IRS Update: What s Happening Now

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1 2 nd Annual CFMA Southwest Regional Conference San Diego, CA September 25-27, 2016 IRS Update: What s Happening Now Presented by: Kathy Petronchak

KATHY PETRONCHAK Former IRS Commissioner of Small Business/Self Employed (SB/SE) Division;

Commissioner and current alliantgroup Vice Chairman, Mark W.

compliance with IRS standards 37 years of experience in directing IRS compliance

2 KATHY PETRONCHAK Former IRS Commissioner of Small Business/Self Employed (SB/SE) Division; alliantgroup Director of IRS Practice & Procedure Chief of Staff under former IRS Commissioner and current alliantgroup Vice Chairman, Mark W. Everson Served directly with small and mid-sized businesses and practitioners on compliance with IRS standards 37 years of experience in directing IRS compliance activities and providing tax controversy services Member of the AICPA Tax Executive Committee and former Chair IRS Practice and Procedures Committee

3 Agenda State of the IRS IRS stats Examination Process Focus Areas Dispute Resolution Appeals Future State Identity Theft Legislation alliantnational

4 STATE OF THE IRS

5 Less Resources Current State of the IRS FY 2016 IRS budget $11.23B - over $1B in cuts since slight 2016 funding increase allocated to customer service/telephone assistance, fraud detection, cybersecurity Very limited ability to hire new employees - essentially a hiring freeze Significant increases in executive and senior manager retirements - 41% of managers and 61% of executives eligible to retire in 2016 Overall staffing down from 100,000 in 2010 to less than 85,000 in % of overall workforce eligible to retire in 2016 increases to 40% by 2019 Revenue Agent and Revenue Officer staffing down by 15-18% since 2010 Appeals staffing has fallen by 20% since 2010

6 IRS Audit Stats- Fiscal Year 2015 Category Returns Filed # Examined Coverage % Individual 146,861,217 1,228,117.8% Small Corporation 1,797,366 16,460.9% Large Corporation 66,484 7, % Partnerships 3,766,567 19,212.5% S-Corps 4,605,766 18,595.4%

8 IRS Examinations Background Primarily used to determine whether taxpayer has properly reported income and expenses on tax return Field examinations are conducted by revenue agents By nature, the examination process is adversarial, but it does not have to be acrimonious

9 Examination Process Begins with letter notifying taxpayer that their tax return has been selected for examination Notification letter is followed with an Information Document Request ( IDR ). IDRs are the revenue agents informal device for gathering information Taxpayer responds to IDR, and a meeting is scheduled with the revenue agent to discuss taxpayer s responses and potential issues If a taxpayer is represented, the representative will attend the meeting with the agent on behalf of the taxpayer.

10 Examination Process (cont.) Follow-up IDRs may be issued If revenue agent feels like they are not getting complete cooperation, they may issue summonses to taxpayer and other third party record-keepers Revenue agent may also request to interview taxpayer When revenue agent is satisfied with the information provided will write up a report report could propose adjustments to income, a refund to the taxpayer, or no adjustment at all

11 Large Business & International (LB&I) Examination Process Publication 5125, Large Business & International Examination Process Issue focused examination process Enforcement process for Information Document Requests (IDRs) Summons if not complied with Acknowledgment of facts IDR

12 Issue Focused Examination Process Applies from the IRS s first contact with the taxpayer through final resolution of issues designed to establish the roles and responsibilities of both IRS examiners and taxpayers during an examination IRS says one change is that examiners are expected to work transparently and collaboratively with taxpayers to understand the taxpayer s business and share issues that have been identified for examination

13 Campaign Design Organizes work to achieve a collective impact on compliance outcomes Includes transition from a system in which work is DAS-classified to a system where work is selected based on impact on compliance and linked to intended compliance outcomes Campaigns will feature the right mix of treatment streams to achieve intended outcomes Provides clearer direction on why work was selected and what compliance outcomes are intended Maximizes campaign effectiveness by selecting tailored treatments with a defined goal Encourages the broader tax community to look to LB&I for guidance and direction on issues

14 Campaign Design (cont.) Examples of a campaign design that chooses mix and volume of treatments to achieve intended impact: Limited Issue Exam to focus expertise on discrete, priority issues Practitioner Outreach to discuss the issue and encourage them to look to LB&I for guidance and direction on issues Compliance Assurance Process (CAP), use of these audits for insight into how other taxpayers planned to treat the issue Industry Events for discussion of issue and understanding of industry practices and to establish common groundwork for field guidance Industry Issue Resolution guidance issued to address correct method of handling issue

