It seems as though the IRS doesn’t let a day go by without making announcements sure to put fear into the American taxpayer. Including the ones in this post, the IRS has launched 59 campaigns to date. 

Recently, the agency announced a slate of six compliance “campaigns” from its Large Business and International (LB&I) Division, which makes it sound like they are hitting just enterprises and offshore companies. However, a couple of these campaigns also impact individual taxpayers when they may not be expecting it. Some of these announcements impact American taxpayers who aren’t even living in the United States. 

Here is an overview of each new campaign and what it might mean for you and your taxes.

The New Six in Brief

The IRS is concentrating its attention both offshore and on companies who decided to change from C-corporations to S-corporations. 

• S-Corporation Built-In Gains Tax - When switching from a C-corporation to an S-corporation, a company may be subject to something called the Built-In Gains Tax. 
• Post Offshore Voluntary Disclosure Program Compliance - after launching the OVDP (offshore voluntary disclosure program), the IRS is putting people who haven’t complied with foreign income and asset reporting requirements after it ended FATCA and OVDI.
• Expatriation - If you are a U.S. Citizen and long term resident who expatriated on or after June 17, 2008, you may not have properly complied with some of the filing requirements or tax obligations.
• High Income Non-Filer - Just because you didn’t receive a W-2, 1099, or the foreign equivalent does not excuse you from filing your taxes if you are a U.S. citizen or resident alien. 
• U.S. Territories - Erroneous Refundable Credits - If you claimed a refundable tax credit on your individual return and you are a resident of a U.S. territory, you may be in for a surprise.
• Section 457A - Deferred Compensation Attributable to Services Performed Before January 1, 2009 - Kind of a mouthful for a campaign name, but it primarily applies to asset manager of funds established outside the U.S.
• Let’s take a closer look at these.

S-Corporation Built-In Gains Tax

For whatever reason, some C-corporations switched their business structure to an S-corporation. Once the change is made, the company can pass corporate income, losses, deductions, and credits to shareholders for federal tax purposes. It’s a way of avoiding double-taxation. 

Unfortunately, the corporation is supposed to pay the tax assessed against any unrealized built-in gain from selling C-corporation assets within five years of conversion. The IRS hates to miss out on any taxes, and it found out that maybe a few converted corporations didn’t pay the tax and possibly weren’t aware of it. Now the IRS is sending letters, conducting outreach, and conducting issue-based examinations. 

This activity is supported by recent court decisions, so, yeah…they have the right.

Post Offshore Voluntary Disclosure Program Compliance

In 2009, the IRS offered the Offshore Voluntary Disclosure Program (OVDP) hoping more taxpayers would comply with the foreign asset reporting requirements. In other words, it was a tax amnesty program. You could come forward with your unreported foreign accounts and not get charged as a criminal. 

That program was replaced in 2011 by FATCA - Foreign Account Tax Compliance Act, also known as OVDI. Three years later, the program was changed again  and the IRS didn’t set a deadline for taxpayer application for the program. 

In March 2018, they shut down the whole program. If you didn’t take advantage of the amnesty when you had the chance, you are a target. At the moment, you get 50 lashes with a wet noodle consisting of a soft letter and examination.

Expatriation

If you thought you could get out of paying your taxes by moving out of the county, sorry, Charlie. It doesn’t work that way. Being an Expat sounds romantic, but U.S. citizens and permanent residents outside the U.S. are still considered to be subject to U.S. tax on worldwide income. Even if you renounced citizenship, the IRS still wants their cut. 

If you qualify as a “covered expatriate,” your costs may be bigger than you realize. A covered expatriate:

• Has an annual net income tax (not average income) for the five years ending before the date of expatriation/termination of residency that is more than an amount adjusted for inflation. For 2019, that would be $168,000.
• Has a net worth of $2 million or more on the date of expatriation or termination.
• Fails to certify on Form 8854 the he or she complied with all federal tax obligations for the five years preceding the date of expatriation or termination.

Citizenship renunciations trigger tax consequences for the past, present, and future. One consequence could be the denial of your U.S. passport due to significant unpaid taxes as stated by IRC Section 7345. If you owe $52,000 or more in unpaid taxes, your passport is history.

Now, to be clear, the entire announcement for this campaign states:

“U.S. citizens and long-term residents (lawful permanent residents in eight out of the last 15 taxable years) who expatriated on or after June 17, 2009, may not have met their filing requirements or tax obligations.”

It then goes on to say that it will be taken care of through outreach, soft letters, and examination. However, the IRS does not relinquish the ability to get tough if it has to.

This one gets pretty tangled, so you should contact a tax expert if you find yourself in this position. Maybe a tax treaty in the country where you now live will help.

High Income Non-Filers

All U.S. citizens and resident aliens must report worldwide income and pay the IRS its share. Just because you didn’t receive a W-2, 1099, or other income reporting form doesn’t absolve you of filing your taxes with the federal government.

So, bottom line is…if you have income, you are required to file your tax return. End of story. You will get the examination treatment to bring you into compliance.

U.S. Territories - Erroneous Refundable Credits

A refundable credit means you can claim it even if you don’t owe taxes. You don’t lose the credit, it is refunded to you. Unfortunately, people living in a U.S. territory instead of in the United States aren’t supposed to qualify. 

From Puerto Rico to the Palmyra Atoll, no claiming refundable U.S. tax credits, even though you are a U.S. citizen.

Section 457A - Deferred Compensation Attributable to Services Performed Before January 1, 2009

Before January 1, 2009, asset managers who performed services for funds established outside the country could defer receiving performance and management fees. When Section 457A was enacted, however, this ability to defer compensation earned after December 31. 2008  was limited if it was for services performed for “non-qualified entities.”

Now, the IRS is taking a closer look. You may want a review of the terms of any plan you vested and get a risk assessment before the agency comes knocking.

There you have it. Six additional ways the IRS wants to check on tax payments. If you have any questions, call Top Tax Defenders. We are happy to help.