IRS Announces Five New Compliance Campaigns that Focus on Pass-Through Entities and Spin-Offs
The IRS Large Business and International Division (LB&I) recently announced five new tax reporting compliance campaigns. In general, compliance campaigns are designed to select tax returns for “audit” or examination which are more likely to involve certain identified tax reporting risks. The recent IRS announcement indicates a continued effort of the LB&I division to modify its compliance campaign process by refocusing its resources on voluntary taxpayer compliance efforts and higher risk substantive issues.
Compliance campaigns are generally designed to select tax returns which are more likely to involve certain risk areas. The IRS intends to address the identified campaigns using “treatment streams” i.e., a variety of approaches - such as issue-based examinations, soft letters, development of new form instructions, etc. The stated goal of the campaigns is to improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources. In the announcement, the IRS briefly explains the underlying issue of each campaign and describes the potential treatment streams.
The five new LB&I compliance campaigns are summarized below.
- Self-Employment Contributions Act (SECA) Tax: Partners in a partnership that render services are subject to the SECA tax on their distributive share of the partnership’s income. However, some limited partners and limited liability company (LLC) members that render services on behalf of a partnership or LLC do not report the flow-through income as earnings subject to the SECA tax. The goal of this campaign is to “increase compliance with the law as supported by several recent court decisions.” The treatment streams for this campaign will be two-pronged. First, issue-based examinations of returns, in addition to outreach to practitioners, professional service associations, and software vendors to educate tax professionals about the correct treatment and reporting requirements.
- Sale of a Partnership Interest: Partners must report the sale of a partnership interest on their individual income tax return. This campaign is aimed at taxpayers who do not report the sale of a partnership interest, or incorrectly report the amount and character of the gain or loss from such transaction. The IRS will employ a variety of treatment streams including, but not limited to, examinations and soft letters.
- Partnership Stop Filer: Some partnerships continue to have economic transactions after they stop filing tax returns. Often these transactions are not being reported to the partners. This campaign seeks to address the situation where transactions are not reported to partners. The IRS treatment streams for this campaign include soft letters encouraging voluntary self-correction and stakeholder outreach.
- Costs that Facilitate an IRC Section 355 Transaction: Costs to facilitate a tax-free distribution pursuant to IRC Section 355, such as a corporate spin-off, are required to be capitalized and are not currently deductible. Some taxpayers are improperly deducting such costs in the year the distribution is completed. This campaign’s objective is to ensure that such costs are capitalized when required. The treatment streams for this campaign include issue-based examinations.
- Partial Disposition Election for Buildings: IRC Section 168 regulations provide rules for recognizing gain or loss on the disposition of Modified Accelerated Cost Recovery System (MACRS) property and allow taxpayers to elect to recognize gain or loss associated with the partial disposition of property. The goal of this campaign is to ensure taxpayers properly recognize gain or loss upon the partial disposition of structural components of a building. The treatment streams for this campaign include issue-based examinations and potential changes to the IRS forms and the supporting instructions and publications.
For more information see, IRS Announces Initial Rollout of Campaigns and IRS Announces Rollout of 11 LB&I Compliance Campaigns.
What does CohnReznick think?
The IRS compliance campaigns put taxpayers on notice that the IRS will be closely considering certain issues – including the issues described above. Any taxpayer with a tax return that presents one of the above issues should be particularly careful to ensure that the transaction or item is accounted for properly.
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