The IRS Large Business and International (LB&I) Division recently added four new compliance campaigns to its active list, two of which could impact international taxpayers.
1. Allocation of Success-Based Fees. Success-based fees paid in transactions under certain regulations are presumed facilitative and must be capitalized. Generally, these are amounts contingent on the closing of a merger or acquisition, such as fees paid to an investment banker. These fees may instead be allocated to nonfacilitative activities and currently deducted, if the taxpayer meets certain documentation requirements.
A safe harbor election exists for allocating success-based fees paid in covered transactions without meeting the above documentation requirements so long as 70% of these fees are allocated as nonfacilitative (deductible currently) and 30% are allocated as facilitative (capitalized). The goal of this LB&I campaign is to ensure taxpayer compliance with current law.
2. FIRPTA Reporting Compliance for NRAs. The Foreign Investment in Real Property Tax Act (FIRPTA) taxes nonresident aliens (NRAs) on the disposition of their U.S. real property interests. Generally, the buyer/transferee is the withholding agent and is required to withhold 15% of the amount realized on the sale, file the required forms and remit any taxes owed to the IRS.
There are forms that can be filed to reduce the amount of withholding to cover the actual liability on the net gain rather than having 15% withholding on the gross proceeds. However, addressing the issue should be started before the close of the transaction to avoid having to wait and file for a refund (which can not be filed until the following year).
This LB&I campaign is intended to increase FIRPTA voluntary compliance through issue-based examinations and external education and outreach. The IRS notes that an issue-based approach should be used when performing risk analysis to identify issues that are material or have significant compliance risk.
Moore Doeren Mayhew has addressed both of these issues with clients and is available to discuss how you can avoid issues with the IRS under their new compliance campaign. Contact your MDM advisor or click here to learn more about these issues.