IRS Audit Campaigns - Section 965 Transition Tax

The IRS Large Business and International division (LB&I) updated list of audit “campaigns” on July 2, 2018, which now includes the Section 965 Transition Tax.  These campaigns are part of the IRS’s strategy to focus limited resources on areas in which the IRS believes scrutiny is needed or present risk of noncompliance.  LB&I ’s compliance campaigns have been implemented in an effort to move toward issue-based examination, train its agents and implement process to improve return selection, identify issues representing a risk of non-compliance and drive taxpayers’ behavior.

Section 965 requires United States shareholders to pay a transition tax by due date of 2017 tax return on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States.  As this provision is considered to be the single most largest revenue generator for the government, IRS has issued many guidance related to the provision, including External Communication https://www.irs.gov/businesses/section-965-transition-tax, and added the provision to its audit campaigns.   In its external communication, it stated that “taxpayers must keep adequate records to support the calculation of tax pursuant to section 956.  The IRS plans to monitor compliance with the provision of section 965.  Follow-up inquires may occur if the IRS determines that the required filings and/or payments are not made.”

As we expect increased scrutiny related to section 965 compliance, as evidenced by launched audit campaigns and many guidance and communications issued, we advise that you retain adequate records to support the section 965 tax computation.

Link to July 2 IRS announcement:  https://www.irs.gov/businesses/irs-announces-the-identification-and-selection-of-five-large-business-and-international-compliance-campaigns