15 Campaign Design (cont.) Limited Issue Exams o Design and implementation of a limited issue examinations program, informed by lessons learned from prior efforts and current practices. The issue selection process for limited exams will be centered on the broader compliance goals within LB&I. This will be paired with the development of a reporting mechanism to capture issues discovered, but not worked during the examination for inclusion in risk modeling and future issue development. Enables the division to gain focused expertise on discrete, priority issues Supports wider coverage of taxpayers as fewer resources are assigned to large examinations Provides refreshed guidance at all levels for the new methods of performing limited issue exams

16 Practice Areas Nine Practice Areas A Practice Area is a group of employees organized together to focus on one or more areas of expertise. Each Practice Area (along with other activities) will study compliance issues within their area of expertise and suggest campaigns to be included in the compliance plan. Five Practice Areas Devoted to Subject Matter: Pass Through Entities Enterprise Activities Cross Border Activities Withholding and International Individual Compliance Treaty and Transfer Pricing Operations Four Practice Areas Represent Compliance Regions: Western, Central, Eastern and Northeastern

17 Executing the Exam Written Acknowledgment of the Facts (AOF) LB&I requires that all information, including all relevant facts and supporting documentation, be submitted to LB&I for consideration Issue team should collaborate with the taxpayer to develop all facts before issuing a NOPA. Issue team is expected to conduct on-going interactive discussions to resolve any factual disputes and discuss tax positions on issues Before an unagreed issue is sent to Appeals, the issue team will solicit a written acknowledgment of the facts o ensures all relevant facts including those favorable to the taxpayer, are fully developed Allows issue team to address any additional or disputed facts identified by the taxpayer before the case is sent to Appeals Issue manager should review the taxpayer s response to the acknowledgement of facts to assess the strengths and weaknesses of each side s position and to ascertain if the issue can be resolved Taxpayer reminded that 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

18 Types of Issues Un reasonable Compensation Closely held companies Menard, Inc. v. Commissioner, 560 F. 3d 620 (7 th Cir. 2009) Employment Tax violations Captive Insurance Companies ACA Reporting Offshore enforcement Banks, whistleblowers, treaties

19 Multinational controversy Tax treaties and Tax Information Exchange Agreements Joint International Tax Shelter Information & Collaboration Network (JITSIC) Foreign Account Tax Compliance Act (FATCA) Transfer pricing Mutual Agreement Procedure Advance Pricing Agreement

20 Dispute Resolution Fast Track is an expedited dispute resolution program Occurs during the examination phase Goal: resolve issues earlier in the process and more quickly than traditional approaches Occurs after one or more issues have been defined in a notice of proposed adjustment (NOPA) Appeals fresh look at a taxpayer s IRS dispute in which examination team has limited or no involvement Post Appeals Mediation non-binding process that uses the services of a mediator

21 Pre-Filing Agreements (PFAs) Revenue Procedure provides guidelines Resolution of items before filing a tax return Applies to completed transactions/events not yet reported on the income tax return User fee required $134,300 for PFA requests submitted on or after June 3, 2016 $218,600 for PFA requests submitted on or after January 1, 2017

22 2015 PFA Statistics Issue Received Accepted Closed Worthless Stock/Bad Debt Deduction IRC 41, Research Credit Cost Segregation Study & Depreciation/Depletion 1 1 Gain/Loss on Sale/Exchange of Property/Stock 2 Deductibility of Settlement/Fine Payments Treatment of Interest of Member of Consolidated Group 1 Deductibility of Charge offs of Partially Worthless Debt 1 Tax Consequences of a Merger/Acquisition/Liquidation Withholding and Reporting Requirements Bankruptcy Issues 1 1 1

23 Audit Tips to Consider When should you extend the statute of limitations? When is it beneficial to consider an alternative resolution approach? How will you obtain the necessary information and how quickly? Who is best suited to present your arguments on technical issues when the law is not agreed upon?

