowledge and training in that particular subject matter. Among the tax issues that are the subject of these new audit campaigns are captive service providers (focusing on transfer pricing), offshore private banking (focusing on unreported income) , and Form 5471 foreign corporation reporting (focusing on “loose-filed” forms). To date the IRS has announced a total of 53 campaigns. A complete list of the 53 IRS audit campaigns can be found here .
The newly-announced campaigns were identified through LB&I data analysis and suggestions from IRS employees. The stated goals are to improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources. The three new campaigns are:
Captive Services Provider Campaign
The section 482 regulations and the OECD Transfer Pricing Guidelines provide rules for determining arm’s length pricing for transactions between controlled entities, including transactions in which a foreign captive subsidiary performs services exclusively for the parent or other members of the multinational group. The arm’s length price is determined by taking into consideration data available on companies performing functions, employing assets, and assuming risks that are comparable to those of the captive subsidiary. Excessive pricing for these services inappropriately shifts taxable income to these foreign entities and erodes the U.S. tax base. The goal of this campaign is to ensure that U.S. companies are paying their captive service providers no more than arm’s length prices. The treatment streams for this campaign are issue-based examinations and soft letters.
Offshore Private Banking Campaign
U.S. persons are subject to tax on worldwide income from all sources including income generated outside of the United States. Taxpayers must comply with income tax and information reporting requirements associated with these offshore activities. The IRS is in possession of records that identify taxpayers with transactions or accounts at offshore private banks. This campaign addresses tax noncompliance and the information reporting associated with these offshore accounts. The IRS will initially address tax noncompliance through the examination and soft letter treatment streams. The IRS has said that additional treatment streams may be developed based on feedback received throughout the campaign.
Loose Filed Forms 5471
Certain US persons are required to report annually their ownership interest in a foreign corporation using Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. The Form 5471 must be attached to an income tax return (or a partnership or exempt organization return, if applicable) and filed by the return’s due date including extensions. The IRS has identified some taxpayers incorrectly filing Forms 5471 by sending the form to the IRS without attaching it to a tax return. If a Form 5471 is required to be filed and was not attached to an original return, an amended return with the Form 5471 attached should be filed. The goal of this campaign is to improve compliance with the requirement to attach a Form 5471 to an income tax, partnership or exempt organization return.