The IRS constantly makes announcements to create awareness and put fear into the American taxpayer. The IRS has launched over 59 campaigns to date. 

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

Here is a general idea of each campaign and what it might mean for you and your taxes.

The New Six in View

The IRS is focusing its attention on offshore and on companies who settled to make a change from C-corporations to S-corporations. 

  • S-Corporation Built-In Gains Tax – When changing from a C-corporation to an S-corporation, a company may experience something called the Built-In Gains Tax. 
  • Post Offshore Voluntary Disclosure Program Compliance – After initiating the OVDP (offshore voluntary disclosure program), the IRS is putting people who haven’t conformed to foreign income and asset reporting requirements after it concluded FATCA and OVDI.
  • Expatriation – U.S. Citizens and long term residents who expatriated on or after June 17, 2008, may not have properly obeyed some of the filing requirements or tax duties.
  • High Income Non-Filer – If you didn’t receive a W-2, 1099, or the foreign equivalent, it does not exempt you from filing your taxes if you are a U.S. citizen or resident alien. 
  • U.S. Territories – Erroneous Refundable Credits – For those who claimed a refundable tax credit on their individual return and are residents of a U.S. territory, they may be in for a surprise.  
  • Section 457A (Deferred Compensation Attributable to Services Performed Before January 1, 2009) – This primarily applies to asset manager of funds established outside the U.S. 

Let’s take a clearer look at these.

S-Corporation Built-In Gains Tax

Some C-corporations changed their business structure to an S-corporation for reasons best known to them. Once the change is effected, the company can pass corporate income, losses, deductions, and credits to shareholders for federal tax purposes. It’s a way of staying clear from double-taxation. 

Unfortunately, the corporation is supposed to pay the tax assessed against any unrealized built-in gain from selling C-corporation assets in the period of the five years of conversion. The IRS does not like to miss out on any taxes. It also discovered that maybe a few converted corporations didn’t pay the tax and likely did not know of it. Now the IRS is sending out letters, conducting outreach, and conducting issue-based examinations. 

They have full right of this process as this activity is supported by recent court decisions

Post Offshore Voluntary Disclosure Program Compliance

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

That program was substituted 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 map out a deadline for taxpayer application for the program. 

In March 2018, they stopped the whole program. If you didn’t take advantage of the amnesty when you had the opportunity, you are a target. 

Expatriation

If you thought leaving the country could get you out of paying your taxes, sorry, it doesn’t work that way. Being an Expatriate sounds convincing, but U.S. citizens and permanent residents outside the U.S. are still regarded as being subject to U.S. tax on worldwide income. Even if you renounced your citizenship, the IRS still wants their cut anyway. 

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

  • Has an annual net income tax (not average income) for the five years ending before the date of expatriation or 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 verify on Form 8854 that he or she complied with all federal tax obligations for the five years preceding the date of expatriation or termination

Citizenship denial triggers tax consequences and effects for the past, present, and future. One consequence could be the denial of your U.S. passport due to important unpaid taxes as stated by IRC Section 7345. If you owe $52,000 or more in unpaid taxes, this will affect your chance of getting a passport.

Now, for the essence of clarity, 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 all sorted out 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 complex, so you should contact a tax expert if you find yourself in this position. Maybe a tax agreement in the country where you now live will help.

High Income Non-Filers

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

So, in summary, if you have an income, you are required to file your tax return. That is it. You will get the examination treatment to bring you into agreement.

U.S. Territories – Erroneous Refundable Credits

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

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 put off receiving performance and management fees. When Section 457A was enacted, however, this capacity to defer compensation earned after December 31. 2008 was restricted if it was for services performed for “non-qualified entities.”

Now, the IRS is observing every action. You may want a reassess the terms of any plan you vested and get a risk assessment before the agency comes knocking at your door.