24 th Annual Health Sciences Tax Conference

Transcription

1 24 th Annual Health Sciences Tax Conference December 8, 2014

2 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the U.S. This presentation is 2014 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of U.S. and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer s facts and circumstances. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 2

3 Presenters Dave Courtney Vice President Tax Ardent Health Services Nashville, TN Mark Mesler Ernst & Young LLP Atlanta, GA Frank Ng Ernst & Young LLP Washington, DC Page 3

4 Discussion topics IRS organization updates Large Business & International examination update Coordinated Industry Case pilot Quality Examination Process Issue Practice Groups Information Document Requests Directive Transfer pricing examinations International Practice Networks Pre-Filing Agreements Compliance Assurance Process Appeals Judicial Approach & Culture (AJAC) Project Global Tax Risk Management Survey Page 4

5 IRS organization updates Page 5

6 IRS organization Appeals Communications & Liaison Office of Compliance Analytics Equity, Diversity & Inclusion Commissioner Chief of Staff Deputy Chief of Staff Office of Research, Analysis and Statistics National Taxpayer Advocate Chief Counsel* Services & Enforcement Operations Support Criminal Investigation Large Business & International Division Agency-Wide Shared Services Chief Financial Officer Office of Professional Responsibility Office of Online Services Chief Technology Officer Privacy, Governmental Liaison and Disclosure IRS Human Capital Officer Return Preparer Officer Tax Exempt & Government Entities Division Whistleblower Office Small Business/Self Employed Division Wage and Investment Division Page 6

7 Recent IRS organization changes Established Assistance Commissioner (International) within Large Business & International (LB&I) Division to manage IRS-wide international compliance programs Moved jurisdiction of Tax Exempt/Governmental Entities (TE/GE) Counsel organization to Office of Chief Counsel (previously reported to TE/GE Division Commissioner) Realignment of pre-filing compliance programs to Wage & Investment Division (WI) and post-filing compliance programs to Small Business/Self-Employed Division (SB/SE) Identity theft victim assistance centralized under WI Creation of Office of Compliance Analytics and Chief Risk Officer reporting to Commissioner Page 7

8 New IRS Taxpayer Bill of Rights Page 8

9 FY 2013 IRS statistics Operating budget was approximately $11.5 billion Enforcement $5.0 billion Taxpayer services $2.3 billion Operations support $4.0 billion Business system modernization $0.2 billion Costs 41 cents, on average, to collect $100 More than 240 million federal tax returns filed Gross revenue collected was $2.5 trillion Revenue from all enforcement activities is $53.35 billion Recommended additional tax after audit was $37.09 billion Civil penalties assessed of $25.9 billion Civil penalties abated of $11.4 billion Page 9

10 FY 2013 audit coverage rates Category Coverage rate Overall individual 1.0% Individual with income over $200, % Individual with income over $1 million 10.8% Small corporation under $10 million in assets 1.0% Large corporation $10 50 million in assets 7.0% Large corporation $ million in assets 15.5% Large corporation $100 $250 million in assets 19.4% Large corporation $250 million to $20 billion and over in assets 22.5% 91.2% Partnership.4% Page 10

11 IRS FY 2015 budget priorities Enforcement priorities Identify theft and refund fraud Foreign Account Tax Act compliance implementation Affordable Care Act (ACA) statutory requirement implementation Enforcement priorities International and offshore compliance Expand audit coverage, focus on high-wealth individuals Improve coverage of partnerships and flow-through entities Enhance collection coverage Expand compliance coverage in tax-exempt sector Tax return preparer compliance and professional responsibilities Fraud referrals, employment taxes and abusive tax schemes Leverage data to improve audit selection Page 11

