The IRS Large Business and International Division (LB&I) announced on October 30, 2018, the approval of five further compliance campaigns related to international tax matters. These new campaigns are in addition to previously announced international tax compliance campaigns and demonstrate the ongoing efforts and focus of the IRS on these areas. Both US taxpayers and international financial institutions should pay close attention to these campaign issues in connection with their ongoing compliance obligations.
The existing and new campaigns both build on newer legislation and regulations pursuant to the 2017 Tax Cuts and Jobs Act (TCJA) and some focus on long-standing IRS compliance concerns, including use of offshore structures, information reporting obligations and the US Foreign Account Tax Compliance Act (FATCA). The IRS continues to review the TCJA legislation to determine which existing campaigns may have been impacted by the law and expects to issue further updates and new campaigns.
The international tax compliance campaigns announced by LB&I add to those announced on January 31, 2017 (its first 13 campaigns), November 3, 2017 (11 campaigns), March 13, 2018 (five campaigns), May 21, 2018 (six campaigns), July 2, 2018 (five campaigns), and September 10, 2018 (five campaigns). LB&I plans to use these campaigns to achieve its compliance objectives in a more targeted manner using its limited available resources, by focusing on compliance issues that present an identified risk. These compliance campaigns represent enforcement (examination, audit and investigation) efforts by the IRS, as opposed to new voluntary disclosure programs similar to campaigns in the UK.
Following are the five new international compliance campaigns included in the current rollout:
1. Individual Foreign Tax Credit Phase II
This campaign focuses on US taxpayers claiming individual foreign tax credits but who do not meet the requirements to claim such credits. Credits are available to alleviate double taxation, with a dollar-for-dollar credit applied against US taxes on non-US source income, for non-US taxes paid on such income. However, taxpayers must meet specific requirements to qualify for such tax credits. The IRS will address noncompliance through a variety of treatment streams, which may include examination of taxpayer returns.
2. Offshore Service Providers
This campaign targets both US taxpayers and their non-US service providers. The campaign focuses on US taxpayers who engaged so-called “Offshore Service Providers” to facilitate the creation of foreign entities and tiered structures to conceal the beneficial ownership of foreign financial accounts and assets. The campaign targets schemes used generally for the purpose of tax avoidance or evasion. The IRS will address this campaign through issue-based examinations.
3. FATCA Filing Accuracy
By now, virtually all affected taxpayers and financial institutions are familiar with FATCA and the associated reporting obligations. Over the last several years, taxpayers, financial institutions and their advisers have speculated as to when and how the IRS will use information obtained under FATCA to target individual taxpayers or non-US financial institutions and to ensure their compliance with FATCA reporting obligations.
The stated purpose of this campaign is to detect, deter and discourage offshore tax abuses through increased transparency, enhanced reporting and strong sanctions. Under FATCA, non-US financial institutions and certain non-financial entities are required to report accounts (including investments in non-US financial institutions) held directly by their US account holders or investors or indirectly by certain foreign entities with substantial US owners or US controlling persons. This campaign addresses the reporting obligations of such non-US financial institutions and other entities obligated to report under FATCA, where they have not met all of their FATCA compliance responsibilities. The IRS will address noncompliance through a variety of treatment streams, including termination of the FATCA-compliant status of non-US financial institutions.
4. Form 1120-F Delinquent Returns Campaign
Non-US corporations must file IRS Form 1120-F (US Income Tax Return of a Foreign Corporation) on a timely basis and in a true and accurate manner in order to claim deductions and credits against any income effectively connected with a US trade or business. The objective of this campaign is to encourage non-US corporations to timely file their returns on Form 1120-F and to address the compliance risk for delinquent Form 1120-F returns. The IRS will address this compliance gap through field examinations of delinquent returns and external education outreach programs.
5. Work Opportunity Tax Credit
The Work Opportunity Tax Credit (WOTC) is a US federal tax credit available to employers for hiring individuals from targeted groups that have faced significant barriers to employment. The objective of this campaign is to develop an LB&I directive for taxpayers experiencing late certifications and to promote consistency in the examinations of WOTC claims. This campaign would not impact most taxpayers and financial institutions in the scope of their international taxation issues.
Compliance for Taxpayers and Financial Institutions
As most of these new campaigns and previously announced campaigns make clear, the IRS is using its resources to target specific issues impacting both US taxpayers and their international financial institution service providers, in an effort to increase compliance and revenue in the area of international taxation.
On the one hand, it is important that both individual and corporate taxpayers examine their own compliance with respect to the announced compliance campaign issues and more generally in the area of US international taxation and information reporting. In particular under the latest compliance campaigns, taxpayers should ensure they have correctly applied any foreign tax credits claimed against their US tax obligations and ensure that their FATCA reporting is complete and accurate. Taxpayers should also ensure that any structures involving non-US entities or offshore service providers are properly reported and documented.
On the other hand, the international financial institutions that serve clients with US tax and reporting issues should continue to pay close attention to the specific campaign issues and include appropriate measures in their international tax compliance framework. In particular, non-US financial institutions should ensure the proper documentation and tax compliance of US customers where non-US structures and service providers are involved. Financial institutions should also ensure that they have in place a robust FATCA compliance program that meets all of the associated due diligence and reporting obligations, as well as a comprehensive FATCA compliance policy, including good recordkeeping and documentation procedures, to substantiate such compliance.
Proactively addressing these compliance issues will benefit both financial institutions and their customers in the long run.