For the past few years, the Internal Revenue Service’s (IRS) Large Business and International (LB&I) Division has been shifting to a new audit strategy known as “campaigns.” This shift in focus concentrates on examining tax issues that will have the broadest impact on tax compliance while making the most efficient use of IRS’s dwindling resources. Given cuts to IRS funding, and the demand for IRS manpower to deal with the newly enacted tax laws under the Tax Cuts and Jobs Act, TCJA, it’s a wise move for IRS to more effectively harness its examination resources. You can read more about the development and evolution of this “campaign” strategy in the September 14, 2016 report issued by the Treasury Inspector General for Tax Administration. Full details from the IRS tracking the development of its “campaigns” is here.
The roll out of “campaigns’ also signals IRS’ greater reliance and proficiency using data analytics and technology to comb through massive amounts of information garnered from numerous sources. Such data mining is the linchpin of success with IRS’ offshore initiatives. It came as no surprise to me that on May 21, 2018, IRS announced the rollout of six additional compliance campaigns to be undertaken by LB&I. The milestone of IRS’ starting its “campaign” initiatives began in January 2017 with 13 identified campaigns. Obviously, the strategy continues to flourish.
Five of the six new campaigns target “foreign” tax areas and deal with US withholding/deposit/reporting requirements and international individual tax compliance, with a particular focus on nonresident aliens (NRA). The campaigns identify the US tax forms that will be targeted to ensure the relevant compliance. One can expect an increase in audits in the areas described in the newest campaigns.
- Forms 3520/3520-A: Whenever a US person has an interest in or a transaction with, a foreign trust or receives foreign gifts or bequests or has an interest in a so-called foreign “grantor” trust, numerous tax filing obligations will be triggered. Learn more about foreign trusts at my blog posts here, here and here. Learn more about foreign gifts and bequests here.
- Forms 1042/1042-S: US persons who make payments of US-source income (such as interest, dividends, royalties) to foreign persons have very precise filing and withholding duties that cannot be ignored or taken lightly. This campaign addresses the US withholding agents who make such payments but do not meet all their compliance duties.
- Nonresident Alien Tax Treaty Exemption: This campaign targets foreign persons who claim tax treaty benefits and is anticipated to be an area ripe for audits. IRS has found that there are often improper claims to treaty benefits, incorrect or incomplete forms being provided to the US withholding agents and other similar problems leading to improper taxation.
- Nonresident Alien (NRA) Schedule A and Other Deductions: Foreign persons who claim deductions for certain eligible expenses under Form 1040NR Schedule A are often failing to keep proper records, taking improper deductions and failing to substantiate their entitlement to the deductions. Another area ripe for audit.
- NRA Tax Credits: Foreign persons claiming tax credits are often doing so improperly (earned income, qualifying dependents, education credits). Catching them out means the IRS can cash in on tax and penalty dollars.
It is clear that the noose continues to tighten for those who are delinquent or non-compliant when it comes to foreign income or assets. It’s also drawing close for foreign taxpayers improperly claiming benefits under US tax rules or treaties.
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