12 LB&I examination update Page 12

13 LB&I organizational chart LB&I Commissioner Heather C. Maloy Deputy commissioner (domestic) Deputy commissioner (international) Shared support Pre-filing and technical guidance Sergio Arellano (A) Doug O Donnell (A) Susan Latham, Dir. Tina Meaux, Dir. (A) Communications, technology and media Cheryl Claybough, Dir. Kimberly Edwards, DFO NW (A) Rosemary Daley, DFO SW Assistant deputy commissioner, international David Varley (A) Business systems planning Dean Wilkerson, Dir. Deputy director Deborah Palacheck (A) Financial services Rosemary Sereti, Dir. Jo McGready, DFO Fin Prod Barbara Harris, DFO NY International business compliance Sharon Porter, Dir. (A) Orrin Byrd, DFO W (A) Jolanta Sanders, DFO E William Holmes, Dir. IDM Management and finance Keith Walker, Dir. Global high wealth Cheryl Claybough, Dir. (A) International Individual compliance David Horton, Dir. Pam Drenthe, DFO Planning, analysis, inventory and research Christopher Larsen, Dir. (A) Heavy manufacturing and pharmaceutical Rosemary Sereti, Dir. (A) Catherine Jones, DFO NE Lavena Williams, DFO SE Transfer pricing operations Hareesh Dhawale, Dir. APMA (A) Equity, diversity and inclusion Rona Evans, Dir. Natural resources and construction Kathy Robbins, Dir. Katheryn Houston, DFO W Dennis Figg, DFO E (A) Steve Whitaker, DFO Eng (A) Foreign Payments Practice Theodore Setzer, Dir. Division planning, oversight reporting and liaison Michael Boccarossa (A) Retailers, food, transportation and healthcare Lori Nichols, Dir. (A) Margaret Von Lienen, DFO E (A) Lori Caskey, DFO W Paul Curtis, DFO CAS (A) = Acting Page 13

14 LB&I update Organizational leadership changes Five top executive departures including Deputy Commissioner (International, Transfer Pricing Director, Director Advance Pricing Agreement Mutual Agreement, Director International Strategy, Acting Deputy Commissioner (Domestic) Departure due to retirements and general tenure of private sector recruitments Domestic and international resource alignment Implementation challenges of 2010 LB&I restructuring Rumor of pending LB&I organization changes Impact to taxpayers Potential change of upper management on audits Potential delays in examination process Uncertainty on decision-making authorities Decline in experienced workforce Page 14

15 LB&I Coordinated Industry Cases (CIC) pilot IRS LB&I initiated a new CIC pilot 30 April 2014 Pilot will run for 18 months Currently, CIC cases are: Front-end loaded into the compliance plan Limit flexibility to allocate resources to other compliance activities Under the new process, all CIC cases would: Undergo a consistent classification process to determine return compliance risk and to identify issues Be entered into the workload delivery system New classification process will include: Issue identification and written explanations on compliance risks and documentation to support compliance risk conclusions All information will be included in case file for use in examination Page 15

16 Quality Examination Process Page 16

17 Quality Examination Process (QEP) Page 17

18 Quality Examination Process a collaborative process Steps for conducting a quality audit Planning Pre-audit analysis Planning meetings to scope issues with taxpayer Taxpayer orientation and initial financial and transaction data Finalize exam plan and milestones Execution Information document request and analysis Monitoring audit team performance and audit scope Discussion of issues with taxpayer Resolution Confirming facts Consult with specialists and experts Issue resolution strategies Determine areas of agreement Page 18

19 Issue Practice Groups Page 19

20 Formation of Issue Practice Groups (IPGs) Creation of Issue Practice Groups for domestic issues to enhance knowledge management structure, employee development and collaboration among examiners IPGs led by IPG Coordinator with one or more full-time subject matter experts (SMEs), part-time SMEs who spend less than 25% of their time as Collateral SMEs, and an IPG analyst On August 17, 2012, the IRS announced the termination of the tiered issue process All prior Industry Director Directives (IDDs) relevant to the tier issues are withdrawn and should not be followed by examiners Page 20

21 Current list of domestic IPGs Partnerships and TEFRA RICs, REITs and REMICs S-Corporations and Cooperatives Non-Life Insurance Compensation and Benefits Corporate Distribution and Adjustments Corporate Income and Losses Business Credits Energy Credits Life Insurance Penalties Financial Instruments Deductable and Capital Expenditures (DCEs) Inventory and 263A Methods of Accounting and Timing previously CAM Page 21

