11th Annual Domestic Tax Conference. 28 April 2016 New York City

Transcription

1 11th Annual Domestic Tax Conference 28 April 2016 New York City

2 IRS/Large Business and International s shift in audit focus and enforcement trends

3 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 US. This presentation is 2016 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 US. 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

4 Today s presenters Linda Kroening Executive Director, Ernst & Young LLP Laura Prendergast Executive Director, Ernst & Young LLP John DiIorio Senior Manager, Ernst & Young LLP Matthew Cooper Senior Manager, Ernst & Young LLP Page 3

5 Agenda IRS budget and resource constraints New Large Business and International (LB&I) structure Changing LB&I examination approach and process Update on appeals process New partnership audit procedures Other IRS developments Page 4

6 IRS budget and resource constraints Page 5

7 IRS budget reduced In FY 2010, the IRS s budget was $12.1b. Its budget for FY 2015 is $10.9b, a reduction of approximately 9.9% or around 17% adjusted for inflation. $15 $10 $5 $0 FY 2010 FY 2011 FY 2012 IRS funding FY 2013 FY 2014 FY 2015 This is the lowest level of funding since 2008, and the lowest since 1998 when inflation is considered. IRS Commissioner John A. Koskinen Actual dollars (billions) Inflation adjusted dollars (billions) 1, Page 6

8 Number of employees down Number of full-time equivalents (FTEs) at fiscal year-end ,540 78,121 83,613 89,551 91,380 94, ,000 40,000 60,000 80, ,000 Source; IRS Data Book(s) , Table 30. Page 7

9 FY 2015 IRS audit coverage rates Category Coverage rate Overall Individual 0.8% Individual with income over $200, % Individual with income over $1m 9.6% Small corporation under $10m in assets 0.9% Large corporation $10 $50m in assets 5.8% Large corporation $50 $100m in assets 11.3% Large corporation $100 $250m in assets 14.2% Large corporation $250m to >$20b in assets 14.0% 64.0% Partnership 0.5% Page 8

10 New Large Business and International (LB&I) structure Page 9

11 LB&I s new structure As of 7 February 2016 LB&I is organized by 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. Page 10

12 LB&I restructuring LB&I is now organized into nine practice areas: five subject-matter based and four geographically based. Subject-matter practice areas 1. Pass-through entities 2. Enterprise Includes financial products and institutions, corporate issues, credits, and penalties 3. Treaty and transfer pricing 4. Withholding and international individual compliance Includes FATCA 5. Cross-border activities International activities other than those falling under the transfer pricing and withholding areas Geographic practice areas 1. Northeast (New York) 2. East (Downers Grove, Illinois) 3. Central (Houston) 4. West (Oakland, California) Page 11

13 LB&I high level organization chart LB&I Commissioner Douglas O Donnell Director Program and Business Solutions Susan Latham Deputy Commissioner Rosemary Sereti Assistant Deputy Commissioner Compliance Integration David Horton Assistant Deputy Commissioner International Theodore Setzer Director Technology and Program Solutions Kathryn Greene (A) Director Resource Solutions Keith Walker Director Data Mgt. William Holmes Director Compliance Planning and Analytics Christopher Larsen Director Western Compliance PA Kimberly Edwards Director Pass Through Entities PA Cheryl Claybough Director Enterprise Activities PA Kathy Robbins Director Central Compliance PA Tina Meaux Director Cross Border Activities PA John Hinding Director Eastern Compliance PA Lavena Williams Director Withholding and Int l Individual Compliance PA Pamela Drenthe Director Treaty and Transfer Pricing Operations PA Sharon Porter Director Northeastern Compliance PA Barbara Harris Operations West Don Sniezek (A) Operations Southwest Paul Curtis Computer Audit Specialists Global High Wealth Deputy Director Pass Through Entities Cliff Scherwinski Promoter Program Senior Advisor Elizabeth Wagner Director Financial Institutions and Products Gloria Sullivan Financial Products Banks/Insurance/ RICs-REITs- REMICs Affordable Care Act Director of field Operations North Central Katheryn Houston Engineers Operations South Central Margie Maxwell (A) Operations East Orrin Byrd Operations West Jolanta Sander Operations Great Lakes Steve Whiteaker Tax Computation Specialists Operations Southeast John Hinman (A) Operations Foreign Payments Practice Johanna McGeady-Muirphy Operations International Individual Compliance Elise Gardner Operations Transfer Pricing Practice Cheryl Teifer Economists Director Advance Pricing and Mutual Agreement Hareesh Dhawale Director Treaty Administration Deborah Palacheck Operations North Atlantic Catherine Jones Operations Mid-Atlantic Dennis Figg Director Corporate/Credit Holly Paz Treaty Assistance and Interpretation Team Corporate Issues and Credits Penalties Exchange of Information Joint International Tax Shelter Information Center Page 12

