IRS Approves Three New Enforcement Campaigns Based on Data Analysis and Employee Feedback

The IRS has announced three focused enforcement areas, all related to international tax compliance. The three campaigns were identified through data analysis and suggestions from IRS employees, highlighting the IRS’s use of cutting edge technologies and feedback to identify areas of noncompliance. The new campaigns, announced April 16, 2019, are as follows:

1. Captive Services Provider Campaign (Controlled Foreign Subsidiaries)

The IRS is focused on transactions between commonly controlled entities where a foreign subsidiary performs services exclusively for a parent company or other members of a multinational group. The IRS is concerned with excessive pricing for the services provided by the foreign subsidiary to inappropriately shift taxable income to the foreign entity and erode the U.S. tax base. Businesses with foreign subsidiaries providing services to related entities may see audits of this issue along with informal inquiries from the IRS. Because the pricing of transactions between controlled entities is highly complex, and audits of such can be high-stakes, U.S. taxpayers with foreign subsidiaries may wish to review their structure and pricing arrangement and seek counsel in the event of contact from the IRS.

2. Offshore Banking Campaign

After years of DOJ and IRS investigations into offshore tax evasion, the IRS has massive amounts of data that identify U.S. taxpayers with transactions or accounts at offshore private banks. The IRS campaign will focus on tax noncompliance and information reporting failures associated with offshore accounts. U.S. persons with unreported offshore income or assets are facing an IRS that is armed with information from the Swiss bank program, whistleblowers, the offshore voluntary disclosure program, FATCA, and other sources, and is making use of powerful analytics tools to mine the data and pursue noncompliant taxpayers.

3. Loose Filed Forms 5471

Form 5471 is an information return that U.S. persons with certain interests in foreign corporations must file.  The form is attached to an income tax return (or partnership return) and filed with such return. The IRS has identified that taxpayers are incorrectly filing Forms 5471 without a tax return.  Form 5471 can be very complex and, depending on the relationship between the filer and the foreign corporation, requires different levels of information. Taxpayers who have filed Form 5471 apart from an income tax return should consider seeking professional advice to correct such error.  For U.S. persons who have an interest in a foreign corporation, they should consider whether a Form 5471 is required. The penalties for noncompliance with the Form 5471 requirements can be significant, even if no income tax is due.

Clark Hill’s tax controversy and litigation team has resolved hundreds of offshore tax matters and worked with numerous clients to resolve international information reporting issues (such as Form 5471). We also have experience guiding U.S. clients with foreign entities through transfer pricing audits. For questions or more information about IRS compliance, audits, or tax litigation, please contact Joshua Wu, Rachael Rubenstein, or another member of Clark Hill's Tax and Estate Planning Business Unit.