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Part 4. Examining Process

Chapter 1. Planning and Special Programs

Section 9. International Features

4.1.9  International Features

4.1.9.1  (10-24-2006)
Overview-International Returns

  1. This chapter discusses features unique to returns with international issues.

  2. The Chief, Classification Section is responsible for ensuring all returns with international characteristics are classified at the campus before sending them to the Areas.

  3. An international examiner will classify all returns with international characteristics except for those under the jurisdiction of SBSE International which will be classified by SBSE International examination personnel.

  4. The jurisdiction for the field examination of entities filing Form 1120F is determined by the assets of the corporation. Entities with assets < $ 10 million are under the jurisdiction of SBSE International. Entities with assets > $10 million are the jurisdiction of LMSB.

  5. Form 1040NR, Form 1040PRForm 1040SS and Form 1040 returns with Form 2555 or Form 2555EZ attached are under the jurisdiction of SBSE International.

  6. Foreign Sales Corporation (FSC).

    1. A FSC is a taxable foreign corporation that files Form 1120F-FSC (U.S. Income Tax Return of a Foreign Sales Corporation) at the Philadelphia Campus.

    2. The FSC Repeal and Extraterritorial Income Exclusion Act of 2000 repealed the FSC provisions of IRC §921 through IRC §9217 effective October 1, 2000. The Act also provides qualifying taxpayers with an Extraterritorial Income Exclusion, which is figured on Form 8873 and provides transition rules for existing FSCs.

    3. 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 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.

    4. Taxpayers may elect to apply the extraterritorial income exclusion rules instead of the FSC rules for transactions occurring during the transition period.

    5. The Philadelphia Campus will transfer Form 1120F-FSC returns to the appropriate campus for screening and/or classification by an international classifier.

    6. A small 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 1120F-IC-DISC.

4.1.9.2  (10-24-2006)
Identification of Returns

  1. Individuals responsible for the classification of returns will do the following:

    1. Identify returns they select for possible examination or those they will associate with returns already under examination as "International."

    2. Ensure the Form 3210,Document Transmittal sent to the Area 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.

    3. Assign the applicable project code from the list below to returns selected before sending them to the Area.

4.1.9.2.1  (10-24-2006)
Project Codes

  1. Project code 0090 — returns selected before transmitting them to the Area

  2. Project code 0162 — Form 1120F and Form 1040(with Form 2555). Project Code 0162 takes precedence over the project codes identified in (1) above.

4.1.9.3  (10-24-2006)
Corporation, FSC, IC-DISC, Individual, Partnership, Fiduciary Returns

  1. 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 and foreign bank, securities, and other financial accounts.

  2. 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, they should select the return for examination.

  3. Instructions for selecting returns identified during classification as reporting Subpart F income ( IRC §951IRC §964, inclusive) appear in the Law Enforcement Manual.

4.1.9.4  (10-24-2006)
International Related Forms

  1. Reserved

4.1.9.4.1  (10-24-2006)
Form 3520 Internal Processing

  1. Form 3520, Creation of, or Transfers to, Certain Foreign Trusts is filed at the Philadelphia Campus. A copy is forwarded to the Classification Section at the campus where the related tax return will be filed.

  2. During July of each year, the income tax return which relates to the prior year Form 3520 will be secured.

  3. When Forms 3520 are received in the campuses, they will be associated with copies of the related returns, prior to classification by an international examiner. The copies of Forms 3520will remain with their related returns. Related returns to associate are:

    1. Person filing the return, identified by the TIN (of the filer) on Form 3520, line 1b

    2. Form 3520-A (Foreign Trust Owned by U.S. Persons) identified by TIN on Form 3520, Line 1b

    3. Form 706, if check box describing U.S. person filing return is identified as " Executor"

  4. Include a three-year Midwest Automated Classification System (MACS) print of the Form 3520 and for each related return. If the related return is already open, the copy of the Form 3520 will be forwarded for association. Upon receipt in the Area, the related return will be referred to the International Enforcement Program.

  5. 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. See Figure 4.1.9-1., Form 3520 Information.

    Figure 4.1.9-1
    IfForm 3520 Then
    Line 10 is YES (the transfer is a completed gift or bequest) Form 706 and/or Form 709should be filed and associated.
    Line 12 is NO (filer is not treated as owner of the assets)  
    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, Foreign Estate or Trust, or Foreign Partnership with the Form 3520.
    Line 15 is NO (no election under IRC §057 )  
    Line 16 is NO (no election under similar principles under IRC §367)  

  6. 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)

  7. A foreign trust without a U.S. owner which has effectively connected U.S. source income is filed currently on Form 1040NR-Fiduciary . This Form is filed at the Philadelphia Campus and is processed on the Automated Non-Master File System (ANMF). Forms 1040NR-Fiduciary fall under the jurisdiction of SBSE International.

