The IRS has streamlined its enforcement campaigns resulting in an increased probability of more businesses, as well as individuals, being examined for specific issues. In 2017, the IRS Large Business and International Division (LB&I) announced its move toward issue-based examinations and a compliance campaign process. LB&I serves corporations, subchapter S corporations, and partnerships with assets greater than $10 million. The centrally identified campaigns target issues representing a significant risk of noncompliance. These campaigns are intended to improve voluntary compliance with outreach efforts and published guidance. Since January 2017, LB&I has announced 24 audit campaigns. A few of these campaigns, as summarized below, are of note because they have the potential to affect not only LB&I businesses but also many midmarket companies and individuals.
S Corporation Losses Claimed in Excess of Basis Campaign focuses on shareholders that claim losses and deductions to which they are not entitled because they do not have sufficient stock or debt basis in the S corporation to absorb these items. Potential tools for this audit campaign include issue-based examinations and soft letters encouraging voluntary self-correction.
Related Party Transactions Campaign addresses transactions between commonly controlled entities that provide taxpayers a means to transfer funds from the corporation to related pass through entities or shareholders. LB&I is allocating resources to this issue to determine the level of compliance in related party transactions of taxpayers in the mid-market segment.
Individual Foreign Tax Credit Campaign targets Form 1116 filed by individuals to claim a credit for taxes paid on their foreign source income. The credit is used to reduce their U.S. income tax liability. Due to the complexity of the foreign tax credit (FTC) calculation, there is a potential risk for an incorrect credit to be claimed. LB&I will conduct examinations to audit the FTC calculations.
Foreign Earned Income Exclusion Campaign examines individuals who have claimed the foreign income exclusion or the foreign housing exclusion but do not meet the requirements. The Internal Revenue Service will address noncompliance through a variety of treatment streams, including examination.
If your tax situation is affected by any of these campaigns, or if you have any questions regarding the potential issues related to these campaigns, please contact us at (703) 385-8888.
Written by: Sue Shaughnessy, CPA, MST
Sue Shaughnessy, a tax supervisor and IRS representation specialist at Thompson Greenspon, has been with the firm since 1997. Prior to joining Thompson Greenspon, she worked seven years as a Senior Internal Revenue Agent with the IRS. Her experience with the IRS has been a key component in her ability to address and successfully resolve Examination and Collection issues for our clients.
Sue is primarily responsible for resolving client issues with Federal and State Taxing Authorities involving both Collection and Examination issues. For the past 10 years, she has worked extensively with both business and individual clients to settle outstanding income tax and employment tax liabilities with Collection by negotiating Installment Agreements, Offers in Compromise and Penalty Abatement Requests. She has also represented clients at both the state and federal level on the Examination of income tax returns, employment tax returns and sales tax returns. With both Collection and Examination issues, Sue has taken issues to the Appeals level, and worked effectively with Appeals Officers to resolve client’s disputes.
Throughout her career, Sue participates in continuing education programs and annually attends a local IRS liaison day to maintain relationships with IRS personnel.