Resolving Tax Controversies: An Overview For Counsel Association of Corporate Counsel, 2017 Back to School Symposium August 15, 2017

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1 Resolving Tax Controversies: An Overview For Counsel Association of Corporate Counsel, 2017 Back to School Symposium August 15, 2017 Brent C. Gardner, Senior Tax Counsel, Director of Tax Controversy, Hewlett-Packard Company Robert C. Morris, Partner, Norton Rose Fulbright

2 An Overview of the U.S. Tax Controversy Process IRS Examination Conducted by Revenue Agents IRS Examination function divided into four operating divisions responsible for different groups of taxpayers Wage & Investment, Small Business & Self-Employed, Large Business and International (LB&I), and Tax Exempt and Government Entities Statute of Limitations Generally the statute of limitations for the IRS to assess tax expires three years from the due date of the return or the date on which it was filed, whichever is later 2

3 An Overview of the U.S. Tax Controversy Process (cont d) Revenue Agent Report / 30-Day Letter Prepared and issued at the conclusion of the examination Details whether tax return will be accepted as filed or proposes adjustments Taxpayer may protest proposed adjustments to IRS Office of Appeals IRS Office of Appeals Independent organization within the IRS whose mission is to resolve tax disagreements Considers protests, holds conferences, and negotiates settlements Litigation United States Tax Court, United States District Court, United States Court of Federal Claims 3

4 IRS Examination: What is the IRS Asking for? 1. Board meeting minutes, W-2s for all officers and directors, audit committee minutes, and compensation committee meetings 2. Interview notes, internal communications, and requests to third parties 3. Draft opinions, final opinions, transfer pricing reports, and invoices from advisors 4. Intercompany agreements and customer agreements 5. Organizational charts and employee compensation/performance information 6. Site visits and court-reporter recorded interviews 7. Taxpayer to create documents 8. Written acknowledgement of Exam Team facts 9. Response to penalty IDR 4

5 Written Acknowledgement of Facts (Publication 5125) LB&I issue team members are responsible for documenting all the facts that they have secured so that they can accurately apply the law. For potentially unagreed issues, the issue team members are For expected potentially to seek unagreed the taxpayer s issues, acknowledgment the issue on the team facts, resolve members any factual are differences expected and/or to document factual disputes. The issue manager should ensure that all relevant facts, including seek additional the taxpayer s and/or disputed acknowledgment facts, are appropriately on considered the facts, before resolve a Notice of any Proposed factual Adjustment differences is issued. If a and/or case is closed document to Appeals factual and the disputes. taxpayer provides relevant new information that requires investigation or additional analysis, the case will be returned to exam s jurisdiction for consideration. Before an unagreed issue is sent to Appeals, the issue team will solicit a ( ) Written Acknowledgment of the Facts (AOF) written acknowledgment of the facts to ensure all relevant facts 1. LB&I requires that all information, including all relevant facts and supporting documentation, be submitted to LB&I for consideration in the development of an issue. The taxpayer has primary responsibility for ensuring the facts have been fully provided to LB&I, so that the law is applied to the full set of facts. The taxpayer must be reminded that the case will be returned to exam's jurisdiction for consideration or examination if new information is provided by the taxpayer after a case is closed to Appeals. 3. Before an unagreed issue is sent to Appeals, the issue team will solicit a written acknowledgment of the facts to ensure all relevant facts, including those favorable to the taxpayer, are fully developed. This process will allow the issue team to address any additional or disputed facts identified by the taxpayer before the case is sent to Appeals. 5. The taxpayer must be reminded that the case will be returned to exam's jurisdiction for consideration or examination if new information is provided by the taxpayer after a case is closed to Appeals. 5

6 Sample Acknowledgement of Facts IDR from IRM 6

7 Missions IRS The IRS mission is to "provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all." APPEALS Resolve tax controversies, without litigation, on a basis which is fair and impartial to both the government and the taxpayer and in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Internal Revenue Service. 7

8 IRS Appeals Statistical Snapshot FY 2012 FY 2013 FY 2014* FY 2015 Total Staffing 1,981 1,829 1,708 1,569 Total Receipts 135, , , ,870 Receipts Mix % Collection 55% 54% 53% 55% % Exam 45% 46% 47% 45% Total Closures 144, , , ,673 8

