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IRS Provides Roadmap of Audit Triggers

Tax Law Alert John T. Barry, David Brunori, Patricia A. Hintz, Dawn R. Gabel, Gregory L. Lohmeyer, Elizabeth G. Nowakowski, Jeffrey B. Fugal

Earlier this month, the Internal Revenue Service issued 11 new issue-focused audit campaigns. These campaigns indicate where the IRS will focus its efforts in the coming years. And they represent areas where the IRS believes compliance is wanting. Businesses and their tax teams should be aware of these developments as the IRS has expressly emphasized they will lead to more audits.

Business issues that will receive additional scrutiny:

Energy Efficient Commercial Building Property

The IRS plans on reviewing deductions for installation of energy efficient commercial building property

Economic Development Incentives

The IRS will examine companies that receive government incentives to insure those incentives are properly characterized as non-shareholder capital contributions

Form 1120-F Foreign Withholding

The IRS will focus on verification of withholding by foreign entities seeking refunds or credits under Form 1120-F

Agricultural Chemicals Security Credit

The IRS plans on examining claims under Section 45O which allows a credit for agricultural businesses incurring security costs to safeguard chemicals.

Deferral of Cancellation of Indebtedness Income

The IRS will examine compliance with cancellation of indebtedness rules concerning reacquisition of debt instruments

Corporate Direct (Section 901) Foreign Tax Credit

This campaign will focus on corporations that claim credit for foreign taxes paid in lieu of deductions

Section 956 Avoidance

The IRS plans on greater scrutiny of controlled foreign corporations who make loans to US parent companies.

Individual issue that will receive more scrutiny:

Swiss Bank Account Owners

Through this campaign the IRS will focus on Americans who may be beneficial owners of accounts held in Swiss financial institutions

Individual Foreign Tax Credit (Form 1116)

The IRS plans on examining more closely individuals who claim credit for foreign taxes paid on foreign source income.

Foreign Earned Income Exclusion

The IRS will examine more closely individuals who claim foreign earned income or foreign earned income exclusion

Tax Credits Claimed by US Nonresident Aliens

The IRS will verify withholding credits reported on Form 1042-S

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This is the second wave of campaigns aimed at particular issues the IRS believes deserve more scrutiny. If you find yourself with any of the situations mentioned above there is a greater likelihood of audit. Feel free to consult with a member of the Quarles & Brady LLP tax team.