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Keeping the Holidays Merry By Avoiding Scrutiny from the IRS

As the holidays approach taxpayers may want to consider how to keep the season merry by staying off of the IRS’s naughty list. To address common taxpayer reporting problems the IRS employs through its Large Business and International Division (LB&I) comprehensive enforcement strategies, known as “compliance campaigns.” Below are ten recently announced campaigns of which taxpayers should be aware:

TCJA Campaign

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, comprising the most sweeping changes to the Internal Revenue Code in decades.  Starting in tax year 2020, the majority of tax returns that will be under review by LB&I will contain changes brought about by the TCJA. This campaign was initiated to closely monitor TCJA related reporting items on a select pool of returns.

SECA Tax Campaign

Partners report income passed through from their partnerships. Unless an individual partner qualifies as a “limited partner” for self-employment tax purposes, the partner’s distributive share is subject to self-employment tax under the Self-Employment Contributions Act (SECA). Some individual partners, including service partners in service partnerships organized as state-law limited liability partnerships, limited partnerships, and limited liability companies, have inappropriately claimed to qualify as “limited partners” not subject to SECA tax.

Micro-Captive Insurance Campaign

This campaign addresses transactions described in Transactions of Interest Notice 2016-66, in which a taxpayer attempts to reduce aggregate taxable income using contracts treated as insurance contracts and a related company that the parties treat as a captive insurance company. Each entity that the parties treat as an insured entity under the contracts claims deductions for insurance premiums. The manner in which the contracts are interpreted, administered, and applied is inconsistent with arm’s length transactions and sound business practices.

High-Income Nonfiler Campaign

The IRS has found of the estimated $39 billion average annual gross Tax Gap that is due to nonfilers, the majority of the tax loss is attributable to high-income taxpayers.  This campaign is concentrated on bringing into compliance taxpayers with annual earnings in excess of $100,000 who have not filed tax returns.

Partnership Stop Filer Campaign

Partners report income, losses, and other items passed through from their partnership. Some partnerships stop filing tax returns for various reasons yet still have economic transactions that aren’t being reported to their partners. The IRS has found these transactions are often not being reported by the partners.

Related-Party Transactions Campaign

This campaign focuses on transactions between commonly controlled entities that provide taxpayers a means to transfer funds from a corporation to related pass-through entities or shareholders on potentially tax advantageous terms. LB&I is allocating resources to this issue to determine the level of compliance in related-party transactions of midmarket taxpayers.

S Corporation Distributions Campaign

When S Corporations distribute property or cash to shareholders various tax consequences may follow.  The IRS has identified three common reporting errors involving S corporation distributions:

  • An S corporation fails to report gain upon the distribution of appreciated property to a shareholder.
  • An S corporation fails to determine that a distribution, whether in cash or property, is properly taxable as a dividend.
  • A shareholder fails to report non-dividend distributions in excess of its stock basis that are subject to taxation.

S Corp Losses Claimed in Excess of Basis Campaign

LB&I has discovered that S corporation shareholders commonly claim losses and deductions to which they’re not entitled because they don’t have sufficient stock or debt basis to absorb these items.

Syndicated Conservation Easement Transactions Campaign

To prevent taxpayers from taking inappropriately large deductions for easements purportedly donated to charity, LB&I is concentrating on syndicated conservation easement transactions.  On August 25, 2020, the Senate Finance Committee released a report on its investigation into the abuse of syndicated conservation easement transactions. The report encourages the IRS to continue taking enforcement action against syndicated use of conservation easement transactions and to take further action to preserve the integrity of the conservation easement tax deduction.

Virtual Currency Campaign

U.S. persons are subject to tax on their worldwide income from all sources, including transactions involving property. IRS Notice 2014-21 states that virtual currency is property for federal tax purposes and provides information on the U.S. federal tax implications of convertible virtual currency transactions. The IRS has initiated a campaign designed to address noncompliance related to the use of virtual currency through multiple treatment streams.

If you have any questions about how to stay out of the IRS’s cross hairs with respect to these compliance campaigns please contact your local Withum Tax Advisor.

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