The IRS recently announced an initiative to examine inbound distribution companies. These suggestions can help you prepare if your organization is selected for an audit.

The film Casablanca gave rise to several famous phrases. “Round up the usual suspects” was spoken by Claude Rain’s character at both the beginning and end of the movie and even became the title of another famous 1995 film. In the movie, and now in general usage, it refers to people habitually suspected of or arrested for a crime. Those “rounded up” are generally scapegoats rather than the actual perpetrators of the crime in question.

Earlier this year, the IRS Large Business and International Division announced 13 campaigns in their movement toward issue-based examinations. Among these campaigns is an initiative to examine inbound distribution companies, or shall we say, to round up the usual suspects.

Why inbound distributors?

The IRS has stated that the goals of its campaigns are to identify high risk areas in order to best use limited resources. Given the high U.S. corporate tax rate compared to the rest of the world, multinational corporations have a natural incentive to limit their taxable income in the United States. By keeping U.S. taxable income low, these corporations can keep money overseas and out of the U.S. economy. With this in mind, the IRS may view inbound companies as a low-hanging fruit to identify non-compliance and increase tax revenues.

Representatives from the IRS have noted that the program will differ from past programs, and it won’t simply target the largest companies. Even if a company has minimal intercompany activity, it may still be subject to scrutiny. The IRS has noted that taxpayers selected as a part of the campaign will be notified through normal audit procedures, and taxpayers are permitted to ask if they’ve been selected as a part of the campaign.

How can taxpayers prepare for a potential audit?

As with any potential audit risk, taxpayers should prepare to handle possible questions with proper documentation to support their positions. In this case, the IRS will most likely request an up-to-date and accurate transfer pricing study. The study should accurately address the intercompany transactions that are occurring in the ordinary course of business, particularly as they relate to U.S. activity.

If your business doesn’t have a transfer pricing document in place, consider reaching out to an international tax specialist to understand your potential exposure and how to correct it going forward.

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Treasury Secretary Steve Mnuchin’s review of some controversial tax regulations will be due just in time for taxpayers preparing for their 2017 returns.

Deus ex machina literally translates as “a god from a machine.” The term originates in ancient Greek theatre and refers to scenes in which a crane (machina) was used to lower actors or statues playing a god or gods (deus) onto the stage to set things right, often near the end of the play. For a modern cinematic example, think of the ending to “War of the Worlds” where the aliens suddenly die from exposure to Earth’s bacteria.

President Donald Trump and Treasury Secretary Steven Mnuchin may provide a deus ex machina finale for many of the tax regulations enacted under President Obama’s administration during 2016. At the end of April, the President ordered Secretary Mnuchin to review “all significant 2016 tax regulations to determine if they impose an undue financial burden on taxpayers, are needlessly complex, create unnecessary requirements, or exceed what’s allowed under law.”

You may recall that 2016 was an unusually prolific year for tax regulations. The Treasury department spent a large portion of the year tinkering with “anti-inversion” regulations to make it more difficult for American companies to relocate their headquarters overseas. Regulations were also issued under Section 385, regarding how to distinguish debt from equity for U.S. tax purposes, as well as regulations under Section 987, on how to translate foreign business operations from their local currency to the U.S. dollar.

These regulations were somewhat controversial. The anti-inversion regulations are incredibly complex. The Section 385 regulations raised eyebrows since they went far beyond rules to distinguish debt from equity and invalidated, for tax purposes, the use of debt in many common transactions. The Section 987 regulations impose a significantly more complex methodology on taxpayers than prior proposed versions and also wipe away all existing latent foreign currency losses, which are considerable given the current position of the U.S. dollar to other currencies, particularly the euro, pound, and Canadian dollar.

Steve Mnuchin’s report is due in 150 days, just in time for taxpayers preparing for their 2017 income tax returns. Perhaps it will provide another deus ex machina ending, like throwing a bucket of water on the Wicked Witch of the West.

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Form vs. substance plays out in tax court — with international tax implications

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One family puts a clever twist on an IC-DISC — but the IRS quickly disputed its creativity. Who will emerge triumphant? Conflict lies at the heart of every good story. How interesting would Moby Dick be without Captain Ahab? And Batman is just a goofball with a cool car absent the Joker. In the tax […]

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Predicting the shape of 2017 tax reform: Read the tea leaves or drink the tea?

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Amid uncertainty and a full congressional agenda, we’re running out of tools to predict changes in tax legislation. Today’s word of the day is “tasseography,” a fortune-telling method based on interpreting the patterns in tea leaves, coffee grounds, or – perhaps more fitting for those of us working to stay abreast of forthcoming tax legislation […]

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