4.1.9.4.2  (10-24-2006)
Form 926

  1. Taxpayers must file Form 926,Return by a U.S. Transferor of Property to a Foreign Corporation, Foreign Estate or Trust, or Foreign Partnership on the day of the transfer and at the service center where they normally file their return.

  2. The excise tax per IRC §1491does not apply if Federal income tax avoidance is not a principal purpose of the transfer.

  3. After processing, Form 926will be forwarded to the Chief, Classification Section, who will enter a Transaction Code (TC) 930 on the transferor’s account to secure the return when filed. If a transferor files Form 926 at a campus other than the one where the transferor normally files their return, the Chief, Classification Section in the receiving campus will forward Form 926 to the Chief, Classification Section at the transferor’s controlling campus.

  4. The transferor’s return and Form 926 will be associated before classification. An international examiner will classify all Forms 926.

  5. Due to their potential use in classifying Form 706NR, Estates of Nonresidents and Form 1040NR filed by foreign trusts, copies of Forms 926 indicating that the transferee is either an Estate or Trust should be forwarded to SBSE Area 15 at the following address:

    Internal Revenue Service
    Attn: International PSP Territory Manager
    950 L’Enfant Plaza S.W , Room 4411
    Washington, D.C. 20024

  6. When classifying Form 926, the international examiner may generally accept as filed the following types of transfers.

    1. Form 926 with a transferee that is an exempt organization [Reg. 1492–1(a)(1)]. A copy of the Commissioner’s determination letter must be attached.

    2. Transfer plans approved by the Commissioner [Reg. 1492–1(a)(2)]. A copy of the Commissioner’s approval letter must be attached.

  7. Returns selected for examination will be forwarded to the appropriate Area office. Area offices should follow normal assignment, survey, and examination procedures.

4.1.9.5  (10-24-2006)
Foreign Information Documents

  1. 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. Philadelphia Campus receives and stores documents from approximately 15 treaty countries in many formats.

  2. Foreign information documents showing individual taxpayers [Individual Master File (IMF)] as recipients are subject to processing under the Information Returns Program (IRP).

4.1.9.5.1  (10-24-2006)
Classification Procedures

  1. Foreign Information Return Program (FIRP) documents, which meet the selection criteria contained in the Law Enforcement Manual , will be processed as follows:

4.1.9.5.1.1  (10-24-2006)
Campuses

  1. The PSP Territory Manager, Philadelphia Campus will:

    1. Sort the Automatic Exchange documents

    2. Forward them to the payees’ campus, Attention: Chief, Classification

    3. Forward Automatic Exchange documents with incomplete taxpayer information to the Director, Compliance, Attn: Manager, Exchange of Information Programs for return to the submitting country.

  2. The Chief, Classification at each campus will:

    1. Receive FIRP documents for payees within that campus

    2. Perfect those documents without TINs

    3. Perform a cross-reference search for spouses’ TIN

    4. Forward FIRP documents (after TIN perfection) to the PSP Territory Manager in the payees’ Areas, or per other Area instructions

4.1.9.5.1.2  (10-24-2006)
Area Offices

  1. The following procedures are required for Area classification.

    If the FIRP documents relate to: Then the PSP Territory Manager will:
    Cases in Status 06 or 08 Request the return from the campus.
    Cases in Status 10 or 12 Forward FIRP documents to the group manager.
    Coordinated Examination Program (CEP) cases—open Forward FIRP documents to the CEP manager.
    CEP cases—not open Forward FIRP documents to the district CEP Program Manager.
    Banks or insurance companies Forward FIRP documents to banking or insurance group manager.
    TE/GE returns Forward FIRP documents to Chief, TE/GE Commissioner.
    Survey cases Attach FIRP documents to the return.

  2. Personnel screening FIRP documents to decide whether to secure related returns, should consider the following factors:

    1. The impact Foreign Tax Credits (FTC) which may be available to the taxpayer

    2. The source and type of the foreign income

    3. The underlying asset and the method of acquisition

  3. The PSP Territory Manager will place returns selected for examination into the appropriate program (Tax Auditor or Revenue Agent). If a return is surveyed, the FIRP document should be attached to the return.

  4. ALL PERSONNEL WILL CONSIDER THESE DOCUMENTS SENSITIVE UNDER THE EXCHANGE OF INFORMATION PROVISIONS OF THE VARIOUS TAX TREATIES AND WILL NOT MAKE THEM AVAILABLE EXCEPT FOR FEDERAL TAX ADMINISTRATION PURPOSES UNDER ANY DISCLOSURE PROVISIONS. ADDRESS ALL INQUIRIES CONCERNING THE DISCLOSURE OF THIS INFORMATION TO THE DIRECTOR, COMMUNICATIONS, NATIONAL HEADQUARTERS.

