- 4.1.9 International Features
- 22.214.171.124 Overview-International Returns
- 126.96.36.199 Identification of Returns
- 188.8.131.52.1 Project Codes
- 184.108.40.206 Corporation, FSC, IC-DISC, Individual, Partnership, Fiduciary Returns
- 220.127.116.11 International Related Forms
- 18.104.22.168.1 Form 3520 Internal Processing
- 22.214.171.124.2 Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation
- 126.96.36.199 Foreign Information Documents
- 188.8.131.52 Form 5074, Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands
- 184.108.40.206 Large Business and International (LB&I)-Special Instructions for International Returns
Part 4. Examining Process
Chapter 1. Planning and Special Programs
Section 9. International Features
June 18, 2014
(1) This transmits revised IRM 4.1.9, Planning and Special Programs, International Features.
(1) Minor editorial changes were made throughout this IRM. Form and IRM references were reviewed and updated as necessary.
(2) Throughout this IRM, Large and Mid-Size Business (LMSB) references was changed to Large Business and International (LB&I) to reflect the name change. Also the IRM was updated to reflect SB/SE International moving to LB&I International Individual Compliance (IIC).
(3) Replaced "Midwest Automated Compliance System (MACS)" with "Compliance Data Environment (CDE)." Replaced "Centralized Files and Scheduling Unit (CFSU)" with "Centralized Files and Scheduling (CF&S)" throughout this IRM.
(4) Other significant changes are as follows:
|IRM 220.127.116.11||Clarified who works returns with Form 2555, Foreign Earned Income, attached.|
|IRM 18.104.22.168 (6)||Changed Philadelphia Campus to Ogden Campus.|
|IRM 22.214.171.124.1 (1)||Changed Philadelphia Campus to Ogden Campus.|
|IRM 126.96.36.199.1 (6)||Changed Philadelphia Campus to Cincinnati Campus and SB/SE International to SB/SE Estate and Gift.|
|IRM 188.8.131.52.2||Updated instructions for classifying Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation.|
|IRM 184.108.40.206||Changed Philadelphia Campus to Ogden Campus.|
|IRM 220.127.116.11.1.1||Deleted this section because this information is currently in IRM Exhibit 4.61.2-1 (7)(c) Obtaining Information, Books, and Records of U.S. and Foreign Entities|
|IRM 18.104.22.168.1.2||Deleted this section because this information is currently in IRM 22.214.171.124.21, Foreign Information Return Program (FIRP)|
|IRM 126.96.36.199||Changed Philadelphia Campus to Austin Campus. Added table to calculate tax due.|
|IRM 188.8.131.52.4||Changed Philadelphia Campus to Austin Campus.|
Director, Examination Planning & Delivery
This chapter discusses features unique to returns with international issues.
The Chief, Classification Section is responsible for ensuring all returns with international characteristics are classified at the campus before sending them to the areas.
All returns with international characteristics will be classified by international examiners.
The jurisdiction for the field examination of entities filing Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, is Large Business and International (LB&I) Operating Division. Entities with assets > $10 million are the jurisdiction of LB&I, International Individual Compliance (IIC).
Form 1040-NR, U.S. Nonresident Alien Income Tax Return, Form 1040-PR, Self-Employment Tax Return - Puerto Rico (In Spanish),
Residents of Puerto Rico who wish to file a return in Spanish may file Form 1040-PR in place of Form 1040-SS.
Form 1040-SS, U.S. Self-Employment Tax Return (Including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico), and Form 1040, U.S. Individual Income Tax Return, returns with Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, attached are under the jurisdiction of LB&I International Individual Compliance (IIC).
Foreign Sales Corporation (FSC).
A FSC is a taxable foreign corporation that files Form 1120-FSC, U.S. Income Tax Return of a Foreign Sales Corporation at the Ogden Campus.
The FSC Repeal and Extraterritorial Income Exclusion Act of 2000 repealed the FSC provisions of IRC 921 through IRC 927 effective October 1, 2000. The Act also provides qualifying taxpayers with an Extraterritorial Income Exclusion, which is figured on Form 8873, Extraterritorial Income Exclusion, and provides transition rules for existing FSCs.
No corporation may elect to be a FSC after September 30, 2000. In general, a FSC that was in existence on September 30, 2000 and at all times thereafter will continue to use the FSC rules for qualifying transactions occurring in the ordinary course of business before January 1, 2002. These FSCs will continue to use the FSC rules after December 31, 2001 for transactions pursuant to a binding contract between a FSC and a person, if that binding contract was in effect on September 30, 2000 and has remained in effect.
