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August 2018 brought two major developments in the Department of Treasury’s race to finalize its partnership audit reform regulations before partnerships begin in early 2019 filing tax returns for the first time under the new regime. First, on August 7, the Department of Treasury (“Treasury”) issued final regulations for partnership representatives. Second, on August 13, Treasury issued new proposed regulations implementing the centralized partnership audit regime, consolidating, amending, and releasing its prior regulations issued in 2017 and early 2018. Our prior coverage of these initial regulations can be found here and here. Both sets of regulations issued in August include certain substantive changes due to comments received by the IRS.

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On October 1, Charles Rettig began his term as 49th Commissioner of the IRS. This gives the IRS a Commissioner for the first time in approximately one year, since his predecessor John Koskinen, an Obama appointee, stepped down in fall 2017. David Kautter, the Treasury Department’s assistant secretary for tax policy, had been running the IRS in the interim.

Continue Reading Rettig Starts Four-Year Term as IRS Commissioner

In Veg Corp. v. U.S., No. 2:17-cv-02893 (D. Nev. July 30, 2018), the district court refused to analyze compliance with IRS document requests in a vacuum, and, instead, considered the parties’ understanding of the document requests. Continue Reading District Court Clarifies Rules Related to IRS Formal Document Requests for Documents Outside the U.S.

In this Ropes & Gray podcast, Gabby Hirz, counsel in the tax controversy group, is joined by Loretta Richard, a partner in the tax and benefits group and co-founder of the tax controversy group, and Christi Lazo, counsel in the private client group, to discuss another notable Tax Court decision, Lender Management LLC v. Commissioner of Internal Revenue. Lender Management considered whether a family office was operating a trade or business and could therefore deduct investment expenses as business expenses.

In November 2017, the IRS Large Business & International Division (“LB&I”) announced the expansion of its compliance campaigns, selecting eleven additional areas on which to focus. IRS LB&I now has 24 total campaigns ongoing, including the 13 campaigns originally announced in January 2017. The new slate of campaigns reflect the IRS’s continued focus on international enforcement. Some particularly notable campaigns include:

  • Swiss Bank Program Campaign. The IRS started the Swiss Bank Program in 2013 to allow financial institutions to disclose information on U.S. account holders in order to reduce, or avoid, their criminal liability for their role in facilitating the evasion of U.S. tax. Since the beginning of the program, approximately 80 banks have participated, and the IRS has amassed a trove of information on U.S. taxpayers. This campaign will seek to leverage the information received to identify taxpayers who have not been complying with obligations to report foreign accounts.
  • Verification of Form 1042-S Credit Claimed on Form 1040NR Campaign. This campaign will focus on verifying withholding credits or refunds claimed by U.S. nonresident taxpayers, to be sure that foreign income is being properly reported.
  • Section 956 Avoidance Campaign. The IRS LB&I wants to be sure that U.S. parent corporations are properly reporting as income loans from controlled foreign corporations. This campaign will also focus on taxpayers who may be pooling cash to avoid their 956 obligations.
  • Deferral of Cancellation of Indebtedness Income Campaign. Taxpayers who incurred COD income in 2009 and 2010 were allowed to report that income over five years, from 2014 through 2018. With the COD deferrals, original issue discount (“OID”) deductions were also meant to have been deferred. Now that the end of the five-year window is approaching, the IRS LB&ID will be assuring itself that COD income and OID deductions are being properly made.

These campaigns, on top of the 13 campaigns announced this time last year, evidence some of the IRS’s biggest priorities headed in 2018. Like the prior campaigns, these new campaigns will use a variety of tools, including issue-based examinations and soft letters. In addition to the four expansion areas examined above, the seven other campaigns focus on: (1) Form 1120-F Chapter 3 and Chapter 4 withholding, (2) foreign earned income or housing exclusion (Section 911), (3) agricultural chemicals security credits (Section 45O), (4) energy efficient commercial building deductions (Section 179D), (5) corporate direct foreign tax credits (Section 901), (6) economic development incentives, and (7) individual foreign tax credits (Form 1116).

 

 

John D. “Don” Fort, the new chief of the IRS Criminal Investigation division (“IRS-CI”), announced that two new programs will be fully operational in 2018: (1) the Nationally Coordinated Investigations Unit, and (2) the International Tax Enforcement Group. Fort also explained that the Criminal Investigation division is—and will be—increasingly focusing on the use of cryptocurrencies. Read more about those programs and the focus on cryptocurrencies below. Continue Reading IRS Criminal Investigation Division Announces New Programs Fully Operational in 2018

Gabby Hirz, a senior attorney in the Tax Controversy Group discusses one of the most notable decisions of third quarter 2017, Grecian Magnesite Mining v Commissioner of Internal Revenue, with Rom Watson, a partner in the Tax Group and co-head of the firm’s International practice group.  Grecian Magnesite Mining considered whether a foreign corporation’s proceeds arising from the redemption of an interest in a U.S.-based partnership were taxable in the U.S. as U.S.-source income or income effectively connected with a U.S. trade or business (ECI).  In doing so, the Tax Court called into question the validity a 30-year old revenue ruling.