9 Early Referral to IRS Appeals Rev. Proc Developed, unagreed issues are transferred to IRS Appeals while the audit continues on other issues Benefits include consideration of issues without hot interest Appropriate when: The issue is not expected to be resolved at exam level The issue has been fully developed at exam level Resolution of the issue at appeals would result in resolution of the entire case The remaining issues under exam are not expected to be completed before IRS Appeals can resolve the early referral issue 9

10 Fast Track Settlement Program Must now be considered by exam team Post issuance of notice of proposed adjustment, but before revenue agent report / 30-Day Letter Increase issue resolution at lowest level Case remains in exam s jurisdiction, but use IRS Appeals tools Goal is to complete within 120 days Taxpayer retains option to go to IRS Appeals Taxpayer, exam team, and IRS Appeals must agree to participate and agree to a mutual resolution Decision makers must be present at conference No prohibition on ex parte communications 10

11 Fast Track Settlement Opening Letter 11

12 Fast Track Settlement Attachment 12

13 Traditional IRS Appeals Protest is due 30 days after Revenue Agent Report is issued Exam team has discretion to grant extensions under reasonable circumstances Exam team s stingy practice on granting extensions Partial and skeletal protests may be rejected IRM Critical to prepare protest in advance of receiving Revenue Agent Report Exam team rebuttal 13

14 Rapid Appeals Process (RAP) (IRM ) Purpose Expedite the case in IRS Appeals Overview Uses mediation techniques to convert appeals preconference into working meeting for IRS Appeals, exam team, and taxpayer. IRS Appeals is responsible for independently evaluating the hazards of litigation. IRS Appeals is the sole decision maker for all disputed issues for IRS. Participation is voluntary. Traditional IRS Appeals process used if either party objects. Either party may withdraw at any time. Goals One conference to settle. Use best practices from Fast Track to resolve issues more quickly. Improve customer satisfaction. 14

15 Rapid Appeals Process Attachment 15

16 Rapid Appeals Process Attachment (cont d) 16

17 Post-Appeals Mediation (PAM) Rev. Proc , and Non-binding process used after settlement negotiations are unsuccessful An IRS Appeals Officer trained as a mediator (and if the taxpayer elects, a non-irs mediator) facilitates communications between the IRS and the taxpayer in order for the parties to reach their own negotiated settlement 17

18 Post-Appeals Mediation (PAM) PAM available at Taxpayer s request if settlement negotiations fail to resolve issue Current IRS Appeals practice is to acquiesce to Taxpayer s PAM request Selection of Mediators Current Selection Practice Taxpayer proposes 2-3 Appeals Officer mediators Taxpayer proposes 1-2 Independent Mediators IRS Appeals concurs or vetoes proposed candidates 18

19 Post-Appeals Mediation (PAM) Requires short written position paper (e.g., 20 pages) by each party Party s discretion to submit RAR, Protest Brief, etc. Mediators generally request parties last settlement offers 1-2 day mediation conference consisting of joint and separate sessions with mediators No prohibition on ex parte communications 19

20 Post-Appeals Mediation (PAM) Why undertake PAM? Mediators may bridge gap between parties last offers Means of correcting hazards assessment by inexperienced Appeals Officer Quick procedure: last chance to settle before litigation As next stop is courthouse, why not? 20

21 Duty to Preserve Documents The duty arises when the party has notice that the evidence is relevant to the litigation or when a The party duty should arises have when known the that party the evidence has notice may that be relevant the evidence to future is litigation. relevant Zubulake to litigation v. UBS or when Warburg a party LLC, should 220 F.R.D. have 212 known (S.D.N.Y. that 2003) the evidence (citing Fujitsu may Ltd. be v. relevant Fed. Exp. to Corp., future 247 F.3d litigation. 423, 436 (2d Cir. 2001) Failure to preserve may result in sanctions 21

22 Duty to Preserve Documents? Document production during the IRS's appeals process may be conducted in anticipation of litigation considering the size of the company and the business significance of the transaction. Deseret Management Corp. v. United States, 76 Fed. Cl. 88 (2007). For purposes of work product protection, litigation has been understood to include proceedings before administrative tribunals. Evergreen Trading, LLC. v. United States, 80 Fed. Cl. 122 (Fed. Cl. 2007). 22