4.1.9.5.2  (10-24-2006)
Foreign Information Return Program (FIRP) Document Referrals to Collection

  1. FIRP Documents which meet the following criteria will be referred to Campus Collection:

    1. FIRP Documents with TINs for which no TC 150 has posted on the taxpayer’s account.

    2. Undeliverable documents will not be sent to Collection.

    3. A cross reference on the Spouse’s TIN must be done before forwarding any FIRP document to Collection. All other research done on the FIRP document should be forwarded with the referral.

  2. FIRP documents forwarded to the controlling campus, which are then determined to warrant referral to Collection, must be returned to the Chief, Classification, Philadelphia Campus. The Chief, Classification, Philadelphia Campus, will forward these returned documents to Collection, Philadelphia Campus.

  3. Forward all referrals of FIRP documents to the campus Collection on Form 3210. Itemize FIRP Documents on the Form 3210, and identify them as "Foreign Information Documents."

  4. If the collection function determines that a substitute for return is required, they will forward the information to the PSP Territory Manager on Form 3449, Referral Report.

4.1.9.6  (10-24-2006)
Form 5074, Allocation of Individual Income Tax to Guam or Northern Mariana Islands

  1. Forms 1040 requiring a Form 5074 are filed at the Philadelphia Campus.

  2. These returns are processed, coded, and delivered to Examination as prompt examination returns.

  3. The Campus Classification Section takes the following actions:

    1. Completes page 2 of Form 5074

    2. Forwards a copy of the completed Form 5074 to the Campus Accounting Branch

    3. Classifies the return

4.1.9.7  (10-24-2006)
SBSE International Special Instructions for International Returns

  1. Procedures, instructions, and information for the identification and selection of returns are applicable to SBSE International returns except as provided in the following subsections.

4.1.9.7.1  (10-24-2006)
DIF Returns

  1. The mathematical DIF formulas for individual returns are not generally applicable to international returns identified for SBSE International.

  2. No minimum cutoff scores are applicable to SBSE International individual DIF returns. All individual returns except Specials are maintained on the DIF computer inventory file.

  3. Returns with 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 SBSE International. Taxpayers should file all APO/FPO returns at the Austin Campus.

4.1.9.7.2  (10-24-2006)
Special Returns

  1. The same audit codes used for all individual returns apply when identifying individual returns as Special Returns. Many codes will not apply to Form 1040NR, Form 1040PR and Form 1040SS since the criteria for identifying these special features will not be present on these returns.

4.1.9.7.3  (10-24-2006)
Computer Reports

  1. Computer reports for individual returns (1040–1, 1040–2, etc.) and corporate returns (1120–1, 1120–2, etc.) are generated for SBSE International.

  2. Computer report 1040–2 contains the number of returns filed which have a Form 2555 or Form 2555EZ attached.

  3. The individual returns Post-of-Duty (POD) report 1040–1 is generated for SBSE International using post of duty assigned by country or countries.

    1. Separate PODs are used for APO/FPO returns.

    2. All Form 1040NR are assigned to SBSE International and POD 993.

    3. Various PODs within SBSE International will be assigned Form 1040PR and Form 1040SS

    4. POD 998 will be assigned to SBSE International returns which are not covered by a valid POD code.

4.1.9.7.4  (10-24-2006)
Ordering Returns

  1. Submit all orders for returns to the Philadelphia Campus.

  2. Form 1040NR, Form 1040PR or Form 1040SS may be deleted from SBSE International return orders by excluding the applicable POD(s) to which these returns are assigned from the individual return order.

  3. Form 1040NR, Form 1040NR or Form 1040SSmay be separately ordered for SBSE International by placing a POD Supplemental Order for individual returns.

  4. Form 1040NR are delivered only when the indicator code is either blank or a "J."

  5. Form 1040NR and Form 1040SS are delivered only when the indicator code is blank.

4.1.9.7.5  (10-24-2006)
Classification of Returns

  1. Tax Compliance Officers from SBSE International will classify the following returns:

    • Form 1040 with Form 2555 or Form 2555EZattached

    • Form 1040 with foreign addresses

    • Form 1040PR

    • Form 1040SS

    • Form 1040NR

    • APO/FPO returns

  2. Revenue Agents from SBSE International will classify the following returns:

    • Form 1120F with assets < $ 10 million

    • Form 1040NR Foreign Trusts

    • BMF returns where the taxpayer maintains books and records outside the United States


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