IRS Expands International Tax Compliance Campaigns
Businesses with international operations should pay attention to the latest compliance developments from the IRS’s Large Business and International (LB&I) division. Beginning in April 2019, the LB&I released three new compliance campaigns targeting captive services providers, offshore private banking, and loose-filed Forms 5471.
The IRS’s LB&I compliance campaigns are designed to target high-risk areas and tax issues and come with an increased risk of regulatory scrutiny moving forward. Accordingly, businesses and individuals with an international reach should review the issues being targeted by the new campaigns and determine whether adjustments should be made to their tax planning and processes.
Captive Services Providers
U.S. companies may set up overseas captive subsidiaries as a way to manage certain types of risk. Under Section 482 transfer pricing regulations, the prices for these captive services should reflect the prices charged by independent third parties performing functions, employing assets, and assuming insurance and other risks that are similar to the foreign subsidiary’s captive services. When companies are charged too much for captive services by their foreign subsidiaries, taxable income may be shifted to those foreign entities. The compliance campaign is principally to ensure captive providers are charging arm’s length prices.
Offshore Private Banking
As part of an ongoing effort to ensure the U.S. is taxing its residents’ worldwide income, LB&I is initiating an offshore private banking compliance campaign. U.S. taxpayers already must report their offshore financial accounts through annual Foreign Bank Account Reports (FBARs) on FinCEN Form 114. This campaign will focus on such reporting with respect to accounts involving offshore private banks.
Loose-Filed Forms 5471
Many U.S. individuals and organizations with interests in foreign corporations are required to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, as part of their annual income tax returns. The IRS has noticed patterns of incorrect submissions of this form, including taxpayers submitting forms directly to the IRS (instead of attaching it to their income tax returns). Taxpayers – including not-for-profit organizations – that are required to file the form must amend their income tax returns to attach the form if it was not attached with the original income tax (or exempt organization) return submission.
With the latest three added, there are 53 ongoing IRS compliance campaigns for large and international businesses. The U.S. Office of the Taxpayer Advocate and others have expressed interest in the tax collections and other results of these campaigns.
For More Information
If you have comments or questions about the latest LB&I compliance campaigns, please contact John Forry.