IRS Targets S Corp. Distributions – Virtual Currency
IRS Targets S Corp. Distributions – Virtual Currency – In January of 2017, IRS announced a new audit strategy for its LB&I division known as “campaigns” essentially, shifting its strategy toward issue-based examinations based on compliance issues that LB&I determines present greater levels of compliance risk and thereby improving return selection. IRS initially selected 13 compliance issues when it rolled out this strategy.
In November, 2017 (see “IRS adds new issues to LB&I’s campaign audit strategy”); March, 2018 (see “IRS adds new issues to LB&I’s campaign audit strategy“); and May, 2018 (see “IRS again adds issues to LB&I’s campaign audit strategy”), IRS added to the initial January 2017 list.
S corporation distributions. S corporations and their shareholders are required to properly report the tax consequences of distributions. This campaign focuses on three issues:
(1) when an S corporation fails to report gain upon the distribution of appreciated property to a shareholder;
(2) when an S corporation fails to determine that a distribution (in either cash or property) is properly taxable as a dividend; and
(3) when a shareholder fails to report non-dividend distributions in excess of their stock basis that are subject to taxation.
This campaign includes issue-based examinations, tax form change suggestions, and stakeholder outreach.
Virtual currency. U.S. persons are subject to tax on worldwide income from all sources including transactions involving virtual currency. IRS Notice 2014-21, 2014-16 IRB 938, states that virtual currency is property for federal tax purposes and provides information on the U.S. federal tax implications of convertible virtual currency transactions.
This campaign addresses noncompliance related to the use of virtual currency through multiple approaches, including outreach and examinations.
The compliance activities will follow the general tax principles applicable to all transactions in property, as outlined in Notice 2014-21. IRS will continue to consider and solicit taxpayer and practitioner feedback in education efforts, future guidance, and development of Practice Units.
Taxpayers with unreported virtual currency transactions are urged to correct their returns as soon as practical. IRS is not contemplating a voluntary disclosure program specifically to address tax non-compliance involving virtual currency.