NAVIGATING AN IRS EXAM

Transcription

1 NAVIGATING AN IRS EXAM Feb. 7, 2018

2 Today s presenters Patti Burquest Principal Washington National Tax practice lead Specializes in IRS examination and appeals matters, including alternative dispute resolutions Alina Solodchikova Manager Tax Practice and Procedure, Washington National Tax Handles controversies at all levels of the IRS, including exams and appeals David Click Senior Director National Office of Risk Management Director Teaches on corporate tax, taxation of intellectual property, and tax dispute resolution Senior Manager Specializes in the area of estate and gift, and trust administration Develops and implements tax planning ideas for clients and provides analysis of estate and trust administration issues

3 Agenda Topics What should you do if you receive an IRS notice? Preparing for the audit How do you respond to IRS document requests? Essential elements of an IRS examination When do penalties come into play? How can you mitigate risk of future exams? 2

4 WHAT SHOULD YOU DO IF YOU RECEIVE AN IRS NOTICE?

5 Know your surroundings 4

6 Know your surroundings (cont.) Commissioner Large Business and International (LB&I) Small Business and Self Employed (SBSE) Tax Exempt Government Entities(TEGE) 5

7 Examination selection process: Small Business and Self Employed (SBSE) Computer screening Newspaper articles, news reports SBSE Whistleblowers Related examinations 6

8 Examination selection process: Tax Exempt and Government Entities (TEGE) Case Selection and Delivery Unit uses queries developed by Compliance Strategy and Critical Initiatives Unit to identify returns for examination Case Selection and Delivery Unit transfers returns to the appropriate Audit Unit TEGE Audit Unit conducts examination Audit Group can t self generate audit unless examination is of a related entity, related returns or discrepancy adjustment returns 7

9 Examination selection process: Large Business and International (LB&I) Campaign approach Issue driven examinations Fewer taxpayers are selected based on entity size LB&I Issues selected for examination will be examined by specialized exam teams Various treatment streams may be used, not necessarily an audit 8

10 Treatment streams: LB&I campaigns Tailored alternative treatment streams to achieve compliance Soft letters Tax form changes New guidance Practitioner outreach Examination 9

11 LB&I new organizational structure Five subject matter areas Pass-through entities Enterprise activities (financial products and institutions, corporate issues and credits, and penalties) Treaty and transfer pricing Withholding and international individual compliance (FATCA) Cross border activities Four geographic practice areas Northeast (New York) East (Downers Grove, Illinois) Central (Houston) West (Oakland, California) 10

12 First 13 campaigns, by practice area Enterprise activity Pass-through entities Global Section 48C energy credit Domestic production activities deduction Micro-captive insurance Related party transactions Deferred variable annuity and life insurance reserves Basket transactions Land developers using completed contract method Tax Equity and Financial Responsibility Act (TEFRA) linkage plan strategy S corporation losses claimed in excess of basis Offshore Voluntary Disclosure Program (OVDP) declines or withdrawals Repatriation Form 1120-F non-filer Inbound distributor 11

13 Additional 11 campaigns Global Form 1120-F chapters 3 and 4 withholding Swiss bank program Foreign earned income exclusion Verification of Form 1042-S credit claimed on Form 1040NR Eastern compliance Agricultural chemicals security credit Northeastern compliance Deferral of cancellation of indebtedness income 12

14 Additional 11 campaigns (cont.) Enterprise activities Energy efficient commercial building property Cross border activities Western compliance Economic development incentive Individual foreign tax credit (Form 1116) 13

15 PREPARING FOR THE AUDIT

16 Pre-audit planning Review return to identify potential areas of IRS challenge Are you using the proper method of accounting for a particular item? Change accounting method to obtain audit protection Document why current method is proper Are there errors on the return that could result in a penalty? Rev. Proc (historically applied only in CIC) Qualified amended return Review mandatory IDRs and other items to identify areas that need attention Transfer pricing documentation in some cases Campaigns Tax shelter transactions (listed transactions) 15

17 Pre-audit planning (cont.) Review Audit Technique Guides, Industry Directors Directives and International Practice Units for relevant industries or issues Review items on Schedule UTP, Schedule M-3 and Forms 8886, 8275, 8275R if attached to the return Information return noncompliance (5471s, 5472s, 1042s, etc. Address before audit (QAR, etc.) Review new options relating to international information return compliance issues Is there reasonable cause? 16

