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IRS Targeting Foreign Corporations Which Do Not File!

On February 7, 2017 we posted IRS Has 13 New Compliance Campaigns for LB&I Taxpayers where we discussed that Tax practitioners will face new questions from examination teams as the IRS selects compliance risks based on data, in the Large Business and International Division's (LB&I) move from individual audits of multinationals to broader considerations involving risk assessment and that LB&I released on February 1, 2017 their series of 13 new campaigns aimed at cracking down on tax evasion; including #12 which covers Form 1120-F Non-Filer Campaign.

Foreign companies doing business in the U.S. are often required to file Form 1120-F (U.S. Income Tax Return of a Foreign Corporation).

  • LB&I has data suggesting that many of these companies are not meeting their filing obligations.
  • In this campaign, LB&I will use various external data sources to identify these foreign companies and encourage them to file their required returns.
  • The approach for this campaign will involve soft letter outreach.
  • If the companies do not take appropriate action, LB&I will conduct examinations to determine the correct tax liability.

The goal is to increase voluntary compliance by foreign corporations with a U.S. business nexus.

This will especially affect Canadian and Mexican corporations that receive payments from U.S. sources but do not file a U.S. tax return. Foreign corporations, including Canadian and Mexican corporations, are generally required to file a U.S. tax return if they have a "trade or business" in the United States. Although "trade or business" is not explicitly defined, it may apply to a corporation with a low level of activity. Therefore, Canadian and Mexican companies with U.S. customers that attend U.S. meetings or trade shows or with any U.S. connection could likely be considered to be have a U.S. trade or business.

Many Canadian & Mexican corporations, which take advantage of NAFTA and as a result have a U.S. trade or business are not actually subject to U.S. tax, as they do not have a permanent establishment. The Canada-U.S. as well as the Mexican–U.S. treaties usually limits the United States' right to tax the profits from a Canadian or Mexican company's U.S. trade or business to the profits generated from a U.S. permanent establishment of the  company. However, these corporations are still required to file U.S. form 1120-F "U.S. Income Tax Return of a Foreign Corporation" to assert the treaty claim and failure to file can result in penalties.

The IRS can impose a $10,000 per year penalty for failing to disclose a treaty-based position on a timely filed return.

Therefore, a Canadian or Mexican company with U.S.-based sales could be assessed a $10,000 penalty for each year that it was doing business in the United States and did not file a return.

Since no returns were filed, the IRS can assess penalties for all open tax years in which the Canadian company had U.S. sales, which could result in a significant penalty.

Have US Sales, But No PE?  

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Read more at: Tax Times blog

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