IRS focus on international tax issues

Shulman Says IRS Focus Includes International Tax Abuses and Taxpayers' Economic Struggles


The IRS has made international tax abuses a major focus, IRS Commissioner Douglas H. Shulman stated on February 25. At the same time, the IRS is trying to help compliant taxpayers deal with the fallout from current economic struggles. Shulman spoke at the Tax Council Policy Institute Symposium on resolving cross-border tax controversies.



There has been a tremendous increase in global activity, not only for large business but for small corporations and individuals, Shulman declared. The number of multinational corporations has increased from 3,000 in 1990 to over 65,000; foreign tax credit claims have jumped 70 percent and cross-border capital flows increased to $8.2 trillion.


International Issues


Shulman has made international issues a major IRS focus. The average citizen must believe that corporations are playing by the rules; there is "little tolerance" for tax avoidance, Shulman said. The IRS has an aggressive agenda in the international area, including increased guidance, challenging taxpayers who "push the envelope," and understanding complexity, which creates a greater potential for tax evasion. IRS initiatives include offshore tax avoidance, the qualified intermediary (QI) program, global securities dealing, hybrid structures and expanding international collaboration through the Joint International Tax Shelter Information Centre (JITSIC).



The IRS is engaged in a multi-year effort to develop experts on international issues through increased hiring, training and retention. During the current budget freeze, Shulman moved funds from other areas to maintain this effort.



The Service is focusing on offshore institutions that facilitate offshore tax avoidance and will continue to pressure taxpayers on this issue. Presumably, this focus includes recent activities, such as Swiss banks, offshore bank accounts and John Doe summons enforcement efforts. Shulman again stressed the IRS's voluntary disclosure programs for settling potential liabilities. He noted that offshore tax abuse is also a focus of President Obama.



The IRS is examining and evaluating the QI program, a 10-year-old program that he described as an opt-in system for taxpayer withholding on foreign income. Shulman said it is a good program that has seen some high-profile lapses; again, an apparent reference to Swiss banks and UBS AG in particular. He noted that proposed amendments to the QI program would require accounting firms to oversee QIs and to report to the IRS any internal control failures. The IRS continues to be interested in comments in this area. Other possible changes include enhanced information reporting and enhanced documentation retention policies.



Shulman said that the IRS would like to see an enhanced statute of limitations of at least six years for offshore cases. This would be particularly helpful for cases involving bank secrecy jurisdictions, he commented.



For larger corporate taxpayers, a concern is transfer pricing and other income shifting to low- or no-tax areas. Shulman noted that there is proposed guidance dealing with contract manufacturing and efforts to avoid subpart F income. Global securities dealing is another area of concern, again involving potential income-shifting to low-tax jurisdictions.



The IRS is also looking at hybrid structures, both entities and instruments, which taxpayers may use to exclude income or to take a double deduction. Foreign tax credit generator transactions may also be used improperly to generate a deduction for two taxpayers based on the same payment. The IRS has a docketed case on this latter issue, he indicated.


Taxpayers in Distress


Taxpayers are struggling, so the IRS needs to be attuned and to respond in real time to economic problems, Shulman pointed out. With corporations in a loss situation, the IRS needed to look at the processing of net operating losses, particularly corporate refunds on IRS Form 1139. So the IRS increased staff in that area and reexamined its procedures. The IRS is also focusing on the tax implications of bankruptcies and business workouts.



On the individual front, the IRS has new initiatives to help keep compliant taxpayers in the system during a rough patch when their income has dropped and they may have lost their job. "We want to do the right thing with people in economic distress," Shulman said. One step is to give more discretion to IRS collection staff addressing distressed taxpayer situations. Another step is to beef up the real estate valuation section and to step up reviews of offers-in-compromise that are initially rejected.



The IRS is taking the lead on administering a number of programs under the new economic stimulus act, Shulman noted, including the Making Work Pay Credit, the NOLs for small businesses, expanded COBRA benefits, and numerous business benefits, such as energy deductions and credits. Shulman said the IRS estimates it will issue $330 billion in refunds in 2009.

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The above statement was released today. I am personally aware of the IRS focus on offshore or international tax issues. Those transactions are "red flag" audit issues.

My advice for tax return preparers is to put a lot of time into those tax return issues. Assume that those transactions will be examined. I also recommend disclosure of these red flag issues to take advantage of the "reasonable basis" standard. Curiously, without disclosure I believe any error on this high visibility issue would make a return preparer vulnerable to the "reckless" $5,000 penalty under 6694(b).

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