The Internal Revenue Service (“IRS”) announced on July 29, 2019, that it has added 6 new targets to its ever-expanding list of “compliance campaigns.” The IRS Large Business and International division (LB&I) has been announcing such campaigns since January 2017—the list now composes 59 total targets. These campaigns are intended to “improve return selection, identify issues representing risk of non-compliance, and make the greatest use of limited resources.” The IRS announcement can be found here. The newly added targets are as follows:
- S Corporations Built-in Gains Tax;
- Post Offshore Voluntary Disclosure Program (“OVDP”) Compliance;
- High Income Non-filer;
- U.S. Territories – Erroneous Refundable Credits; and
- Section 457A Deferred Compensation Attributable to Services Performed before January 1, 2009.
S-Corp Built-in Gains (“BIG”) Tax
Of significant interest to our readers is the new focus on the BIG tax. Extra scrutiny by the IRS in this area will be felt by S-Corps which have recently converted from C-Corps to obtain pass-through treatment. If a C-Corp converts to an S-Corp, gains from the sale of assets within 5 years of the conversion may incur a corporate-level tax under the BIG tax found in section 1374 of the Internal Revenue Code (“IRC”). IRC § 1374(d)(7)(A). The S-Corp is required to report the gain and pay the tax at the corporate level. IRC § 1374(a). Proper planning (some which needs to take place before and some which needs to take place after the S election is made) may help minimize the BIG tax.
LB&I’s stated goal in this campaign is to produce technical content to aid revenue agents in their examinations and to increase awareness and compliance with the BIG tax law. It will likely focus on recently converted S-Corps.
The remaining added targets mostly involve issues relating to offshore reporting. More specifically, taxpayers who benefitted from the OVPD may have gotten a pass on previously undisclosed offshore income and asset reporting requirements. Those taxpayers who fail to remain compliant with these reporting requirements post-OVDP are now targets of LB&I. So, too, are taxpayers who expatriate and fail to pay the “exit tax” as required by some expats after June 17, 2008. Additionally, high income earners who fail to file a tax return (possibly because they are not issued W-2 or 1099 equivalents from foreign jurisdictions) are being targeted. Finally, LB&I is also taking a closer look at taxpayers in U.S. territories who are claiming refundable tax credits and at taxpayers who have been deferring compensation from services rendered prior to January 1, 2009.