Taxpayers may elect to apply the extraterritorial income exclusion rules instead of the FSC rules for transactions occurring during the transition period.
The Ogden Campus will transfer Form 1120-FSC returns to the appropriate campus for screening and/or classification by an international classifier.
A small domestic international sales corporation DISC may still exist as an interest charge-domestic international sales corporation (IC-DISC). Generally, this domestic corporation will be non-taxable and file Form 1120-IC DISC, Interest Charge Domestic International Sales-Corporation Return.
Individuals responsible for the classification of returns will do the following:
Identify returns they select for possible examination or those they will associate with returns already under examination as "International."
Ensure the Form 3210, Document Transmittal, sent to the area Planning and Special Programs (PSP) Territory Manager states the returns were selected for "International," and includes special instructions for returns that should be associated with the related return of another area or a return that is part of a national or area coordinated examination.
Assign the applicable project code from the list below to returns selected before sending them to the area.
With the exceptions stated in (3) below, there are no mandatory requirements for selecting corporate, IC-DISC, FSC, individual, partnership, and fiduciary returns showing foreign business transactions or interest in a foreign bank, securities, and other financial accounts.
When screening returns, classifiers will consider the objectives of the International Enforcement Program and carefully scrutinize returns showing foreign business transactions and foreign financial accounts. When foreign business activity appears to be substantial or fraud is suspected, they should select the return for examination.
Instructions for selecting returns identified during classification as reporting Subpart F income (IRC 951 thru IRC 964,) appear in IRM 184.108.40.206.2, Subpart F income in IRC 952 defined.
Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, is filed at the Ogden Campus. A copy is forwarded to the Classification Section at the campus where the related tax return will be filed.
During July of each year, the income tax return which relates to the prior year Form 3520 will be secured.
When a Form 3520 is received in a campus, it is associated with a copy of the related return, prior to classification by an international examiner. A copy of Form 3520 will remain with the related return(s). Related return(s) to associate is as follows:
Person filing the return, identified by the TIN (of the filer) on Form 3520, line 1b
Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, identified by TIN on Form 3520, Line 1b
Form 706, U.S. Estate Tax Return, if check box describing U.S. person filing return is identified as "Executor"
The potential liability for a gift tax, generation skipping transfer tax, or income tax should be considered when classifying the returns. Additionally, consider the penalty for failure to timely file the Form 3520 under IRC 6677. Figure 4.1.9-1, See Form 3520 for more information.
IfForm 3520 Then Line 10 is YES (the transfer is a completed gift or bequest) Form 706 and/or Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, should be filed and associated. Line 12 is NO (filer is not treated as owner of the assets) Consider this as an exam issue. Line 13 is NO (not treated as an exempt transfer) Associate Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, with the Form 3520.
Check the Currency and Banking Retrieval System (CBRS) for the following documents and if filed, associate with the related returns.
TD F 90–22.1, Foreign Bank and Financial Accounts (FBAR)
Cash Transaction Report (CTR)
Suspicious Activity Report (SAR)
A foreign trust without a U.S. owner which has effectively connected U.S. source income is filed currently on Form 1040-NR. This Form is filed at the Cincinnati Campus and is processed on the Automated Non-Master File System (ANMF). Foreign trusts filing Form 1040-NR fall under the jurisdiction of SB/SE Estate and Gift.
Taxpayers must file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation with their U.S. transferor’s annual tax return for the tax year that includes the date of transfer.
Returns are sent to the Philadelphia Classification Department where they will be classified by an international examiner.
Loose Forms 926 are to be forwarded to the Philadelphia Examination Centralized Files and Scheduling (CF&S). The transferors' return and Form 926 are associated prior to classification by an international examiner.
Claims filed with a Form 926 are classified by an international examiner.
When classifying Form 926, the international examiner may generally accept as filed the following types of transfers:
Form 926 with a transferee that is an exempt organization (Treas. Reg. 1492–1(a)(1)). A copy of the Commissioner’s determination letter must be attached.
Transfer plans approved by the Commissioner (Treas. Reg. 1492–1(a)(2)). A copy of the Commissioner’s approval letter must be attached.
Returns selected for examination will be forwarded to the appropriate area office. Area offices should follow normal assignment, survey, and examination procedures.
Income tax treaties generally provide for the exchange of routine information relating to payments made to residents of the contracting countries (foreign information documents). These documents reflect payments of dividends, interest, royalties, commissions, tax refunds, etc. LB&I l receives and processes the documents. For more information go to http://lmsb.irs.gov/international/dir_treaty/eoi_overseas/index.asp, Exchange of Information Program Office.