14 Geographic practice area map AK CA HI W A OR NV ID AZ UT MT WY CO NM ND SD NE T X KS OK MN IA MO AR L A WI IL M S IN MI TN AL OH KY WV GA PA S C VA N C FL NY M E VT NH MA RI CT NY DE NJ MD DC Engineers Computer Audit Specialists Global High Wealth Tax Computation Specialists West Kimberly Edwards Central Tina Meaux East Lavena Williams Northeast Barbara Harris Operations-W D. Sniezek (A) Operations-SW P. Curtis Operations-SC M. Maxwell (A) Operations-NC K. Houston Operations-GL S. Whiteaker Operations-SE J. Hinman (A) Operations-NA C. Jones Operations-MA D. Figg Page 13

15 Practice areas (PA) Director Pass Through Entities PA Director Enterprise Activities PA Director Cross Border Activities PA Director Withholding and International Individual Compliance PA Director Treaty and Transfer Pricing Operations PA Deputy Director Pass Through Entities Director Financial Institutions and Products Operations East Operations Foreign Payments Practice Operations Transfer Pricing Practice Promoter Program Financial Products Banks/Insurance/RICs- REITs-REMICS Operations West Operations International Individual Compliance Economists Director Advance Pricing and Mutual Agreement Affordable Care Act Director Treaty Administration Director Corporate/Credit Treaty Assistance and Interpretation Team Corporate Issues and Credits Exchange of Information Penalties Joint International Tax Shelter Information Center Page 14

16 Compliance practice areas Director Western Compliance PA Director Central Compliance PA Director Eastern Compliance PA Director Northeastern Compliance PA Operations West Operations North Central Operations Great Lakes Operations North Atlantic Operations Southwest Engineers Tax Computation Specialists Operations Mid-Atlantic Computer Audit Specialists Operations South Central Operations Southeast Global High Wealth Page 15

17 Changing LB&I examination approach and process Page 16

18 LB&I shift in audit focus LB&I is moving to a centralized issue selection and return selection approach over the next few years. LB&I seeking to create a more flexible and knowledgeable workforce, using data analytics to better identify areas of noncompliance, and creating tailored treatments to respond to issues. A shift to a centralized issue development process or campaign that focuses on how to identify and address compliance risks. Campaign-related actions would include development of training materials, technical positions, and audit aids, among other tools. New process integrates recent Information Document Request changes and new claim filing policy. LB&I will generally be moving away from the Coordinated Industry Case (CIC) approach. Any potential changes to the compliance assurance process (CAP) have yet to be determined. Page 17

19 IRS issue examination approach Scan universe of external and internal inputs Analyze risk Focus Strategically identify and prioritize areas of compliance risk to more effectively address taxpayer compliance. Execute Execute work with dynamic tools, enhanced training, a robust support infrastructure, and timely feedback mechanisms. Execute Work Adapt Continually gather, assess, and incorporate feedback to enhance operations and improve taxpayer compliance. Develop issues Plan Decide what work is performed, who performs it, and what support is needed, based on areas of compliance risk. Select work Build campaigns Page 18

