The tax laws in the United States are complex and ever-changing. As the Internal Revenue Service (IRS) works to ensure that taxpayers are paying their fair share, the agency regularly announces compliance campaigns to address new issues that arise. Recently, the Large Business & International (LB&I) division of the IRS noted several areas it would be focusing on, and one notable compliance campaign involves taxes on foreign earnings under Code Section 965.

Transition Taxes on Repatriated Foreign Earnings

Section 965 of the Internal Revenue Code requires taxpayers who are shareholders in certain foreign corporations to pay a transition tax on foreign earnings when these earnings are repatriated to the United States. Depending on the profits and losses of the foreign corporations taxpayers hold shares in, they may be able to reduce the amount of these earnings that are included in their income. The transition tax rates are 15.5 percent for inclusions equal to the taxpayer’s aggregate foreign cash position and 8 percent for gross income above that amount.

Over the last few years, more and more people have begun to invest in virtual currencies such as Bitcoin, use them to pay for goods and services, and exchange them with others. However, even though the use of cryptocurrencies has increased, many people have not been properly reporting these virtual currencies on their taxes. In fact, out of the 132 million electronically filed tax returns in 2016, only 802 reported virtual currency income. This activity has not escaped the notice of the IRS, and the agency is looking to enforce tax laws on virtual currencies.

IRS Compliance for Cryptocurrencies

The IRS’s Large Business & International (LB&I) division recently identified virtual currencies as one of five new compliance campaigns it will be conducting. The LB&I division will begin using outreach to educate taxpayers about their requirements for reporting income from virtual currencies, as well as examinations (audits) of taxpayers who do not correctly report income.

The Large Business & International (LB&I) division of the IRS has announced several new compliance campaigns that signal where the IRS will allocate its audit resources. If you are a business owner concerned about the ramifications of a tax audit, it is advisable that you contact a qualified business tax attorney who can give you customized legal support. 

What is an IRS Compliance Campaign? 

The LB&I division of the IRS creates compliance campaigns in an effort to keep taxpayer examinations centered on issues. These campaigns, which are rolled out periodically, are meant to zero in on areas that present the greatest risk of non-compliance.

Tax fraud is common in the United States; however, this type of activity often goes unreported or undiscovered. Tax fraud not only affects the government’s ability to obtain funds used to provide essential services to citizens, but fraud can also take the form of tax scams that seriously harm many individuals. If you suspect that a person, business, or organization is committing tax fraud, you should understand the steps you can take to report this fraud to the IRS.

Reporting Tax Fraud

Depending on the type of fraud, there are different methods of reporting information to the IRS:

U.S. taxpayers who own assets held in foreign countries are required to report the assets to the Internal Revenue Service (IRS) and pay taxes on income from the assets. For taxpayers who have not met their reporting requirements, the IRS has provided a variety of methods for compliance, including the Offshore Voluntary Disclosure Program (OVDP). However, the IRS has announced that the OVDP will end September 28, 2018.

Offshore Tax Compliance Options

The current version of the OVDP, which was instituted in 2014, allows taxpayers with undisclosed foreign assets to become compliant with IRS requirements, thus minimizing the civil penalties they are required to pay and avoiding the possibility of criminal prosecution for tax evasion. This program is meant to allow those who have willfully failed to report foreign assets to achieve compliance and pay any taxes that are owed, as well as applicable penalties.