18 Preparing for the IRS examination Preparation should be ongoing (while transactions are occurring) Significant tax planning transactions Document non-tax business reasons before the transaction, the profit motive and the economic considerations for the transaction including projected cost reduction, etc. Include this documentation in the approval process Incorporate non-tax business discussions in technical memoranda Save all documents that are relevant to heavily tax-planned transactions 17

19 Outline of the audit process 18

20 HOW DO YOU RESPOND TO IRS DOCUMENT REQUESTS?

21 What is an Information Document Request (IDR)? The primary tool used by the IRS to solicit information and documentation in writing, during the course of an examination IRS Form 4564 Issued in the beginning of an audit, but additional IDRs may be issued as the case progresses Authorized by Internal Revenue Code Section

22 LB&I IDR - key elements Issue-driven examinations IDR process requires collaboration Draft IDRs provided for discussion Agreed upon timelines IDRs must be issue focused One IDR per issue Must identify the issue Must relate the requested items to the issue No more fishing expedition IDRs Issue focused rules do not apply to IDR One Standard books and records IDR issued at the beginning of the audit IDR enforcement process for missed response deadlines Delinquency Notice Pre-summons Letter Summons and summons enforcement 21

23 LB&I IDR- key elements (cont.) Risk assessment of the return Analyze responses to IDR One Identify issues to be examined Identify specialists and issue teams Audit plan Identify issues Identify time frames for last IDR Agreement on Notice of Proposed Adjustment (NOPA) response dates Identify estimated date of Revenue Agent Report Discuss collaborative approach with the taxpayer 22

24 TEGE issued new guidance for IDR process Effective April 1, 2017, TEGE Division of the IRS will apply the following procedures Taxpayers will participate in the IDR process Examiners will discuss the issue being examined and the information needed with the taxpayer prior to issuing an IDR Examiners will ensure that the IDR clearly states the issue and the relevant information they are requesting If the taxpayer does not timely provide the information requested in the IDR by the agreed upon date, including extensions, the examiner will issue a delinquency notice Enforcement process Delinquency notice Pre-summons letter Summons 23

25 SBSE initial contact and IDR Initial contact with taxpayers will be made by mail, using approved form letters No more telephone calls to taxpayers Approved initial contact letters are listed in IRM Issue focused IDRs 24

26 ESSENTIAL ELEMENTS OF AN IRS EXAMINATION

27 Essential elements of an examination RSM US LLP. All Rights Reserved.

28 Essential elements of an IRS examination: Opening conference, initial contact LB&I Opening conference Introduction to IRS examination team Lead Revenue Agent IRS Team Manager IRS Specialists Referrals Territory Manager TEGE Office Correspondence Examination Program (OCEP) Office audits, interviews or correspondence May start as correspondence and convert into office interview/field audit Examination team consists of Exempt Organization Revenue Agent, Tax Compliance Officer and a Manager SBSE By mail (correspondence audit) Field exam Office exam Audit Technique Guides Revenue Agent and IRS Team Manager Use of specialists is possible RSM US LLP. All Rights Reserved.

29 Timing of examination Exchange of information Completion of field work Expected date of proposed adjustment Conclusion of examination RSM US LLP. All Rights Reserved.

30 Essential elements of an IRS examination: Proposing adjustment LB&I Proposed adjustment Notice of proposed adjustment (NOPA), Form 5701 Sets out IRS views of the facts, relevant law and analysis Taxpayer will 1) agree, 2) disagree, 3) present additional information to resolve the issue Alternative dispute resolution TEGE No change exams (no change to exempt status, reclassification of exempt status, assessment of tax or penalty) I.R.M No change, but written advisory (change of status, 990 filer to 990- PF) Proposed adjustments, Revenue Agent s Report Initial report or formal report SBSE No change exams Change examsmanagerial involvement is required in an effort to resolve the case Different requirements for explanation of items for field exams and office exams Taxpayer can agree, disagree, resolve the case RSM US LLP. All Rights Reserved.

31 Essential elements of an IRS examination: Closing conference LB&I Closing conference Discuss proposed adjustments with the taxpayer Discuss the application of any accuracy related penalties Discuss resolution of the issues or closing of the examination process TEGE Closing conference Discuss proposed adjustments with the taxpayer Explain appeal rights May be followed by managerial conference Can be more than one managerial or closing conference Revocation of taxexempt status, penalties SBSE Closing conference Discussion of proposed adjustments Resolution of issues Accuracy related penalties Audit reconsideration is possible, but if statutory notice of deficiency is issued, 90-day period can not be extended RSM US LLP. All Rights Reserved.

