IRS again adds issues to LB&I's campaign audit strategy
IRS Announces the Identification and Selection of Six Large Business and International Compliance Campaign (May 21, 2018)
Continuing a process that it began in January 2017, IRS's Large Business and International division (LB&I) announced the identification and selection of six additional issues that it will be targeting in its "compliance campaign" audit strategy.
Background. In January of 2017, IRS announced a new audit strategy for its LB&I division known as "campaigns"—essentially, shifting its strategy toward issue-based examinations based on compliance issues that LB&I determines present greater levels of compliance risk and thereby improving return selection. IRS initially selected 13 compliance issues when it rolled out this strategy. See "IRS rolls out Large Business and International campaign audit strategy" (2/2/2017).
Foreign Trust Compliance. This campaign will take a multifaceted approach to improving compliance with respect to the timely and accurate filing of information returns reporting ownership of and transactions with foreign trusts. It covers Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner.
Forms 1042/1042-S Compliance. Taxpayers who make payments of certain U.S.-source income to foreign persons must comply with the related withholding, deposit, and reporting requirements. Key to that compliance are Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding. This campaign addresses withholding agents who make such payments but do not meet all their compliance duties.
Nonresident Alien Tax Treaty Exemptions. This campaign is intended to increase compliance in nonresident alien (NRA) individual tax treaty exemption claims related to both effectively connected income and fixed, determinable, annual periodical income. Some NRA taxpayers may either misunderstand or misinterpret applicable treaty articles, provide incorrect or incomplete forms to the withholding agents, or rely on incorrect information returns provided by U.S. payors to improperly claim treaty benefits and exempt U.S. source income from taxation.
Nonresident Alien Schedule A and Other Deductions. This campaign is intended to increase compliance in the proper deduction of eligible expenses by NRA individuals on Form 1040NR Schedule A. NRA taxpayers may either misunderstand or misinterpret the rules for allowable deductions under the previous and new Code provisions, not meet all the qualifications for claiming the deduction, and/or not maintain proper records to substantiate the expenses claimed.
Nonresident Alien Tax Credits. This campaign is intended to increase compliance in NRA tax credits. NRAs who either have no qualifying earned income, do not provide substantiation/proper documentation, or do not have qualifying dependents may erroneously claim certain dependent-related tax credits. In addition, some NRA taxpayers may also claim education credits (which are only available to U.S. persons) by improperly filing Form 1040 tax returns.