22 Information Document Requests Directive Page 22

23 LB&I Directive on Information Document Requests (IDRs) issued 2/28/14 Reiterates requirement that all IDRs must be: Issue focused (i.e., identify and state the issue that has led the examiner or specialist to request the information included in the IDR) Discussed with taxpayer prior to issuance, both in regard to content and determining a reasonable response time frame Outlines mandatory three-step IDR enforcement process: Delinquency Notice Pre-Summons Letter Summons Effective date 3/3/2014 Page 23

24 LB&I Directive on IDRs Examiners and specialists are permitted to grant taxpayers one extension of up to 15 business days before the enforcement process begins. If no response is received by the IDR due date and no extension is granted, the IDR enforcement process begins on the date the extension determination is communicated to the taxpayer. IDR enforcement process The examiner or specialist and taxpayer will determine a reasonable response due date to an IDR. Page 24

25 LB&I Directive on IDRs Delinquency Notice Signed by team manager, discussed with taxpayer and issued by examiner or specialist within 10 business days of the application of the enforcement process new response date no more than 10 business days from date of Delinquency Notice Pre-Summons Letter Signed by territory manager, who will issue and discuss the next steps with taxpayer at equivalent level within 10 business days after the Delinquency Notice due date new response date no more than 10 business days from date of Letter (unless DFO approval) Summons If information is not provided, a summons will be issued for enforcement by IRS Counsel and Department of Justice Page 25

26 New IDR enforcement process timeline Within 10 business days No more than 10 business days No more than 10 business days 10 business days No timeline specified but likely quickly IDR deadline Delinquency Notice Response date Delinquency Notice Pre- Summons Letter Pre- Summons Letter response date Summons Under the new directive, the IDR process - from the date of the initial draft IDR to the initiation of the summons process - can take approximately 140 days. Page 26

27 Transfer pricing examinations Page 27

28 New Transfer Pricing Audit Roadmap On February 14, 2014, the Transfer Pricing Operations (TPO) released the Transfer Pricing Audit Roadmap (the Roadmap). The Roadmap provides IRS transfer pricing practitioners with recommended audit procedures and links to useful reference material. The Roadmap provides insight into what to expect during a transfer pricing examination. This transparency is intended to help improve communications and efficiency, for the benefit of both the IRS and taxpayers. The 24-month cycle guideline is not fixed. Page 28

29 Transfer Pricing Audit Roadmap Organized around a 24-month audit timeline, the Roadmap breaks down a transfer pricing audit into three phases: Planning Execution Resolution Emphasis is placed on coordination within LB&I throughout the process, including the exam team, IRS transfer pricing specialists and the taxpayer, and encourages constant communication among all three groups of stakeholders. The stated purpose of the Roadmap is: To provide the transfer pricing practitioner, whether employed in TPO or International Business Compliance (IBC), with audit techniques and tools to assist them with the planning, execution and resolution of transfer pricing examinations. Page 29

30 Transfer Pricing Audit Roadmap Quality Examination Process (QEP) QEP phases Planning Execution Resolution Transfer pricing audit stages and timeline Cycle time in months Non-cycle time 1 st to 2 nd 3 rd 4 th 5 th 6 th 7 th to 15 th 16 th 17 th 18 th 19 th 20 th to 23 rd 24 th Pre-examination analysis Opening conference, transfer pricing orientation Preparation of initial risk analysis, exam plan and key milestones Fact finding and additional IDRs, functional analysis Mid-cycle risk assessment Issue development and preliminary reports Pre-Notice of Proposed Adjustment (NOPA) issue presentation Resolution discussions Final NOPA and case closing Page 30

31 International Practice Networks Page 31

32 IRS International Practice Networks Integrated international program International matrix is a framework for international strategy, training, networks and data management Organizes all international issues into four areas: Business Outbound, Business Inbound, Individual Outbound and Individual Inbound Four cross-over issues including Foreign Currency, Information Gathering, Corporate Organizations/Transactions and Treaties International Practice Networks (IPNs) aligned with the matrix strategy Most international matrix issue areas represented by an IPN IPNs led by Steering Committee technical specialist staff, an international manager sponsor, LB&I, SB/SE and Associate Chief Counsel (International) attorneys IPNs intended to allow international personnel organization wide and counsel to share and collaborate on strategic international issues Page 32

