By David B. Marion
In late January 2017, LB&I Commissioner, Douglas O’Donnell, announced a new campaign and audit guidelines to conduct issue-based examinations on a variety of international issues.
As a former senior manager in LB&I’s International Division, Mr. O’Donnell was my immediate supervisor for eight of the last 10 years of my tenure with the IRS. Therefore, I can assure you that when Mr. O’Donnell announces a new compliance campaign, it will be implemented quickly, will focus on the issues as advertised, and will receive whatever resources are needed to make it happen.
There are two ways to approach this heightened audit risk. The first is to ignore it and hope that you do not get identified for examination. The second, and recommended approach, is to conduct risk assessments of your international activities and take the necessary actions to reduce your potential compliance exposure if you are selected for audit.
The new audit guidelines cover the gamut as far as international issues go. From transfer pricing involving FCC’s to unreported repatriations from CFC’s to foreign business activities in the U.S., the new areas of emphasis are almost certain to touch some aspect of your activities if you are a global enterprise.
As listed below, the IRS’s description of international issues to be targeted make it clear that if you have these issues the IRS will, at a minimum, be reviewing your tax returns to determine their examination potential. For each of the above items, identified below are the areas of highest risk followed by a recommendation.
Repatriation Campaign. LB&I is aware of different repatriation structures being used for purposes of tax-free repatriation of funds into the U.S. in the mid-market population. Many of these taxpayers do not properly report repatriations as taxable events on their returns. The goal of this campaign is to simultaneously improve issue selection filters while conducting examinations on identified, high-risk repatriation issues and thereby increase taxpayer compliance.
The IRS will be closely scrutinizing any potential investments in U.S. property by CFC’s, which would include any loans to the parent and any loan guarantees. If these items are present they should be reviewed carefully to insure compliance with IRS Code Section 956.
Form 1120-F non-filer campaign. Foreign companies doing business in the U.S. are often required to file Form 1120-F. LB&I has data suggesting that many of these companies are not meeting their filing obligations. In this campaign, LB&I will use various external data sources to identify these foreign companies and encourage them to file their required returns. The approach for this campaign will involve soft letter outreach. If the companies do not take appropriate action, LB&I will conduct examinations to determine the correct tax liability. The goal is to increase voluntary compliance by foreign corporations with a U.S. business nexus.
The IRS has a variety of means of determining certain business activities in the U.S. that are foreign based. If there are no corresponding returns filed, the IRS will pursue the activity to determine if delinquent returns are due, which would have significant penalties. Any foreign entity with a U.S. business nexus should carefully evaluate the nature of the activity to determine if the permanent establishment threshold has been met, in which case Form 1120-F would be due on an annual basis.
Inbound distributor campaign. U.S. distributors of goods sourced from foreign-related parties have incurred losses or small profits on U.S. returns, which are not commensurate with the functions performed and risks assumed. In many cases, the U.S. taxpayer would be entitled to higher returns in arms-length transactions. LB&I has developed a comprehensive training strategy for this campaign that will aid revenue agents as they examine this IRS Code Section 482 issue. The approach for this campaign will be issue-based examinations.
This means that if your foreign controlled U.S. company has related transactions, either with its foreign parent or other related foreign entities, you need to take a detailed look into those transactions and determine if a transfer pricing study is warranted. Such a study will give you a strong basis for your transfer pricing method and protect your company from severe penalties if fault is found with your related party pricing.
Thompson Greenspon is available to assist you with your current international issues/filings, transfer pricing studies, as well as representation if you are selected for examination under this program. Contact us at 703.385.8888 or firstname.lastname@example.org.
About the Author:
Transfer Pricing Specialist
David Marion joined Thompson Greenspon in 2014 as a transfer pricing specialist. Having worked with the IRS for more than 35 years, David’s experience is instrumental to interpreting regulations and providing other guidance for a variety of complex and often controversial international issues.
David has held a number of compliance-related positions during his tenure with the Examination and Large Business & International divisions of the IRS. As Manager of the International Technical Advisor headquarters group, he provided a wide variety of technical support across the country. During his 12 years of managing a large group of international examination specialists, David was intimately involved with many international cases, of which transfer pricing was the most prevalent issue.
In addition, as Foreign Payments Manager, David was also responsible for the IRS compliance program for international withholding. Within this position, David helped enforce policy consistency among various IRS centers.
As Competent Authority Manager, David gained extensive transfer pricing experience with Europe and Canada. He conducted numerous negotiations with foreign officials on behalf of taxpayers, of which 95 percent were closed successfully with mutual agreements.
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