The New Campaigns
On May 21, 2018, the IRS Large Business and International Division (LB&I) announced its identification and approval of six additional compliance campaigns. Previously, the LB&I had announced 29 compliance campaigns: 13 campaigns on January 31, 2017, 11 campaigns on November 3, 2017, and 5 campaigns on March 13 of this year.
Five out of six new campaigns are centered around withholding and international individual compliance, focusing on both return accuracy and information reporting. These five campaigns are as follows:
- F3520/3520-A Noncompliance and Campus Assessed Penalties
- Forms 1042/1042-S Compliance
- Nonresident Alien Tax Treaty Exemptions
- Nonresident Alien Schedule A and Other Deductions
- NRA Tax Credits
The IRS communicated that the LB&I campaigns are the result of its extensive efforts to redefine large business compliance work, to create greater transparency between the IRS and LB&I’s taxpayer segment, and to build a supportive infrastructure inside the LB&I. According to the IRS, the LB&I identifies campaigns through data analysis and suggestions from IRS employees. Through these campaigns, the IRS anticipates improving return selection and focusing on the issues that present the greatest risk of noncompliance. The IRS will implement various treatment streams within each campaign, including examinations, assessment of penalties and outreach/education.
Through the F3520/3520-A Noncompliance and Campus Assessed Penalties campaign, the LB&I expects to improve compliance with respect to the timely and accurate filing of information returns reporting ownership of, and transactions with, foreign trusts. The IRS plans to address noncompliance through a variety of treatment streams including, but not limited to, examinations and assessment of penalties when the forms are received late or are incomplete.
The Forms 1042/1042-S Compliance campaign focuses on compliance with the withholding, deposit, and reporting requirements of the withholding agents who make payments of certain US-source income to foreign persons. The IRS intends to address noncompliance and errors through a variety of treatment streams, including examination.
The Nonresident Alien Tax Treaty Exemptions is aimed to increase compliance in nonresident alien individual tax treaty exemption claims related to both effectively connected income and Fixed, Determinable, Annual Periodical income. The IRS observed that some nonresident alien (NRA) taxpayers may either misunderstand or misinterpret the treaties, provide incorrect or incomplete forms to withholding agents or rely on incorrect information returns provided by withholding agents to improperly claim treaty benefits and exempt US source income from taxation. This campaign appears to be closely linked to the Forms 1042/1042-S Compliance campaign which is aimed at the reporting compliance of the payors of US-source income to the NRA taxpayers. The IRS plans to address noncompliance through a variety of treatment streams including outreach/education and traditional examinations.
Similarly, the IRS notes that NRA taxpayers may either misunderstand or misinterpret the rules for allowable deductions of eligible expenses on Form 1040NR. Such taxpayers, according to the IRS, may claim deductions while not meeting all the qualifications for claiming the deduction and/or do not maintain proper records to substantiate the expenses claimed. The IRS plans to address this noncompliance through its Nonresident Alien Schedule A and Other Deductions campaign, and anticipates employing a variety of treatment streams including outreach/education and traditional examinations.
Finally, the IRS expressed concern regarding NRAs improperly claiming certain dependent related tax credits when they do not have qualifying earned income, do not provide substantiation/proper documentation, or do not have qualifying dependents. Additionally, the IRS noted, some NRA taxpayers may also claim education credits that are only available to US persons by improperly filing Form 1040 tax returns. The IRS, through the NRA Tax Credits campaign, plans to address noncompliance using a variety of treatment streams including outreach/education and traditional examinations.
The IRS has formulated its issue-based approach as part of its efforts to direct its diminishing resources toward issues that it believes present the greatest risk of noncompliance. Given the focus of the LB&I’s new campaigns on withholding and international individual compliance, this area continues to be a hot topic for the IRS. In the process of issue-based examinations, taxpayers should expect to interact with IRS personnel that have been trained to deal with the specific issues of focus in the campaigns. The international taxpayers and the payors of USsource income to foreign persons are well advised to take advantage of the IRS’s transparency and assess their compliance and potential risks with respect to the issues identified in the campaigns.