The IRS has identified non-U.S. companies doing business in the United States and not filing U.S. tax returns as targets for one of its new, issue-driven “campaigns.” These IRS campaigns are a new approach to identifying non-compliance with the tax laws. The IRS has begun to mail letters to an initial group of targeted companies but these campaigns will continue indefinitely.

When Is a Company Doing Business in the United States for Income Tax Purposes

The question of whether a non-U.S. company is doing business in the United States is often not clear. The threshold is lower than many companies realize and thus can easily be triggered unintentionally. This risk is exacerbated by rules attributing the activities of U.S. agents — whether employees or independent third parties — to their non-U.S. principals. The risk is further increased for non-U.S. companies that do business with U.S. affiliates as well as for businesses operating in partnership form. If a tax treaty applies between the United States and the non-U.S. company’s jurisdiction of residence, special rules may come into play.

Implications for Companies in Various Industries

The IRS has for some time pursued a limited initiative, identifying potential non-filers among non-U.S. companies providing services in the U.S. Gulf of Mexico. Under that initiative, the IRS used information from the U.S. Coast Guard regarding vessels operating in U.S. waters. Under this new campaign, the IRS has indicated that it will use additional data sources — including business registrations, state sales and use tax information, U.S. customs filings, and withholding certificates — to identify non-U.S. companies that are potentially doing business in the United States. The IRS will expand its net to all industries, including distributors, financial services firms, private equity funds and hedge funds.

Vinson & Elkins’ tax lawyers have extensive experience advising non-U.S. companies regarding U.S. trade or business issues, tax treaty analysis, and appropriate structures for intercompany transactions. The evaluation of a non-U.S. company’s U.S. filing obligations is complicated and has serious ramifications — including an indefinite tolling of the statute of limitations, loss of treaty benefits, the potential disallowance of all otherwise deductible expenses, and penalties.