32 Resolution and settlement Upon receipt of a NOPA, the taxpayer has several avenues to resolve an issue Technical advice: On a purely technical issue, the issue can be raised to the IRS Chief Counsel s office for an interpretation of the relevant law Fast track settlement: A dispute resolution technique where an Appeals Officer acts as a mediator between the exam team and taxpayer to resolve an issue Settlement: If the IRS and taxpayer agree to the adjustments, the IRS will have the taxpayer sign a Form 870 allowing the IRS to asses additional tax RSM US LLP. All Rights Reserved.

33 Administrative appeals If the taxpayer and the IRS cannot resolve the outstanding issues at the end of the examination, the taxpayer may request a hearing with IRS Appeals 30 day letter: For unagreed issues, the IRS will issue a 30 day letter to the taxpayer The taxpayer then has 30 days to file a protest to the IRS adjustments and request IRS Appeals consideration RSM US LLP. All Rights Reserved.

34 WHEN DO PENALTIES COME INTO PLAY

35 Accuracy-related penalties overview General rules Applies to an underpayment of tax attributable to due to: Negligence / intentional disregard of rules or regulations Substantial understatement of income tax Substantial valuation misstatement under Chapter 1 Substantial overstatement of pension liabilities Substantial estate or gift tax valuation understatement Section 6662(b) Rate 20 percent of underpayment amount or 40 percent in the case of certain gross valuation misstatements or undisclosed transactions to which the economic substance doctrine would apply No stacking of section 6662 penalties Avoidance and abatement Dependent on reason for underpayment: Reasonable cause and good faith De minimus Based on certain level of authority 34

36 Avoiding accuracy-related penalties Demonstrate that taxpayer had a requisite level of authority to support the position Reasonable basis to avoid negligence penalty Substantial authority for avoid the substantial understatement of tax penalty Adequate Disclosure of the position. If taxpayer adequately discloses a position, then the taxpayer only has to show a reasonable basis to support the position 35

37 Accuracy-related penalty standards of authority Based on the probability of a position succeeding on its merits if challenged: Will 95% Should 70% More likely than not > 50% Substantial authority 40% Realistic possibility of success 33% Reasonable basis Not frivolous Frivolous 20% 36

38 What is adequate disclosure? Form 8275 Form 8275-R Schedule M-3 Schedule UTP Rev. Proc

39 Rev. Proc and disclosure Under Rev. Proc , forms and information included with the tax return are considered disclosures that may avoid penalties Examples include: Form 4684 Causalities and thefts Form 4952 Investment interest expense Form 8833 Treaty-based return positions Form 2106 Employee business expenses Filing the forms or information listed in the Rev. Proc. is considered adequate disclosure no further disclosures (Form 8275) are needed 38

40 HOW CAN YOU MITIGATE RISK OF FUTURE EXAMS?

41 Mitigating future risk In settling an IRS Audit, the results may impact subsequent years. For recurring issues, there are procedures in place to settle these issues. Delegation order Under delegation order 4-23, LB&I managers are delegated the authority apply an appeals settlement to subsequent years Closing agreement Agreement to settle the tax treatment of an item for future years; at the discretion of the IRS 40

42 Mitigating future risk (cont.) Anticipating issues in future examination and taking protective action can make future examinations more manageable. Disclosures For tax positions where there may be a range of authorities, filing a disclosure on Form 8275 reduces your exposure to penalties Accounting method changes If you are on an incorrect accounting method, filing for a change of accounting method (Form 3115) usually provides audit protection Many changes are automatic Documentation Assembling documentation to support a position at the time the return is prepared will save time in the event of an examination 41

43 Download the e-book 42

44 Stay connected and informed Subscribe Register Monitor Explore Follow RSM tax newsletters rsmus.com/events rsmus.com/taxreform rsmus.com/businessgrowth LinkedIn Twitter 43

45 Contact the presenters Patti Burquest Principal Alina Solodchikova Manager David Click Senior Director

46 RSM US LLP One South Wacker Drive Chicago, Illinois +00 (1) This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This document does not constitute audit, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. RSM US LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person. Internal Revenue Service rules require us to inform you that this communication may be deemed a solicitation to provide tax services. This communication is being sent to individuals who have subscribed to receive it or who we believe would have an interest in the topics discussed. RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent audit, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. RSM and the RSM logo are registered trademarks of RSM International Association. The power of being understood is a registered trademark of RSM US LLP.