IC-DISCs are the last surviving major export incentive in the Internal Revenue Code. When combined with the current low rates applicable to qualified dividends, exporters can exclude a significant part of their export income from U.S. income tax. These savings have led to a substantial expansion in regard to their use.
There are a number of technical rules relating to the qualification and operation of IC-DISCs. Given their technical nature and the limited number of IC-DISCs, some taxpayers may expect that if audited, a rigorous examination is unlikely given the limited knowledge of IC-DISCs among most examiners.
However, the IRS has now issued fifty pages of explanation and audit guidelines for IC-DISC examinations. Therefore, taxpayers should expect that international examiners that audit IC-DISCs will be well educated on these special type of entities and how to examine them.
This is not all bad news. The existence of such guidelines allows taxpayers and their advisors to review IC-DISCs before an audit arises, and discover (and remedy) any potential problem areas.