So, who is going to be audited? And for what, initially? Thanks to Professor William Byrnes of Texas A&M School of Law for the heads up on these latest campaigns:
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Foreign Earned Income Exclusion Campaign
Practice Area: Withholding & International Individual Compliance
Lead Executive: John Cardone
Individuals who meet certain requirements may qualify for the foreign earned income exclusion and/or the foreign housing exclusion or deduction. This campaign addresses taxpayers who have claimed these benefits but do not meet the requirements. The Internal Revenue Service will address noncompliance through a variety of treatment streams, including examination.
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Individual Foreign Tax Credit (Form 1116)
Practice Area: Western Compliance Practice Area
Lead Executive: Paul Curtis
Individuals file Form 1116 to claim a credit that reduces their U.S. income tax liability for the amount of foreign taxes paid on foreign source income. This campaign addresses taxpayer compliance with the computation of the foreign tax credit limitation on Form 1116. Due to the complexity of computing the Foreign Tax Credit and challenges associated with third-party reporting information, some taxpayers face the risk of claiming an incorrect Foreign Tax Credit amount. The IRS will address noncompliance through a variety of treatment streams including examinations.
These campaigns represent the second wave of LB&I's issue-based compliance work. More campaigns will continue to be identified, approved and launched in the coming months.
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Swiss Bank Program Campaign
Practice Area: Withholding & International Individual Compliance
Lead Executive: John Cardone
In 2013, the U.S. Department of Justice announced the Swiss Bank Program as a path for Swiss financial institutions to resolve potential criminal liabilities. Banks that are participating in this program provide information on the U.S. persons with beneficial ownership of foreign financial accounts. This campaign will address noncompliance, involving taxpayers who are or may be beneficial owners of these accounts, through a variety of treatment streams including, but not limited to, examinations.
IRS Tax Audits on Form 1116 Foreign Income Exclusion and Foreign Tax Credits
The first and second campaigns, the foreign income exclusion audits and foreign tax credit audits may sound innocuous enough. These audits will just verifying that US expats have properly calculated their foreign income exclusion for foreign tax credit, right?
Well, not so fast. We know the IRS has been making a big deal of out of denying taxpayers foreign taxes paid, because they aren't the right kind of tax the credit applies to. See the Eschel case for an example of the IRS denying a French resident the credit for social security-type taxes paid.
But these aren't the most dangerous risks taxpayers overseas are facing. So many of what should be straight-forward international returns are loaded with incredibly complicated forms. Complicated returns that very few tax preparers and tax payers file correctly even when they make their best efforts. Never mind the FBAR form which is complicated form with consequential penalties, and there are a litany of other forms with $10,000 penalties per year:
- Form 8938
- Form 5471
- Form 8621
- Form 926
- Form 3520-A
- Form 3520, just as an examples.
I suspect these penalties are the IRS's real targets of these two campaigns. Why? Because the IRS has published its IPUs which explain what penalties they are looking for!
Audits on Swiss Bank Account holders through nominees
The IRS is aware that many US account holders have Swiss bank accounts in their names. The IRS has been aware for a long time that a lot of US ownership of Swiss bank accounts is disguised and hidden through shell companies and proxies — i.e., putting an account in the name of a foreign lawyer or friend.
This is what this campaign is looking to uncover. The risks for those who have taken efforts to hide from the IRS by taking the additional step of inserting an intermediary to camouflage a beneficial interest are huge. Willful FBAR penalities can be assessed at 50% of the high balance of the account, and the risk of criminal prosecution is real — there is likely some underlying tax evasion exposure as well. Additionally, there are criminal charges for not filing an FBAR. The jail penalty increases from 5 years to 10 years when another crime such a tax evasion is included.
Other International Campaigns
Additionally, there is also a new campaign for loans a Controlled Foreign Corporation makes to its US parent, AKA 26 USC 956 avoidance.
What to do if you fear an audit or are currently under audit.
Contact us for a confidential consultation. Our international tax team of lawyers, CPAs and tax specialists help our clients from around the globe mitigate the risks of unreported income and assets and make the best out of a difficult situation. These are very serious matters and need to be handled with the utmost of care.
Source: https://www.irs.gov/businesses/large-business-and-international-launches-compliance-campaigns-0