20 Potential implications of new exam approach Fewer continuous large taxpayer examinations. How does it impact determination of effectively settled? Uncertain future of compliance assurance program Greater centralization of issue identification and development. What will be level of IRS transparency on issue selected for examination? Greater scrutiny of issues with higher expectations to produce documentation quickly Potentially less flexibility to resolve issues at exam level Multiple examination teams and management chains based on type of issue selected for audit Page 19

21 New LB&I exam process Publication 5125 (February 2016) Replaces current Quality Exam Process incorporating recent changes New Information Document Request Directive Appeals Judicial Approach and Culture Establishment of subject matter experts to promote knowledge sharing Establishes process for centralized issue identification and selection Exam Teams may limit audit to pre-identified issues Issues to be managed and audited by issue teams Updates to IRM 4.46 sections 1 6 issued in March 2016 Effective for examinations starting as of 1 May 2016 For cases in process as of 1 May, transition to the new process by adopting changes in the Execution and Resolution phases. Page 20

22 LB&I examination process roles and responsibilities Expectations for LB&I examiners Work transparently in a collaborative manner with the taxpayer to understand their business and share the issues that have been identified for examination Engage the taxpayer in the development of the audit steps and potential timeline appropriate for the issues selected in the examination plan; provide a final copy to the taxpayer Follow the information document request (IDR) procedures Keep the taxpayer informed of the status of each issue on a regular basis Provide written documentation of all relevant facts, seek taxpayer acknowledgement, and if the issue is unagreed, appropriately document all disputed facts Apply the law to the facts in a fair and impartial manner Prepare well-developed Notices of Proposed Adjustments Resolve issues at the earliest appropriate point using the appropriate issue resolution tool Page 21

23 LB&I examination process roles and responsibilities Expectations for taxpayers and representatives Work transparently with the exam team by providing a thorough overview of business activities, operational structure, accounting systems, and a global tax organizational chart Identify personnel for each issue with sufficient knowledge who can provide input when establishing initial audit steps, timelines, and actively assist in the development of the issues selected by the exam team Follow the IDR procedures For issues identified for examination, provide work papers and supporting documents requested, including those the taxpayer relied on when preparing the return Collaborate with the issue team to arrive at an acknowledgment of the facts for unagreed issues; provide support for additional or disputed facts To foster early resolution, respond timely to each Form 5701 by providing a written legal position for issues in dispute Resolve issues at earliest appropriate point using an issue resolution tool Page 22

24 LB&I examination process expectations with respect to claims Informal claims for refund Provided to the exam team within 30 days of the opening conference After 30 days, must file formal claims (unless issue has been identified for examination and no IRS published guidance specifically requiring formal claims). In limited circumstances exceptions to the formal claims process may be granted by LB&I senior management. Claims will be disallowed if Treasury Regulation Section standards are not met. Page 23

25 LB&I examination process planning and execution LB&I will determine the scope of the audit and issues to be examined based on the broadest impact on compliance regardless of the size or type of entity. Issue driven examination process Focuses on the right resources on selected issues. Establishment of issue examination team. Centrally selected issues to be managed and audited by issue teams. Encourages collaboration within issue teams where every examiner and their manager are equally responsible and accountable for the examination. Leverages knowledge transfer among technicians. Establishes case timelines as determined by the most complex issues. Case manager in geographical practice will have overall responsibility for the case. Issue manager will collaborate with the case manager. Provides examiners an optional issue-driven risk analysis form (13744-I). Page 24

26 LB&I examination process execution Issue development model Relies on active dialogue and fact sharing Seeks ongoing acknowledgment of facts to ensure accurate tax determinations Updates IRM to include the directives issued on the Information Document Request process Introduces the Acknowledgement of Facts Information Document Request Pro-forma IDR-IRM Exhibit Page 25

