Thought Leadership on Business Ideas for Growth Companies and Growth Consultants presented by Cerini and Associates LLP.
On February 1, 2017 the IRS Large Business & International (LB&I) Division announced a new compliance campaign. This campaign is focusing more on an issue basis, focusing on areas the IRS has deemed to be the highest risk for potential non-compliance and abuse by taxpayers. Overall, 13 areas were chosen for this initial campaign, relating to a number of different tax areas. Among this list are new issues of focus, along with some “old favorites” of the LB&I Division. These areas include:
Micro-captive insurance transactions
Micro-Captive insurance refers to a situation wherein a taxpayer has set up a subsidiary or related party as an insurance company, paying tax deductible premiums to the company. However, under IRS guidelines, these insurance companies are able to exclude up to $1.2 million in premium income, effectively reducing group taxable income. These transactions were listed as a transaction of interest in 2016, as there have been multiple cases of abuse by taxpayers. The IRS will be looking to check if these transactions were negotiated and administered at arm’s length and if they follow sound business practices.
Related party transactions
One of the most common transactions for privately held businesses typically involve the loaning of funds between commonly controlled entities, along with payment of expenses on behalf of controlled entities and transactions between these entities. The IRS will be focusing on the “middle market” segment and looking at these transactions more closely to ensure they are legitimate and in compliance with IRS regulations.
S Corporation losses in excess of basis
Per IRS Code, S Corporation shareholders can only deduct losses for which they have basis. Basis, in basic terms, refers to how much “skin in the game” a taxpayer has, generally the economics they have at risk in their business. Basis for S Corporations has had new regulations and guidance issued in the last few years, including basis issues for personal guarantees on loans & related party loans. This campaign will consist of not only issue-based examinations, but letters encouraging voluntary corrections of past mistakes and a new form for computing basis.