IRS Increases Enforcement Efforts on Large Businesses

The IRS continues to expand its enforcement activities, announcing a new compliance campaign to examine large businesses with issues arising out of the TCJA and CARES Act.

The IRS Large Business and International ("LB&I") Division has announced a campaign focused on compliance issues arising out of the Tax Cuts and Jobs Act ("TCJA"). The campaign—known as the "TCJA Campaign"—signals that LB&I is shifting both its focus and resources away from older years to start examinations and enforcement in years affected by the more recent tax law changes. According to LB&I Commissioner Douglas O'Donnell, campaign examinations will begin shortly after July 15, 2020.

Commissioner O'Donnell recently stated that under this campaign the IRS "will be looking at the entirety of a return, giving examiners the authority to look beyond any specific issue." LB&I examiners will work with IRS subject matter experts, and share information that they learn throughout the IRS to assist in future enforcement activity, including the recently announced global high-wealth audit program.

LB&I has already identified the Section 965 repatriation tax set out in the TCJA as a "compliance priority." The IRS will likely examine taxpayers' structures that were set up to avoid or reduce the 965 repatriation tax, including by shifting the categories of assets held abroad to obtain a more favorable tax rate.

While the IRS has yet to identify other areas of focus under the TCJA, enforcement efforts will likely address:

  • Multinationals that engaged in "GILTI-free" planning to take advantage of a "glitch" in the TCJA's effective date;
  • Qualification for and computation of the Section 199A qualified business income ("QBI") deduction; and
  • Taxpayers that took positions contrary to proposed Treasury regulations on the limitations on business interest deductions.

In describing the TCJA campaign, the IRS stated that "LB&I is also considering the impact of the Coronavirus Aid, Relief and Economic Security ("CARES") Act." The recently enacted CARES Act provided corporate taxpayers with temporary relief from the TCJA's limitations on net operating losses ("NOLs"). In connection with campaign examinations, it is likely the IRS will focus on the validity, business purpose, and substance of transactions that triggered NOLs. The IRS may also address issues relating to the claims for the retention credit under the CARES Act, which the IRS has s ought to define narrowly.

Commissioner O'Donnell's comments are the latest in a series of statements by the IRS of its intention to increase enforcement activity, which have included the announcement of programs to examine and make unannounced visits on high net worth individuals that have a history of not filing timely returns, and to increase criminal referrals. The TCJA Campaign is part of this increased enforcement effort. Taxpayers should prepare now to defend any positions taken on tax returns for taxable years 2018 through 2020, and be ready to take immediate steps if they receive an audit notice or a request for documentation or information.

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