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MAY 2017

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48 MoldMaking Technology —— MAY 2017 THE BOTTOM New IRS Audit Strategy By Michael J. Devereux II, CPA, CMP The IRS Large Business and International Division (LB&I;) has announced a new audit strategy focused on 13 issues, from foreign company reporting requirements to shareholder stock basis in S corporations, which it believes will generate the most tax revenue using the remaining agency resources from the Congressional budget cuts. The LB&I; works with compa- nies that have greater than $10 million in total assets. Most, if not all, mold builders will not be affected by all 13, but here are the three most relevant issues: Related-party transactions. Generally, transactions between related parties must be executed at arm's length under the rules of the Internal Revenue Code. An arm's-length transac- tion is a transaction in which the buyer and seller of a product or service act independently and have no relationship with one another. The concept is in place to ensure both parties are act- ing in their own self-interest and not to determine the transfer price to manipulate earnings between related companies. This new initiative identifies transactions between related parties that provide companies a means to transfer funds from a corporation to related pass-through entities (S corporations, partnerships and limited liability companies). For example, if the owner of a mold shop forms a separate entity to purchase real estate and a building, then rents the building to another mold builder, was the rent determined at the fair market value? If it was not determined at arm's length, the IRS may adjust the amount of rent charged to the mold builder. The IRS has dedicated resources to this issue to deter- mine the level of compliance in related-party transactions of companies in the mid-market segment. Therefore, mold build- ers that own or operate multiple entities should take careful consideration in determining the transaction amount related to transactions between the related parties. S corporation losses claimed in excess of basis. Shareholders (owners) of S corporations must have sufficient basis in order to be able to deduct their proportionate share of ordinary losses incurred by the S corporation. Shareholders may have both stock basis (the basis of the shareholder's com- pany stock) and debt basis (amounts loaned to the S corpora- tion directly by the shareholder). With limited exceptions, stock basis is equal to the amount that the shareholder paid for the stock in the S corporation, increased by items of income and gain, and reduced by items of loss. This means that a shareholder may deduct his pro rata share of an S corporation's losses only to the extent of the total adjusted basis in the S corporation stock. The adjusted stock basis is determined by taking into account the increases and decreases in basis for his share of the S corporation income for the year and its adjusted basis in any indebtedness of the S corporation to the shareholder. For example, loans made from shareholders directly to the S corporation. LB&I; has found that shareholders may claim losses and deductions to which they are not entitled because they do not have sufficient stock or debt basis to absorb these losses. The IRS is arming its revenue agents with technical content to aid in their examination of company losses in excess of the share- holder's basis. The IRS will be conducting issue-based examinations (IRS audits that focus on just one issue) to ensure companies are With the IRS' new focus on these issue-based campaigns, mold builders should ensure they are in compliance with the Internal Revenue Code. 13 Issues for the New IRS Audit Strategy 1. S corporation losses claimed in excess of stock basis 2. Related party transactions 3. Form 1120-F non-filers 4. Micro-captive insurance companies 5. Land developers/completed contract method 6. Inbound distributors 7. Basket transactions 8. Energy credits 9. Offshore voluntary disclosure program declines/withdrawals 10. Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) linkage plan strategy 11. TV broadcasters' domestic production activities deduction 12. Deferred variable annuity reserves and life insurance reserves industry issue resolution 13. Repatriation

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