On April 16, 2019, the Large Business and International (LB&I) Division of the Internal Revenue Service (IRS) announced three new compliance campaigns. The campaigns focus on:
- Transfer pricing for “captive” services providers, which may apply to a broad array of related-party service arrangements;
- Offshore private banking services; and
- The separate filing of Forms 5471 by US shareholders of controlled foreign corporations (CFCs) rather than attaching the form to the accompanying tax returns, so-called “loose-filed Forms 5471.”
As has been the case with past campaigns, LB&I identified the campaign issues through data analysis and recommendations from IRS employees. The announcement of the new campaigns reflects LB&I’s efforts to focus its resources and efforts on issues-based examinations rather than by focusing on specific industries and taxpayers, such as through the Compliance Assurance Process (CAP) program. Consistent with previously announced campaigns, LB&I’s objectives with the new campaigns are to improve tax return selection, to identify issues representing a risk of noncompliance, and to make the greatest use of limited resources.
The new campaigns supplement the initial list of 13 campaigns announced on January 31, 2017, and the campaigns that have been announced since then, bringing the total number of campaigns to 53. For further information on these earlier announcements, Eversheds Sutherland released a general alert discussing the initial 13 campaigns. There are additional alerts on select issues in November 2017 and March 2018.
Related-party “captive” services provider campaign
The “captive” services provider campaign addresses the applicability of transfer pricing rules under section 4821 and the OECD Transfer Pricing Guidelines to certain controlled entities, including foreign captive services providers that perform services exclusively for their parent entity or other members of a multinational group. Specifically, the goal of the campaign is to ensure that US multinational companies pay no more than arm’s length prices to their captive services providers, because excessive pricing may inappropriately shift taxable income to foreign entities, effectively eroding the US tax base. This campaign seeks to ensure compliance through issue-based examinations and soft letters.
Eversheds Sutherland Observation: The somewhat cryptic description of this campaign has generated some uncertainty as to its focus. The use of the term “captive” appears to refer generally to controlled, intra-group service providers, and the inclusion of transactions among controlled entities in which a “foreign captive subsidiary performs services exclusively for the parent or other members of the multinational group” on its face potentially could apply to a multitude of intra-group service arrangements, including possibly foreign-to-foreign service arrangements. Until clarifying guidance is issued, the scope of the campaign will not be entirely clear.
Offshore private banking campaign
The offshore private banking campaign addresses US persons with transactions or accounts at offshore private banks and targets noncompliance and information reporting. The IRS has possession of records that identify such taxpayers and now seeks to improve compliance through examination and soft letter treatment streams. The announcement notes that additional streams to address noncompliance in this area may be developed based on feedback received through the campaign.
Eversheds Sutherland Observation: Through IRS programs, including the former IRS Offshore Voluntary Disclosure Program (OVDP), and the Foreign Account Tax Compliance Act (FATCA), the IRS has collected over a billion records concerning US persons with foreign bank accounts and assets. In recent years, the IRS and the Department of Justice have used voluntary compliance and litigation against taxpayers who fail to file the necessary forms reporting foreign assets and transactions. Further, earlier this month, the Government Accountability Office (GAO) released a report titled “FOREIGN ASSET REPORTING, Actions Needed to Enhance Compliance Efforts, Eliminate Overlapping Requirements, and Mitigate Burdens on U.S. Persons Abroad.”2 The GAO report is critical of the IRS’s progress in pursuing a comprehensive plan to leverage FATCA data to improve taxpayer compliance. Although the former OVDP program has concluded, there exists an expanded four-part compliance initiative―including a revised disclosure policy―for offshore and domestic disclosures. This campaign, combined with the sheer volume of records collected, suggests the IRS has renewed its commitment to leverage FATCA through the use of data analytics, and that the IRS will prioritize its scrutiny of US persons with foreign bank accounts and assets.
Loose-filed Forms 5471
The loose-filed Form 5471 campaign seeks to improve compliance with the requirement to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. Certain US shareholders of CFCs are required to file Form 5471 by attaching it to a tax return (or partnership or exempt organization return, if applicable). For taxpayers who failed to attach required Forms 5471 to their tax returns, this campaign cautions that amended returns should be filed with Forms 5471 attached.
Eversheds Sutherland Observation: This campaign addresses the practice by some taxpayers of filing a Form 5471 without an applicable tax return, and further highlights LB&I’s focus on examining offshore dealings and on curtailing noncompliance. The campaign does not address whether filing an amended return with the Form 5471 appropriately attached will enable taxpayers to mitigate consequences that might otherwise follow from perceived compliance defects.