Update January 2023 – Part II Of II
The Large Business and International (LB&I) Division of the IRS is responsible for tax administration activities for domestic and foreign businesses with U.S. reporting requirements and assets of at least $10 million, as well as the Global High Wealth and International Individual Compliance programs. LB&I addresses taxpayer noncompliance related to unreported income, undisclosed assets, and any other tax avoidance scheme. In this series, we discuss LB&I’s active compliance campaigns, focusing on individuals.
Individuals Employed by Foreign Governments and International Organizations
The IRS, together with the Department of State’s Office of Foreign Missions, will educate employees of foreign embassies, foreign consular offices, and international organizations of their tax obligations. Noncompliance is addressed through soft letters and examinations.
Individual Foreign Tax Credit: Form 1116
To claim a credit for foreign tax paid on foreign-source income, individuals file Form 1116 (“Foreign Tax Credit”) . See IRC § 901 . Computing the credit is complex and taxpayers risk claiming incorrect amounts. Noncompliance is addressed through methods including examinations.
Individual Foreign Tax Credit: Phase II
Qualifying individuals are allowed a dollar-for-dollar credit against U.S. tax on foreign-source income in the amount of foreign tax paid on that income. See IRC § 901 . This campaign targets taxpayers who wrongfully claimed the credit. Noncompliance is addressed through methods including examinations.
IRC 965: Treatment of Deferred Foreign Income Upon Transition to Participation Exemption System of Taxation
U.S. shareholders, including individuals, are required to pay a transition tax on the untaxed foreign earnings of specified foreign corporations, as if those earnings had been repatriated to the United States. Some may pay the section 965 transition tax in installments over an eight-year period while others must pay it with their 2017 tax returns. See IRC § 965 . Noncompliance is addressed through soft letters and examinations.
Loose Filed Forms 5471
Certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations must file Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations.” See I.R.C. §§ 6038, 6046. Form 5471 must be attached to an income tax return (or a partnership or exempt organization return) and filed by the return’s due date. If Form 5471 is required and was not attached to the original return, it should be filed with an amended return.
Nonresident Alien: Individual Tax Credits
This campaign targets nonresident alien (NRA) individuals who erroneously claim dependent-related tax credits. It also targets NRAs who claim education credits (available only to U.S. persons) by improperly filing Form 1040 tax returns. Noncompliance is addressed through methods including education and examinations.
Nonresident Alien: Income from U.S. Real Property
Rental income from property located in the United States is considered U.S.-source income. See I.R.C. § 861(4) . Nonresident alien (NRA) individuals who receive such income must comply with all U.S. tax reporting and filing requirements. This campaign addresses noncompliance through examinations and education.
Nonresident Alien: Schedule A and Other Deductions
Nonresident alien (NRA) individuals claim deductions on Form 1040NR Schedule A, “U.S. Nonresident Alien Income Tax Return – Itemized Deductions.” The goal of this campaign is to ensure that the rules governing deductions are followed. Noncompliance is addressed through methods including education and examinations.
Nonresident Alien: Tax Treaty Exemptions
Certain nonresident alien (NRA) individuals are exempt by treaty from tax on their U.S.-source income (both effectively connected income and Fixed, Determinable, Annual, Periodical income). This campaign targets NRAs who improperly claim treaty benefits. Noncompliance is addressed through methods including education and examinations.
Nonresident Alien: Form 1042-S Credit
This campaign ensures that withholding credits reported on Form 1042-S, “Foreign Person’s U.S. Source Income Subject to Withholding,” are verified before refunds are issued or credits are allowed. Noncompliance is addressed through methods including examinations.
Offshore Private Banking Campaign
Announced in 2019, this campaign targets the failure by U.S. taxpayers to report income and information associated with their offshore banking accounts. Initial methods included examinations and soft letters. This campaign also addresses noncompliance with the Foreign Account Tax Compliance Act (FATCA). See I.R.C. §§ 1471-1474. The IRS is already in possession of records that identify taxpayers with transactions and accounts at offshore private banks.
Offshore Service Providers
This campaign targets U.S. taxpayers who engaged offshore service providers to create foreign entities and tiered structures that conceal the beneficial ownership of foreign financial accounts and assets. The IRS is conducting issue-based examinations.
Post Offshore Voluntary Disclosure Program Compliance
Until 2018, the Offshore Voluntary Disclosure Program (OVDP) gave U.S. taxpayers with undisclosed income from offshore assets a way to resolve their tax liabilities, information reporting obligations, and FBAR requirements. Taxpayers who voluntarily reported their noncompliance were protected from criminal prosecution. A uniform civil penalty structure was applied. This campaign targets OVDP taxpayers who have not remained compliant with their foreign income and asset reporting requirements. Methods include soft letters and examinations.
Puerto Rico Act 22, Individual Investors Act
U.S. Territories: Refundable Credits
This campaign targets residents of U.S. territories who erroneously claimed refundable tax credits on Form 1040, “U.S. Individual Income Tax Return.” Noncompliance is addressed through methods including education and examinations.
U.S. Territories: Self-Employment Tax
Residents of U.S. territories with net self-employment income of $400 or more are subject to U.S. self-employment tax, even if they have no U.S. tax filing obligations. This campaign targets individuals who have failed to pay, or underpaid, the tax. These individuals should file or amend Form 1040-SS, “U.S. Self-Employment Tax Return,” or Form 1040 (PR), “Self-Employment Tax Return – Puerto Rico.” Continued noncompliance will be addressed through methods including examinations.
Swiss Bank Program Campaign
In 2013, the U.S. Department of Justice announced the Swiss Bank Program. The Program allowed Swiss financial institutions to resolve tax-related criminal liabilities in connection with undeclared U.S.-related accounts. To qualify for non-prosecution, the banks are required to provide information on accounts in which U.S. taxpayers have direct or indirect interests, as well as agree to close the accounts of those who fail to comply with U.S. reporting obligations. The Swiss Bank Program Campaign addresses noncompliance by U.S. taxpayers. Methods include examinations.
Virtual Currency Compliance Campaign
The Virtual Currency Compliance campaign addresses noncompliance related to the use of virtual currency. Methods include examinations. Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practical. The IRS has made it clear that a voluntary disclosure program for tax noncompliance involving virtual currency is not contemplated. Enforcement is likely to be swift. For U.S. tax purposes, virtual currency is property. See IRS Notice 2014-21 for the federal