IRS officials have issued a warning regarding changed returns and claims for the withdrawal of domestic manufacturing activities. This provision of tax law has been repealed under the Law on Tax Reductions and Employment for tax years after December 31, 2017. Following the repeal, the IRS received a wave of questionable amended declarations and claims to tax benefits in the EU billions of dollars.
“We have no concerns when taxpayers seek legal benefits,” said Doug O’Donnell, commissioner for large corporations and international corporations. “But a very high percentage of the claims for the now-lifted withdrawal from domestic manufacturing activities are not adequately supported by those who claim it.”
A large majority of filings are taxpayers applying for DPAD for the first time based on post-release studies that contain inappropriate assumptions about facts and law.
In September 2018, LB & I announced a campaign to risk assess claims or changed returns under the repealed section of the law. The IRS will continue to investigate this issue even though the section has been repealed.
Auditors review these claims with the assistance of the Chief Counsel, engineering specialists, and the Corporate Income and Losses Practice Network. In July 2020, the IRS issued a GLAM covering examples of unsubstantiated online software activity under Section 199. In many audit cases, taxpayers have granted 100% of the claim after the challenge. And the IRS continues to have litigation under Section 199.
Auditors were advised to consider Section 6676, Incorrect Refund or Credit Claim, Penalties, other applicable penalties, and referrals to the Office of Professional Responsibility (OPR) where applicable. Taxpayers and their advisors should ensure that they have records in place to support their position and should expect the IRS to impose reasonable penalties unless taxpayers can demonstrate that they have a reasonable cause. A study does not necessarily provide a reasonable reason.
“Unearned claims are detrimental to tax administration and voluntary compliance. Any corporate taxpayer considering filing such a claim should reconsider this. Taxpayers who have already filed an application can withdraw from the IRS review contact to avoid penalties, “said O’Donnell.