27 Pro-forma IDR IRM exhibit Purpose of IDR is to ensure that all relevant facts, whether favorable to the taxpayer or LB&I, are being considered before the Form 5701, Notice of Proposed Adjustment (NOPA) is issued. Please review the attached Form 886-A and respond accordingly in writing to the LB&I issue team by the agreed upon date (MM/DD/YYYY). a) Taxpayer agrees to the facts as written. b) Taxpayer provides additional relevant facts and supporting documentation. c) Taxpayer identifies disputed facts and provides clarification and/or supporting documentation Appeals will return the case to exam if the taxpayer presents new information during the Appeals process that was not shared with LB&I during the examination. Therefore, the taxpayer has the primary responsibility to ensure all relevant facts are provided to the LB&I issue team. Your response to the facts does not indicate agreement to the issue or any proposed tax adjustment. It is only to acknowledge that all of the relevant facts have been identified. Page 26

28 LB&I examination process resolution Issue resolution tools Consistently encourages available issue resolution tools Requires consideration of Fast Track Settlement with Appeals Taxpayer responsibility Ensuring all relevant facts and legal arguments provided during examination Pro-Forma IDR for Acknowledgment of Facts on Unagreed Issues (IRM Exhibit ) Prevent case being referred back to LB&I by Appeals Exit strategy Discussions must include efforts to resolve tax controversy for certainty Joint critique of the exam process to recommend improvements Address future tax treatment of issues to eliminate carryover/recurring issues Page 27

29 Update on appeals process q Page 28

30 Appeals Judicial Approach and Culture (AJAC) 18 July 2013 Interim Guidance Memo for Appeals Employees AJAC applies to Examination and Collection cases AJAC themes: Judicial approach to Appeals hearing by utilizing what is in the case file No new issues raised by Appeals. Appeals will attempt to settle a case on factual hazards when the case submitted by Compliance is not fully developed and the taxpayer has presented no new information or evidence. If a taxpayer provides Appeals with new information, Appeals will return the case to LB&I. If a taxpayer raises new arguments at Appeals, LB&I will be given the opportunity to review and comment on the arguments, but Appeals will maintain jurisdiction. Page 29

31 Appeals Judicial Approach and Culture (AJAC) 3 July 2014 Appeals released second phase of AJAC Statute of Limitations one year remaining prior to acceptance Providing Exam with opportunity to comment (specific time frame, 45 days) or return case to Exam (Appeals releases of jurisdiction to Exam) Premature referral of case to Appeals or new information presented by taxpayer during Appeals Hearing Page 30

32 Appeal procedure changes Elimination of Appeals arbitration program (Rev. Proc obsoleting Rev. Proc ) Fast Track Settlement Program Updated Cases in which a 30-Day Letter has been issued are eligible for the Fast Track Settlement (FTS) Program. This does not change LB&I s general practice to offer FTS in appropriate situations prior to issuance of a 30-Day Letter. Also, FTS must be initiated prior to the issuance of the 90-Day Letter Fast track cases no longer qualify for post Appeals mediation process IRS Notice : The IRS described updates to its administrative appeals process for cases docketed in the Tax Court. Page 31

33 New partnership audit procedures Page 32

34 Background New partnership rules and procedures enacted by the Bipartisan Budget Act of 2015 (Budget Act) Budget Act partnership rules affect Who pays tax How much tax is paid Procedures Applies to partnership tax years beginning after 31 December 2017 A partnership may elect to apply the new procedures to earlier years Election cannot be made until the IRS issues guidance Joint Committee on Taxation estimates the provisions will raise almost $10b over a 10-year period Page 33

35 Background Prior to Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) Until TEFRA was enacted in 1982, the IRS had to audit each partner separately IRS difficulty in administering partner level audits led to TEFRA TEFRA is generally the current regime for auditing most partnerships Centralized procedure, but IRS needs to still make partner level assessments IRS has had trouble administering TEFRA New rules replace TEFRA and are intended to provide for a centralized audit procedure that the IRS can administer New rules replace electing large partnership ELP rules as well Page 34