33 International Practice Network Income shifting Inbound financing Repatriation/ withholding International Business Compliance (IBC) inbound Income shifting Jurisdiction to tax Deferral planning US activities Foreign tax credit management Repatriation International Business Compliance (IBC) outbound Jurisdiction to tax Offshore arrangements Foreign tax credits Pass-thru entities US investments International Individual Compliance (IIC) inbound Foreign corporations International Individual Compliance (IIC) outbound International Practice Networks will focus on international issues and will replace the tiered issue process The International Practice Network will report to LB&I Deputy Commissioner (International) Corporate organizations/transactions Page 33

34 Goals for the International Practice Networks Tap into technical expertise: Facilitate the Knowledge Management model to broaden technical expertise and increase technical advice output Coordinate and support identification and publication of guidance Expand collaboration: Facilitate and engage additional resources to identify expertise throughout LB&I and the IRS to augment the development of technical positions IPNs do not command or control issues Improve quality and institution building: Sharing institutional knowledge and best practices to improve quality across the organization Concurrent opportunities to teach and learn Improve line of sight: LB&I is emphasizing line of sight into technical positions and consistent application of issue guidance across the organization Page 34

35 Pre-Filing Agreements Page 35

36 Pre-Filing Agreements (PFAs) Revenue Procedure Enables taxpayers and the IRS to resolve, before the filing of a return, the treatment of an issue otherwise likely to be disputed in post-filing examinations If successful, results in a closing agreement An agreed-upon methodology may be used for up to four subsequent years Provides full resolution of issue earlier than traditional return filing and examination Benefits taxpayer and IRS by improving the quality of tax compliance while reducing its costs, burdens and delays Affords heightened certainty for financial statements Page 36

37 Pre-Filing Agreement (PFAs) Excluded issues Transfer pricing, change of accounting method Penalties or criminal sanctions and reasonable cause determinations. Pending or proposed request for Private Letter Ruling (PLR) or Technical Advice Memorandum (TAM) or contrary to an issued PLR or TAM involving the taxpayer Issues subject of pending litigation with the IRS Issues designated for litigation by IRS Office of Chief Counsel Issues that involve a tax shelter Issues that require a determination of whether the taxpayer, rather than another entity, is the common law employer Page 37

38 Pre-Filing Agreement (PFAs) Acceptance of request into PFA program is subject to discretion of LB&I management $50,000 filing fee upon acceptance into PFA program Either party may withdraw at any time Return filing requirements are not suspended or waived Inspection of records pursuant to the PFA process does not preclude a later examination Selection criteria include: Impact on other years, issues and taxpayers Availability of IRS resources Probability of completing the PFA by the date for filing the earliest affected tax return Page 38

39 Compliance Assurance Process Page 39

40 What is CAP? The Compliance Assurance Process (CAP) is a program in which taxpayers and the IRS work together to achieve real-time tax return certainty. The program allows taxpayers to have a proactive relationship with the IRS, while managing their tax controversy and risk Key CAP component is real-time taxpayer interaction with issue identification and resolution Cooperative joint effort to resolve all issues and reach agreement prior to return filing Earlier certainty on the tax return is driven by taxpayer participation and cooperation, contemporaneous disclosures and issue resolution Page 40

41 Three CAP phases Pre-CAP phase The IRS and the taxpayer develop a plan to eliminate open years within a set time frame. They work in a cooperative and transparent post-file environment. The ultimate goal is meeting the selection criteria and progressing to the CAP phase. CAP phase The taxpayer and the audit team work in a real-time environment to identify and resolve issues prior to filing (same as current CAP process). The taxpayer works with the audit team by identifying transactions and providing information to resolve material issues. The taxpayer receives full acceptance if all material issues are disclosed and the tax return filing is consistent with the agreed tax treatment. Compliance maintenance phase The IRS will adjust the level of review work and time applied. The level of review will be adjusted based on the taxpayer s unique experience in CAP and history of compliance and risk. Material transactions and issues are periodically disclosed. Page 41

