The Internal Revenue Service (“IRS”) Large Business and International (“LB&I”) division recently announced the roll-out of thirteen campaigns as part of the IRS’s examination process. A campaign is an issue-based compliance process that centers on focused examinations. These campaigns cover a range of topics, including positions on related party transactions and S Corporation losses claimed in excess of basis. Campaigns are a new approach to enforcement by the IRS that the IRS hopes will identify the most serious tax administration risks, create specific plans to move toward compliance, and effectively deploy IRS resources. A taxpayer can be the subject of multiple campaigns during an examination.
The IRS will issue “soft letters” to some taxpayers, in which the IRS identifies the campaign issue and indicates the taxpayer’s return appears to include this position. The letter will articulate the IRS’s legal position and ask whether the taxpayer agrees to change its position by amending the return. Soft letters will not be released publicly.
The IRS recently informed taxpayers that the receipt of a soft letter does not mean the IRS has opened an examination. Further, taxpayers are not required to respond to the letters. However, failure to respond could lead to an examination.
Taxpayers should be aware that this new approach means businesses and high-net-worth individuals dealing with any of the identified issues may face increased IRS audit risk. These taxpayers should work with their legal advisors to avoid or prepare for IRS challenges.
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