Foreign information documents showing individual taxpayers, Individual Master File (IMF), as recipients are subject to processing under the Information Returns Program (IRP).
Forms 1040 requiring a Form 5074, Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands (CNMI) are filed at the Austin Campus.
These returns are processed, coded, and delivered to Austin Campus as prompt examination returns.
Austin Campus takes the following actions:
Completes the following (previously on page 2 of Form 5074):
1. Income tax reported on Form 1040. Include any recapture of education credits. $XXXX 2. Alternative minimum tax $XXXX 3. Add lines 1 and 2 $XXXX 4. Foreign tax credit $XXXX 5. Credit for child and dependent care expenses $XXXX 6. Credit for the elderly or disabled $XXXX 7. Education credits $XXXX 8. Retirements savings contributions credit $XXXX 9. Child tax credit $XXXX 10. Adoption credit $XXXX 11. Credits from Form 8396, Mortgage Interest Credit and Form 8859, District of Columbia First-Time Homebuyer Credit $XXXX 12. Other credits $XXXX 13. Add lines 4 through 12 $XXXX 14. Subtract line 13 from line 3. If the result is zero or less, enter -0- $XXXX 15. Additional tax on IRAs, other qualified retirement plans, etc. $XXXX 16. Other Chapter 1 taxes. Include any tax from Form 4970, Tax on Accumulation Distribution of Trusts. $XXXX 17. Taxes to be allocated. Add lines 14 through 16. $XXXX Guam CNMI 18. Divide the amount on page 1, line 29 of the Form 5074 by the adjusted gross income (AGI) reported on Form 1040. Enter the result as a decimal (rounded to at least three places.) X.XXX X.XXX 19. Tax allocated to Guam or the CNMI. Multiply line 17 by line 18 $XXXX $XXXX 20. Enter the amount from page 1, line 34 of Form 5074 $XXXX $XXXX 21. Tax due. Subtract line 20 from line 19 $XXXX $XXXX
Forwards a copy of Form 5074 and the calculation in (a) above to the Austin Campus Accounting Branch.
Classifies the return.
Procedures, instructions, and information for the identification and selection of returns are applicable to LB&I returns except as provided in the following subsections.
The mathematical discriminant function (DIF) formulas for individual returns are not generally applicable to international returns identified for LB&I.
No minimum cutoff scores are applicable to LB&I individual DIF returns. All individual returns except "specials" are maintained on the DIF computer inventory file.
Returns with Army Post Office/Fleet Post Office (APO/FPO) addresses are DIF scored and can be selected under the DIF System. Military personnel stationed overseas or on ships generally file these returns. They fall under the jurisdiction of LB&I. Taxpayers should file all APO/FPO returns at the Austin Campus.
The same audit codes used for all individual returns apply when identifying individual returns as "special" returns. Many codes will not apply to Form 1040-NR, Form 1040-PR, and Form 1040-SS since the criteria for identifying these special features will not be present on these returns.
Computer reports for individual returns (1040–1, 1040–2, etc.) and corporate returns (1120–1, 1120–2, etc.) are generated for LB&I.
Computer report 1040–2 contains the number of returns filed which have a Form 2555, Foreign Earned Income or Form 2555-EZ, Foreign Earned Income Exclusion attached.
The individual returns Post-of-Duty (POD) Report 1040–1 is generated for LB&I IIC using post-of-duty assigned by country or countries.
Separate PODs are used for APO/FPO returns.
All Form 1040-NR are assigned to LB&I IIC and POD 993.
Various PODs within LB&I IIC will be assigned Form 1040-PR and Form 1040-SS
POD 998 will be assigned to LB&I IIC returns which are not covered by a valid POD code.
Submit all orders for returns to the Austin Campus.
Form 1040-NR, Form 1040-PR, or Form 1040-SS may be deleted from LB&I IIC return orders by excluding the applicable POD(s) to which these returns are assigned from the individual return order.
Form 1040-NR, Form 1040-PR, or Form 1040-SS may be separately ordered for LB&I IIC by placing a POD supplemental order for individual returns.
Form 1040-NR are delivered only when the indicator code is either blank or a "J."
Form 1040-PR and Form 1040-SS are delivered only when the indicator code is blank.
Tax compliance officers from LB&I IIC will classify the following returns:
Form 1040 with Form 2555 or Form 2555-EZ attached
Form 1040 with foreign addresses
Revenue agents from LB&I IIC will classify the following returns:
Form 1120-F with assets > $ 10 million
Form 1040-NR foreign trusts
BMF returns where the taxpayer maintains books and records outside the United States