The IRS Large Business and International (LB&I) division publicly released a “practice unit”—part of a series of IRS examiner “job aides” and training materials intended to describe for IRS agents leading practices for specific international and transfer pricing issues and transactions. The newly released practice unit concerns fixed, determinable, annual, or periodical income from sources within the United States that are not effectively connected with a trade or business in the U.S. (FDAP).
The practice unit focuses on the general rules for determining the source of income. FDAP income consists primarily of passive investment income, including interest, dividends, rents, royalties, etc. The practice unit (release date of July 15, 2016) is available on the IRS practice unit webpage.
The IRS practice units identify areas of strategic importance to the IRS, provide insight as to how IRS examiners will approach various transactions, and generally provide an understanding of the context in which an IRS examiner will approach a particular issue or transaction.
Thus, taxpayers (and their tax advisers) facing an IRS examination or concerned with issue(s) presented by the practice units will want to review the relevant practice units, so as to have a better understanding of the issues that may arise either prior to or during an examination. For instance, the IRS practice units typically provide information that can help taxpayers:
For taxpayers selected for a pending IRS examination, the practice units can provide information that may assist with preparation for the examination.
For taxpayers actually under examination, the practice units may provide information that can assist taxpayers respond to IRS requests.
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