The IRS has released their five audit targets, effective immediately. These are:
AMT credit carryforwards,
S Corporation distributions,
Virtual (crypto) currency,
Corporate reorganizations, and
This type of audit is considered a compliance campaign. First, the IRS identifies some kind of activity that is suspect. For example, they have recently received a list of people who transactions totally $20,000 or more in crypto from Coinbase. There are over 15,000 people on the list. And at the same time, only a little over 800 people filed their tax return, reporting a crypto taxable event.
That could be considered suspect.
The next step is usually what’s called a soft letter. The IRS tells you that they are aware that something may have happened that required filing a return and that you didn’t file a return. They tell you the law and perhaps ask for additional information.
If it happens again, or you don’t respond to the request for information, they may kick this up a notch and start a full blown audit.
The specifics on these five IRS targets follow:
- AMT Credit carryforward
Chances are this will not apply to you, unless you have a corporation that has carryforward AMT credits that are subject to sequestration rules. It’s obscure and technical. It’s also more likely to apply to large corporations who have deeper pockets.
- S Corporation Distribution
There are three areas that the IRS is watching as part of this new compliance campaign:
S Corporation distribution of appreciated property and fails to report the gain,
S Corporation fails to determine if distribution is taxable as a dividend, and
S Corporation shareholder fails to report distributions in excess of basis.
This is only the beginning for the IRS versus crypto tax battles. It’s likely that the Coinbase subpoena will disclose a lot of problems, and tax revenue. If that’s the case, the IRS will be expanding their scope.
- Repatriation of foreign money
This is a strategy that has been used by corporations as a way to bring foreign cash into the US, tax free. It’s through a “Killer B” reorganization where a subsidiary buys shares of a parent company so that the parent can make a tax-free acquisition of a target corporation.
- Transition tax
This is a new provision under the Trump Tax Plan and it’s complicated too. A US shareholder is now responsible for paying tax on untaxed foreign earnings of certain foreign corporations, even if the funds have not come back to the US.
What does this all mean for you? Tax returns and compliance are becoming more complex, especially if you have foreign transactions. Use an experienced CPA and/or tax attorney to help keep you on the right side of the law.