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IRS Announces Four New Compliance Campaigns

The IRS continues to announce new audit strategies for its Large Business and International Division (LB&I), which are known as “compliance campaigns.” At the outset of the LB&I compliance campaign initiative in 2017, the LB&I essentially shifted to examinations based on compliance issues that the LB&I determined presented greater levels of compliance risk, thereby improving the return selection process for audits. The most recently announced campaigns are discussed below.

1) Allocation of Success-Based Fees Without Rev. Proc 2011-29

Success-based fees paid or incurred to facilitate the acquisition of a trade or business, a change in the capital structure of a business entity, and certain other transactions are presumed facilitative and must be capitalized. These fees may instead be allocated to non-facilitative activities, and currently deducted, if the taxpayer meets certain documentation requirements. There is a safe harbor election for allocating success-based fees paid in covered transactions without meeting the above documentation requirements so long as 70% of these fees are allocated as non-facilitative and 30% are allocated as facilitative.

2) FIRPTA Reporting Compliance for NRAs

FIRPTA taxes foreign persons on the disposition of their U.S. real property interests. Generally the buyer/transferee is the withholding agent and is required to withhold 15% of the amount realized on the sale, file the required forms, and remit the tax to IRS. This campaign is intended to increase FIRPTA voluntary compliance through issue based examinations and external education and outreach.

3) IRC Section 807(d) – Computation of Life Insurance Reserves Campaign

The Tax Cuts and Jobs Act (TCJA) amended IRC section 807(d) to provide a new method for computing life insurance reserves, effective for tax years beginning after December 31, 2017. Generally, for purposes of determining life insurance company taxable income, the amount of the life insurance reserves for any contract (other than variable contracts, for which a different subsection applies)), is the greater of the net surrender value of such contract or 92.81 percent of the reserve, subject to the statutory cap as provided in IRC section 807.

The TCJA provided a transition rule for applying this change whereby any difference between the amount of life insurance reserves computed using the new method, versus the amount of such reserves computed using the method applied prior to amendment by the TCJA, should be taken into account ratably over the eight succeeding taxable years. The goal of this Campaign is to examine Forms 1120-L filed by life insurance companies for their 2017 and/or 2018 taxable years (and any related and subsequent year returns) to understand how taxpayers implemented the TCJA rule change, to ensure compliance with this rule change, and to identify compliant and non-compliant technical issues.

4) IRC Section 807(d) – Re-Computation of Life Insurance Reserves Campaign

Under prior law, the interest rate used for computation of life insurance reserves under IRC 807 was the greater of: (i) the applicable federal interest rate, or (ii) the prevailing State assumed interest rate. However, a taxpayer could elect to recompute, every five years, the applicable federal interest rate used in this computation of life insurance reserves. On June 27, 2019, the issued Chief Counsel Advice (CCA) 201939003, which concluded that a taxpayer should be precluded from making such an election on an amended return, and also precludes a taxpayer from making the election on an originally filed 2017 return with respect to contracts issued five or more years prior to 2017.

Thus, a taxpayer may now be at risk for the improper 807(d)(4)(A)(ii) election itself for contracts issued in 2012 and prior years, and also for improperly calculating its Section 807 transition adjustment as required the TCJA (discussed in the section above). The goal of this IRS Campaign is to examine original and amended Forms 1120-L filed by life insurance companies for their 2017 and/or 2018 taxable years (and any related and subsequent year returns) to ensure compliance, and to identify compliant and non-compliant technical issues.

If any of these campaigns are applicable to your business, please reach out to a Withum advisor or contact a member of Withum’s National Tax Services Group to further help your decision in this process.

Author: CJ Stroh, Esq. | cstroh@withum.com

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