36 Partnerships subject to budget act rules Rules apply to all partnerships Mandatory for partnerships with: More than 100 partners, or Any flow-through entity (other than S Corps) Partnerships for which the rules are not mandatory may elect out Election has to be made by the partnership separately for each tax year Should partnership avoid flow-through partners if number of investors does not exceed 100? If elect out, subject to partner level audits IRS needs to issue guidance on the election procedures Page 35

37 Overview who pays? General rule: Partnership pays tax Partnership pays an imputed underpayment (equivalent of tax at highest rate) Costs borne by current partners; no effect on prior year partners Hybrid modifies amount partnership pays Partner attributes may reduce imputed underpayment amount (e.g., tax-exempt partners) Historic partner may amend its return to pay its share of adjustment Partnership still on hook Alternative: Historic partners pay tax Partnership forces partners in year item arose to pay tax owed Historic partners pay; partnership does not Page 36

38 Partnership representative new role The Partnership Representative is the sole person with authority to act on behalf of the partnership and its partners Replaces the TMP or tax matters partner under TEFRA More powerful than the administrative role held by the TMP under TEFRA Partners have no statutory right to participate in an audit or litigation Does not matter whether partner has adopted an inconsistent position Partnership Representative has authority to bind all partners to audit adjustments Partners will not separately sign IRS audit settlement agreements Page 37

39 Partnership representative Partnership may designate the Partnership Representative. Eligible persons: any person with a substantial presence in the United States If partnership does not designate the Partnership Representative, the IRS may select any person to be Partnership Representative. Page 38

40 Notice to partners Neither the IRS nor the Partnership Representative has to give notice of audit or litigation proceeding to the partners. Audit can be resolved with the partnership and partners bound by a settlement (or audit resolution) and without any partners being aware that the partnership was under audit. Page 39

41 Key considerations New partnership agreements should take the new rules into account. Existing partnerships will want to consider amending their agreements. But probably should let the dust settle before taking any action Financial statement considerations? Page 40

42 Other IRS developments Page 41

43 Other IRS developments Schaeffler Privilege Case, No cv (2d Cir. 10 November 2015) US Court of Appeals for the Second Circuit reversed the District Court of the Southern District of New York and held that a taxpayer did not waive attorney-client privilege when he shared documents with a consortium of banks (the Consortium) with which he had a common legal interest. The Second Circuit also sustained the taxpayer's claim of work product protection for the documents, rejecting the lower court's finding that the documents would have been prepared in essentially the same form even if the taxpayer had not anticipated litigation with the IRS. Form 1042 and Other Withholding Tax/Employment Tax Issues IRS Exam teams more frequently issuing IDRs on Form 1042 and other withholding tax/employment tax issues. IRS Employment Tax Agents are in IRS Small Business/Self-Employed Division. Page 42

44 Other IRS developments Change in due dates C Corporations: For tax years beginning after 31 December 2015 Form 1120 is due the 15th day of 4th month following close of year. For calendar tax years beginning after 31 December 2015 until 31 December 2025, the extension period is only 5 months. For tax years on or after 1 January 2026, the extension period will increase to 6 months. Partnerships: For tax years beginning after 31 December 2015, Form 1065 is due the 15th day of 3rd month following close of year. For tax years after 31 December 2015, the extension period changes from 5 months to up to 6 months. FBAR Due date changed from 30 June to 15 April Currently no extension allowed, but for tax years after 31 December 2015, taxpayers will be allowed automatic extension up to 6 months. Page 43

45 Other IRS developments Section 6676 Erroneous Claim for Refund Penalty Previously, 20% penalty for excessive claims that lacked reasonable basis. PATH Act removed reasonable basis standard and added reasonable cause exception. Basket Option Contract Listed Transaction and Basket Contract Transaction of Interest Notices Notices and provide new listed transaction and transaction of interest. Taxpayers who participate in described transactions need to timely disclose on Form ID Theft On 1 March 2016, IRS issued alert to payroll and human resources professionals to beware of an emerging phishing scheme that purports to be from company executives and requests personal information on employees. Page 44

46 11th Annual Domestic Tax Conference 28 April 2016 New York City