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March 21 — The IRS is cracking down in cases where taxpayers set up multiple, separate corporations to escape taxes on foreign base company income or insurance income, according to instructions to its agents.
Issued by the Internal Revenue Service's Large Business and International Division, the new audit guide comes as the agency is ramping up its efforts to find taxpayers trying to hide money in big corporate structures overseas.
The international practice unit—FEN/9433.01_11(2016)—spells out an anti-abuse rule examiners should apply when taxpayers organize, acquire or maintain multiple controlled foreign corporations with a “principal purpose” of avoiding tax on this income by qualifying for a de minimis test.
In these cases, before agents figure out whether taxpayers are eligible for the test, they should aggregate the income of two or more CFCs and treat it as the income of a single corporation, the IRS said.
The practice unit tells agents how to calculate whether taxpayers have to pay tax on foreign base company income (FBCI). Those payments would involve Subpart F “inclusions” of the income under tax code Section 954.
The money would have to be reported on a taxpayer's Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
In looking at foreign base company income, the IRS told agents they first have to determine the CFC's gross income items that make up FBCI, including:
Auditors should ask taxpayers for supporting documentation to verify whether the computation is accurate, the agency said.
Examiners must then adjust the aggregate amount of FBCI and insurance income by considering whether the de minimis test and rules for “full inclusion” of the income apply, the IRS said.
Under that de minimis test, if the sum of a CFC's gross foreign base company income and gross insurance income is less than $1 million or 5 percent of gross income, then none of the CFC's gross income for the tax year will be treated as taxable.
The IRS released the audit guide March 18.
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