42 LB&I Pre-CAP & CAP taxpayers YEAR # of CAP taxpayers # of CAP maintenance taxpayers # of pre-cap taxpayers Not applicable (NA) NA NA NA NA NA NA NA NA NA NA NA NA NA NA Page 42

43 Appeals Judicial Approach and Culture (AJAC) Page 43

44 Appeals Judicial Approach and Culture (AJAC) Project AJAC Project returns appeals to a quasi-judicial approach to case management with goal of enhancing internal and external customer perception of a fair, impartial and independent Office of Appeals AJAC guidance was issued in two phases and applies to examination, collection and penalty cases handled by Appeals AJAC guidance generally applies to non-docketed cases; similar procedures for docketed cases are forthcoming Provides guidance on pre-conference meetings and ongoing communications with LB&I Page 44

45 AJAC Phase 1 Interim Guidance on Examination AP effective 7/18/13 Revised Policy Statement 8-2 (formerly P-8-49) Appeals will not raise new issues or reopen issues agreed to by taxpayer and Compliance Appeals will attempt to settle a case on factual hazards when cases submitted by Compliance are not fully developed and taxpayer presents no new information Clarifies that Appeals officers are not examiners and should not participate in assisting Compliance with case development Page 45

46 AJAC Phase 2 Implementation of AJAC AP effective for all new Appeals cases received on or after 9/2/14 Effective 10/1/14 for assistance between Appeals and Counsel on docketed cases At least 365 days remaining on statute of limitations, at least 180 days for cases returned to originating function for consideration of new information or issue If taxpayer provides new information or new evidence, at least 210 days remaining on the statute of limitation when case will be received by originating (exam) function Page 46

47 AJAC Phase 2 Implementation of AJAC Case returned to examination for further development of new information, taxpayer raises new issue(s), failure to secure timely consent, pending technical advice If Appeals Officer determines taxpayer or practitioner unreasonably delays the process with intentionally submitting new information or raising new issues multiple times, the Appeals Officer can make a determination based on factual hazards without consideration of new information or issues Specific procedures for returning a case to Large Business & International Division Generally return case to LB&I or allow opportunity to review and comment on information with at least 45 days Page 47

48 Global Tax Risk Management Survey Page 48

49 EY 2014 Tax risk and controversy survey Methodology and survey base: 830 tax and finance executives representing more than 20 industries in 25 jurisdictions Four key areas of tax risk identified Reputation risk BEPS and legislation risk Enforcement risk Operational risk Page 49

50 Reputation risk, base erosion profit shifting risk 89% of the largest companies surveyed are somewhat or significantly concerned about the media coverage of the taxes some companies are paying or their seemingly low effective tax rates. This is up from 60% in Conversely, just 9% say they are unconcerned now, compared with 40% in % of the largest companies say they have developed a more structured approach to managing their public tax profile. 94% of the largest companies having an opinion on the matter think that global disclosure and transparency requirements will continue to grow in the next two years. 74% of the largest companies say they feel that tax administrators are now challenging existing structures due to changes in the law or changes in their enforcement approach. 51% of the largest companies said that, in the last two years, they have experienced an increased focus by the tax authorities in their HQ s country on the economic and operational substance of foreign entities in their group. Page 50

51 Tax enforcement risk, operational risk Transfer pricing is thought to be the highest-perceived tax risk area, followed by indirect taxes and permanent establishment risk. 68% of the largest companies report that they feel tax authorities globally have increased their focus on cross-border transactions in the last two years. 68% of the largest companies report that they feel tax audits have become more frequent or aggressive in the last two years. Leading sources of operational tax risk for the largest companies (in order of prevalence): 75% cited insufficient resources to cover tax function activities 64% cited insufficient internal communication 57% cited a lack of processes or technology Only 45% of large companies globally have complete visibility over open tax audits and disputes globally. 43% of all companies use internally developed software or templates to track open tax audits, while 43% use no technology tools at all. Only 12% use a specialist third-party tool from a vendor or professional services company. Page 51

52 Questions? Page 52

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