23 Duty to Preserve Documents? [N]ot all audits by the IRS, or even extensive, IRS administrative proceedings to challenge results of those audits necessarily will lead to litigation. Although there is a point in time during interaction with the IRS that it is reasonable to conclude that litigation is likely or should be anticipated, that determination will differ in every case the courts are split among several circuits regarding when a party involved in the IRS administrative process should be deemed to anticipate litigation Consolidated Edison Co. v. United States, 90 Fed. Cl. 228 (2009). 23

24 Option B Choice of Forum United States Tax Court United States District Court United States Court of Federal Claims 24

25 2014 Tax Litigation Statistics 31,244 of 31,459 of tax litigation cases received by IRS Chief Counsel Attorneys were filed in Tax Court Approximately 2.5% to 5% of cases filed have resulted in a trial History shows that only 781-1,573 of the 31,459 cases filed in 2014 will result in a trial 25

26 Tax Court Docketed Cases, Rev. Proc Taxpayer files a petition in Tax Court in response to a statutory notice of deficiency After case is docketed, referred to IRS Appeals for settlement consideration. Certain exceptions apply: If IRS Appeals issued the notice or taxpayer foregoes settlement consideration by IRS Appeals generally not returned Cases designated for litigation or Division Counsel (or higher) determines referral not in interest of sound tax administration Appeals has sole authority to resolve 26

27 Designating a Case for Litigation 1. Certain cases present recurring, significant legal issues affecting large numbers of taxpayers. When there is a Certain cases present recurring, significant legal critical need for enforcement activity with respect to such issues issues, affecting cases are large designated numbers for litigation of taxpayers. in the interest of sound tax administration to establish judicial precedent, conserve resources, or reduce litigation costs for the For Service example, and taxpayers. judicial precedent For example, may judicial provide precedent guidance may provide for the guidance resolution for the of resolution industry-wide, of industry-wide, tax shelter tax shelter or other or other issues issues, thereby serving early issue resolution and conserving Service and taxpayer resources. IRM ( ) 27

28 Designating a Case for Litigation (cont d) the designated issue in a case will not be resolved 2. When under the jurisdiction of the Service, the designated issue in a case will not be resolved without a full concession by the taxpayer. without a full concession by the taxpayer. 3. In general, an issue will be designated when the case is under the jurisdiction of an Operating Division. If an issue in a case is designated, the taxpayer will not receive a 30-day letter with respect to remaining unresolved issues in the case. Rather, the taxpayer will be issued a If an statutory issue notice in of a deficiency. case is In designated, general, the designation the taxpayer of an issue will in a case will not preclude the settlement of the remaining issues after the not case receive is docketed. a 30-day Nor, in general, letter will with designation respect preclude to remaining Appeals from settling the same issue in other cases within its jurisdiction. As part of the unresolved designation process, issues Counsel in the will case. consider Rather, whether the the issue taxpayer is one of first impression or otherwise involves unique or unusual circumstances. If the will Chief be Counsel issued believes a statutory circumstances notice surrounding of deficiency. the designated In issue are such that settlement of the issue in other cases would be detrimental general, to the principles the designation of sound tax administration, of an issue the Chief in a Counsel case will confer with the Chief, Appeals. The Chief Counsel and the Chief, Appeals, will not also preclude confer as to the impact settlement of the settlement of the of remaining an issue on future issues settlements and a course of action with respect to the settlement of the issue that reflects the best interests of tax administration. after the case is docketed. 28

30 Disclaimer Norton Rose Fulbright US LLP, Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP and Norton Rose Fulbright South Africa Inc are separate legal entities and all of them are members of Norton Rose Fulbright Verein, a Swiss verein. Norton Rose Fulbright Verein helps coordinate the activities of the members but does not itself provide legal services to clients. References to Norton Rose Fulbright, the law firm and legal practice are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together Norton Rose Fulbright entity/entities ). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a partner ) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity. The purpose of this communication is to provide general information of a legal nature. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright.

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