The IRS is Targeting Smaller Foreign Entities: OPERATING A BUSINESS IN THE U.S.

The IRS has recently noted that they are rolling out campaigns to focus on entities below the “big fish” that have historically been targeted. Such campaigns include:

  • Related party transaction campaign – a redefined focus on mid-market entities to determine compliance with U.S. transfer pricing requirements.
  • Inbound distributor campaign – reviewing whether S. affiliates distributing imports from other countries are realizing adequate returns based on their assets, risks assumed, and functions performed.
  • Form 1120-F non-filer campaign – targeting corporations (the IRS believes there are many) with a S. permanent establishment or branch which have not filed U.S. income tax returns. The IRS indicates external data sources will be used to identify these companies, commencing with a “soft letter outreach”. There is no indication of any amnesty, meaning penalties and interest are likely for Canadian corporations which have not complied with any U.S. filing obligations.

Action Item: If operating as a mid-market business in the U.S., be prepared for the possibility of more scrutiny from the IRS.

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