In 2017, the IRS’ Large Business and International Division (LB&I) rolled out a campaign program to identify specific tax issues that present compliance risks. This approach represents the IRS’ shift to issue-based examinations rather than focusing on entities, with a focus on those issues that have been determined to present a significant risk of noncompliance. LB&I currently has 54 active campaigns.
Here are a handful of active LB&I campaigns to keep in mind during 2022 year-end planning:
Partnership Losses in Excess of Partner’s Basis
Partnership Losses in Excess of Partner’s Basis is the only new campaign added to the LB&I active campaigns list in 2022. This campaign will focus on partners who don’t have adequate basis to deduct losses. In general, partners who report flow-through losses must have adequate outside basis, as determined under Internal Revenue Code Section 705, to be able to deduct the losses. Otherwise, the losses are suspended under §704(d) to the extent they exceed the partner’s basis in the partnership interest.
There also is an active campaign regarding sale of a partnership interest. In general, the sale of a partnership interest results in capital gain or loss. If the partner is an individual or trust and held the interest for more than one year, the long-term capital gain tax rate is usually 15 or 20%, depending on the partner’s income level. If the partnership depreciated real property or has appreciated collectibles at the time of the sale or exchange, higher capital gain rates may apply unless the transfer was in the form of a redemption. If the partnership has inventory items or unrealized receivables at the time of the sale or exchange, a portion of the gain or loss may be ordinary gain or loss.
This campaign will address taxpayers who do not report the sale or do not report the gain or loss correctly. Incorrect reporting may include the gain or loss amount or reporting the entire gain as long-term capital gain. Often, a portion of the gain is ordinary gain or taxed at the 25% or 28% long-term capital gain rates. A variety of treatment streams will address taxpayer noncompliance, including examinations. When appropriate, the IRS will issue soft letters. Additional treatment streams include practitioner and taxpayer outreach, tax software vendor outreach, and tax form and publication change suggestions.
In the coming years, the IRS intends to increase its enforcement efforts of partnerships and passthroughs. For example, at the end of 2021, the IRS issued interim guidance on its Large Partnership Compliance Pilot Program, which is being implemented under the LB&I division since partnerships with more than $10 million in assets fall under the LB&I’s jurisdiction. This program relies on data analytics for analysis of specific Subchapter K (partnership) issues and machine learning models to identify noncompliant tax returns.
Taxpayers with an interest in a partnership that could potentially be a subject of LB&I compliance campaigns or the Large Partnership Compliance Pilot program should contact a tax professional for risk analysis and further tax planning opportunities.
S Corporation Campaigns
Similarly, LB&I has found that S corp shareholders claim losses and deductions to which they are not entitled because they do not have sufficient stock or debt basis to absorb these items. LB&I has developed technical content for this campaign that will aid revenue agents as they examine the issue. The treatment streams for this campaign include issue-based examinations, soft letters encouraging voluntary self-correction, conducting stakeholder outreach, and creating a new form for shareholders to assist in properly computing their basis.
S corps and their shareholders also are required to properly report the tax consequences of distributions. The IRS has identified three issues that are part of this campaign:
- An S corp fails to report gain upon the distribution of appreciated property to a shareholder.
- An S corp fails to determine that a distribution, whether in cash or property, is properly taxable as a dividend.
- A shareholder fails to report nondividend distributions in excess of their stock basis that are subject to taxation.
The treatment streams for this campaign include issue-based examinations, tax form change suggestions, and stakeholder outreach.
Related-Party Transactions Campaign
This campaign focuses on transactions between commonly controlled entities that provide taxpayers a means to transfer funds from a corporation to related pass-through entities or shareholders. LB&I is allocating resources to this issue to determine the level of compliance in related-party transactions of midmarket taxpayers. Issue-based examinations are the treatment stream for this campaign.
Virtual Currency
U.S. persons are subject to tax on their worldwide income from all sources, including transactions involving virtual currency. The virtual currency campaign addresses noncompliance related to the use of virtual currency through multiple treatment streams, including outreach and examinations.
The IRS also has updated the virtual currency question on the 2022 Form 1040. The form now asks: “At any time during 2022, did you (a) receive (as a reward, award, or compensation); or (b) sell, exchange, gift, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?” Taxpayers should thus review their virtual currency transactions for 2022 for accurate reporting on their 2022 tax return.
The Infrastructure Investment and Jobs Act also imposes new cryptocurrency information reporting requirements. As a result, cryptocurrency is now subject to the same reporting requirements as stocks and bonds (Form 1099-B), and crypto transactions in excess of $10,000 must be reported on Form 8300. These new rules are effective for returns required to be filed after December 31, 2023 (in general, transactions beginning on or after January 1, 2023), so taxpayers who accept crypto payments should plan ahead to comply with these reporting requirements in 2023. Failure to comply can result in penalties, civil consequences, and felony charges.
Syndicated Conservation Easement Transactions
Under Notice 2017-10, specific syndicated conservation easement transactions are designated as “listed transactions,” requiring disclosure statements by both investors and material advisors. This LB&I campaign is intended to encourage taxpayer compliance, and ensure consistent treatment of similarly situated taxpayers, by ensuring that easement contributions meet the legal requirements for a deduction and the fair market values are accurate. The initial treatment stream is issue-based examinations.
The IRS Office of Chief Counsel has begun to settle certain cases involving abusive syndicated conservation easement transactions, which requires a concession of the tax benefits claimed by taxpayers and imposes penalties. The IRS continues to actively identify, audit, and litigate these transactions and recommends that participants seek the advice of competent, independent advisors in considering the potential resolution of their matter.
Conservation easement transactions also continue to be a focus for Congress. For example, a recently introduced bill in the Senate, the Enhancing American Retirement Now (EARN) Act, proposes to disallow charitable deduction for conservation contributions if the deduction is more than two and a half times the sum of each partner’s basis allocable to the property upon which the easement relates.
You can find more information about LB&I’s compliance campaign program—and a complete list of currently active campaigns—on the LB&I Compliance Campaigns website. For help determining how specific campaigns may affect you, reach out to a tax professional at FORVIS or submit the Contact Us form below.