In a recent Tax Notes article by Andrew Velarde entitled "Individuals Now a Target for LB&I Transition Tax Campaign,” Robert M. Russell discussed the IRS announcement that the Section 965 transition tax will now become an area of enforcement as applied to non-corporate taxpayers.
Excerpts from the article are below:
“If you just look at the dollars paid in [section] 965 tax . . . the large percentage was only paid by a few big multinational corporations. . . . To first look there was to say, ‘How can we cover the most ground?’” said Robert Russell of Kostelanetz & Fink LLP. “But of course, IRS enforcement isn’t just looking at the biggest dollars. They have to cover a broader swath of taxpayers.”
Russell said he wouldn't be surprised if the IRS examines data from taxpayers’ previously filed Form 5471s, reporting income from controlled foreign corporations, to see if they reported any section 965 tax in 2017 or 2018.
“The impact is different when you’re looking at the calculation [for noncorporate taxpayers]. . . Having something focused on these types of taxpayers seems to be worthwhile, in terms of [having] a different approach than the large taxpayers they have already been looking at,” Russell said.
Russell argued that the Tax Cuts and Jobs Act was “very unkind” to noncorporate taxpayers operating internationally, including in relation to section 965. He pointed to its guidance on section 962 as an example of where the IRS tried to provide taxpayer relief to individuals.
“If you’re auditing large corporate taxpayers, you don’t even have to open the code to [section] 962. It just doesn’t apply. This is an area where no one did much work in before,” Russell said.
Noting that every exam is unique, Russell pointed to a key difference between some individual taxpayers calculating their section 965 tax and large multinationals: the adequacy of post-1986 earnings and profits records.
“Sometimes everything is tied down, and sometimes people had to go in and do the best they could trying to get historical records. While, of course, yes, they were required to keep that in the past, it didn’t really have an impact on U.S. tax due in past years,” Russell said. “[With] big corporations with tax departments . . . you expect the historical records to be in better shape than with individual clients, working on this, nailing down the E&P amounts for 30 years. It’s just going to be something the IRS is going to have to work with taxpayers on.”
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