For the past 6 years, the Internal Revenue Service’s (IRS) Large Business and International (LB&I) Division shifted 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 resources. Given funding issues and the increasing demand for IRS manpower it has been 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.
International Tax Matters are Prime “Campaign” Targets
The IRS just updated its audit campaign targets on April 28. Unsurprisingly, many of the campaign areas involve international taxation matters. For example, LB&I active campaigns are now ongoing for: expatriations (many individuals are not filing and paying taxes owed including “exit tax”); those claiming the foreign earned income exclusion / housing exclusion or deduction (many do not meet the necessary requirements in order to qualify for these beneficial exclusions); FATCA filing accuracy; tax noncompliance related to offshore banking; foreign corporations with US business activity; nonresident alien taxation matters; individual foreign tax credits claims and the list goes on.
A Good Habit for Tax Pro’s
I make it a regular habit to frequently review the LB&I Campaigns list to examine the kinds of transactions that could be the target of additional IRS scrutiny.
What should a tax professional do if he or she identifies a targeted area involved with a client matter or an area with which the professional regularly works for clients?
Following are my suggestions. It would be a good practice to work on the matter as if preparing for an IRS audit. Extra care should be taken to ensure that the professional has all necessary documentation in the file as well as file memoranda explaining why certain positions were taken.
Here is an example. Tax pro’s working in the international arena should be well aware that the IRS has in place an audit campaign for individuals who have expatriated. This includes US citizens and long-term residents (lawful permanent residents in 8 out of the last 15 taxable years). When someone expatriates, they want the US tax door to be firmly closed when they go. The tax professional has a responsibility to ensure this happens (at least as much as possible).
An expatriating US citizen, for example, may claim the “dual national exception” to the expatriation regime. My earlier blog post explains all the ins and outs of this exception. The tax professional should have in the file documentation supporting the conclusion that the expatriate was born as a dual national, continues to be a citizen of the country with which dual nationality was claimed, is “taxed as a resident” of that country (here the professional may need the advice of local tax counsel and should have copies of tax returns filed with the other country), as well as backup for the position that the individual has had the required limited physical presence in the US as mandated by the dual national exception. In the event the matter is disputed and the dual national exception denied, a strong file may enhance the ability to abate any civil tax penalties (e.g., reasonable reliance on a tax professional).
Inactive Campaigns
The IRS LB&I Division has also updated its list of campaigns that are not currently active. I was surprised to see that the campaign for Forms 3520/3520-A is on the list. These forms are involved 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 in these cases. You can learn more about the foreign trust reporting rules at my blog posts here, here and here.
Posted May 25, 2023
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