24 Audit Tips: Multinational tax controversy Being prepared for an audit Internal information exchange and cooperation Audit database to share information across countries Personnel to manage controversy in each country Procedures for handling a tax dispute

25 Collection Early Intervention Initiative What it is: a new initiative designed to more quickly identify employers who are falling behind on their federal tax deposits and then help them get caught up on their payment and reporting responsibilities. Used to proactively identify and prevent pyramiding before it becomes unmanageable

26 Collection Early Intervention Initiative (cont.) Why is this important? Because of the significant amount of tax payments that are withheld and required to be remitted to the US Treasury 70% of US tax payments are received from employers Used to remind employers of their payroll tax responsibilities and the consequences of non-compliance

27 Collection Early Intervention Initiative Effects on Stakeholders Employers, payroll service providers and tax reps should expect: More Contacts Earlier Contacts Emphasis on Precluding delinquencies and/or Addressing delinquencies early

28 Appeals Function: Independent administrative appeal function within IRS that reviews cases after Compliance has made its decision and usually prior to a hearing in court Unique in tax administration can settle cases based on hazards of litigation Mission: Resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer Independence: IRS Restructuring and Reform Act of 1998 calls for an independent appeals function within the IRS and prohibits certain ex parte communications between Appeals Officers and IRS employees. Statute of limitations issues Mediation Revenue Procedure

29 IRS Future State Concept of Operations CONOPS

30 Environment changing CONOPS Overview Tax laws increasing in complexity Taxpayer needs and requirements change and evolve Budget and resource constraints are growing Created to communicate vision over next 5 years Each IRS division charged to review Con-Ops 5 themes/initiatives Data-centric operations Use internal and external data to make business decisions, measure performance and improve processes Taxpayer error resolution-lowers risk of filing errors by providing taxpayers with user friendly tools, resources, and education to guide them through preparation, submission and correction of tax documents Expanded partnerships with tax community Compliance risk-focused operations Flexible and well-supported workforce Strategic workload allocation

31 CONOPS (cont.) Benefits of change Increased taxpayer compliance at time of filing Tax community engaged on relevant issues and trends due to greater cooperation with the IRS Tax practitioners work closely with taxpayers to prepare compliant returns Optimized exam case load Enhanced enforcement selection and outcomes Well informed and self sufficient taxpayers Taxpayers have tools and information needed to comply Digital platforms that provide secure online accounts and information Simpler, faster, and easier tax submission evaluations Stronger organizational foundation for workforce development

32 IDENTITY THEFT

33 Refund Fraud the perils of identity theft The numbers remain high This year through May 8th, leads from Security Summit partners resulted in the suspension of 36,000 returns, on which a total of $148 million in refunds was claimed Through April, the IRS stopped over $1 billion in fraudulent refunds claimed by identity thieves on more than 170,000 tax returns The IRS response to date Prevention, detection, victim assistance

34 What s Out There? Tax Scams/Consumer Alerts Fake charity scam regarding flood victims in SC and elsewhere Calls with altered telephone caller ID demand immediate payment of taxes Bogus s Tax professionals receiving s pretending to be from tax software companies Data breach Targeting: Tax Professionals Employers information returns, especially Form W-2, are becoming a major target identity thieves posing as a company s chief executive sent a legitimate-looking to the payroll department requesting a list of all company employees and their W-2s

35 WHAT S NEW IN WASHINGTON?

36 The Good News ASC on Amended Returns New regulations TD issued allowing the alternative simplified credit on amended returns Choose your path Part of alliantgroup s ongoing effort to help its partner CPA s and their clients.

37 Partnership Changes Tax years beginning after December 31, 2017 subject to changes under Bipartisan Budget Act of 2015 Adjustments and tax imposed at partnership level unless elect out If less than 100 partners then can elect out Who gets hit? Current partners for past partners Lots of partnership agreements will have to be amended Return due date changed to 15 th day of third month following close of tax year after December 31, 2015 Replaces TEFRA partnership audit rules

38 New dates for filing W-2s, 1099s now by January 31, Section 6071, effective for 2016 forms Various provisions to prevent fraud in refundable credit area Increase in Paid Tax Preparer Penalty IRS Reform Proposals Education on taxpayer rights 501(c)(4) changes Personnel rules (personal , etc.) IRS Budget IRS Procedure Changes

39 PATH Act Extenders Permanent Research and Development Section 41 Credit against Alternative Minimum Tax for eligible Small Business Section 38(c) 2016 Section 3111(f) shall apply to the payroll tax credit portion of the credit Startup provision Other provisions made permanent American Opportunity Tax Credit Section 25A(i) Extension for deducting state and local general sales taxes Section 164(b)(5)

40 Extenders 5-year through 2019 New Markets Tax Credit Work Opportunity Tax Credit (WOTC) Bonus depreciation with phased down amount Certain CFC look through treatment

41 Extenders 2-year through 2016 Medical Device Tax Moratorium No tax imposed in 2016 or 2017 Cadillac Tax Delay commencement for two years BUT that is in the budget bill and not in this bill 179D Extended ASHRAE standards raised from 2001 to 2007 for buildings placed into service in 2016

42 Questions?

43 THANK YOU Kathy Petronchak

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