The focus of both the Congressional use of legislation and increased pressure on the IRS has been most apparent in connection with foreign-related transactions and financial dealings.

Foreign Account Tax Compliance

The Treasury Department and the IRS are stepping up their oversight of foreign account tax compliance, particularly after passage of a set of compliance measures in the HIRE Act. The IRS issued preliminary HIRE Act guidance, defining foreign financial institution (FFI), describing obligations exempt from withholding, and identifying the information that FFIs must report to the IRS under their FFI agreement in Notice 2010-60. Further details and restrictions are expected in 2011.

FBAR. Persons subject to U.S. jurisdiction (including citizens, residents and domestic entities) must file an FBAR if they have financial interests in, or signature or other authority over, a bank, securities, or other financial account in a foreign country exceeding $10,000. Reports must be filed by June 30 of the succeeding year.

FinCEN. The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) proposed new rules to update the reporting requirements imposed on U.S. persons with foreign bank accounts. The proposed FinCEN rules would clarify who (or what entity) must file a report and which accounts must be reported.

HIRE Act. The HIRE Act reaches individuals with interests in “specified foreign financial assets.” New Code Sec. 6038D, which implements the HIRE Act’s reporting requirements, requires qualified individuals to attach to their income tax returns certain information with respect to each asset if the aggregate value of all the assets exceeds $50,000.

 New Code Sec. 6038D applies to assets held during tax years beginning after March 18, 2010. Calendar-year individuals would first file their HIRE Act information report with their 2011 tax returns filed in 2012.

Voluntary Disclosures, Joint Audits And More

In 2009 and 2010, more than 15,000 individuals participated in an IRS voluntary disclosure program. The IRS also is reportedly launching investigations into other foreign financial institutions as well as preparing for joint audits with other jurisdictions.

Voluntary disclosures. The IRS voluntary disclosure program offered a reduced penalty framework in exchange for voluntary disclosure of unreported accounts. In December 2010, IRS Commissioner Douglas Shulman indicated that the agency is considering another voluntary disclosure program, possibly in 2011.

The voluntary disclosure program has been criticized for failing to distinguish between willful noncompliance and non-willful violations of U.S. tax laws.

Switzerland. In November 2010, the IRS reported that Switzerland had supplied information on approximately 4,000 accounts at Swiss banking giant UBS AG. The IRS predicted that the final count of UBS accounts would exceed 7,500.

Joint audits. The IRS is developing a protocol for joint audits with other countries. A joint audit is not the same as a simultaneous audit where two countries are conducting audits at the same time using exclusively their own resources. Rather, a joint audit is a coordinated action combining the resources of other countries.

Large Business and International Division. The IRS’s heightened focus on international activities in reflected in the 2010 change of the name of the Large and Mid-Size Business (LMSB) Division to the Large Business and International (LB&I) Division.

Other Foreign-Focused Initiatives

Transfer pricing. Code Sec. 482 authorizes the IRS to adjust the income, deductions, credits, or allowances of commonly controlled taxpayers to prevent evasion of taxes or to clearly reflect their income. IRS regulations generally require that prices charged by one affiliate to another, in an intercompany transaction involving the transfer of goods, services, or intangibles, yield results consistent with those realized where uncontrolled taxpayers had engaged in the same transaction under the same circumstances. The IRS had several important developments concerning transfer pricing in 2010.

The IRS announced its nonacquiescence to a major transfer pricing decision on buy-in payments by the Tax Court, Veritas Software Corp, 133 TC __, No. 14, Dec. 58,016 (2009). The IRS disputed the factual findings and disagreed with the Tax Court’s conclusion that the discussion of preexisting intangibles in the governing regulations excluded consideration of subsequently developed intangibles for valuation.

“The IRS is developing a protocol for joint audits with other countries.“

The IRS also announced its acquiescence in result only to another transfer pricing decision, this one by the Court of Appeals for the Ninth Circuit, Xilinx, March 22, 2010, 2010-1 ustc ¶50,302. The Ninth Circuit found a qualified cost sharing arrangement did not apply to a taxpayer’s allocation of employee stock option compensation costs. While the agency acquiesced to the decision’s result (and dismissed it as moot), the IRS disagreed with the Ninth Circuit’s interpretation of the Code Sec. 482 regs that reached that result.

Foreign tax credits. In Notice 2010-65, the IRS provided additional intellectual property exceptions to the foreign tax credit disallowance rules under Code Sec. 901(1) for taking a credit on withholding taxes. The IRS will exempt certain licensing and copyright transactions from the application of Code Sec. 901(1). Regulations to be issued reflecting this guidance will apply to amounts paid or accrued after September 23, 2010.