DID YOU GET YOUR BADGE SCANNED? UPDATE ON LB&I ENFORCEMENT CAMPAIGNS

Transcription

1 DID YOU GET YOUR BADGE SCANNED? UPDATE ON LB&I ENFORCEMENT CAMPAIGNS #TaxLaw #FBA Username: taxlaw Password: taxlaw18

2 Presenters Moderator: Matthew Cooper, Senior Manager, Ernst & Young LLP Panelists: John Hinding, Director, Cross Border Activities Practice Area, Large Business & International Steven Miller, National Director of Tax, alliantgroup LP Jennifer Breen, Partner, Morgan, Lewis & Bockius LLP Page 2

3 Agenda Large Business & International (LB&I) Enforcement Campaigns LB&I Examination Process, Publication 5125 Acknowledgement of Facts IDR Changes to IRS Appeals Consideration Page 3

4 LB&I Enforcement Campaigns Page 4 Presentation title

5 LB&I campaigns background LB&I announced 13 campaigns in a January 31, 2017 news release. 11 new campaigns were announced November 3, 2017 Campaigns are a new workload selection tool that LB&I plans to use for more than 50% of their examinations. Campaigns have different treatment streams, including soft letters. First campaigns are not necessarily issues with the highest compliance risk. LB&I plans more campaigns in the future. Cornerstone of campaigns is internal and external feedback. Page 5

6 LB&I campaigns issues Campaign Description Treatment stream Exec champ IRC Section 48C Credit Whether DOE allocated credits properly claimed 1. Soft letter OVDP Declines-Withdrawals Denied or withdrawn qualified applicants should reapply 199 Multi-Channel Video Whether groups of channels or films are qualified films and software is for customers direct use Micro Captive Insurance Transaction of Interest Notice Issue-based exams Variety, including issue-based exams 1. Practice unit 2. Published guidance 3. Issue-based exams 1. Training 2. Issue-based exams Kathy Robbins Pam Drenthe Kathy Robbins Gloria Sullivan Related Party Transaction Related party transactions in the mid-market Issue-based exams Peter Puzakuilcs Deferred Annuity Life Insurance Basket Transactions Life insurance reserve issues Industry Issue Resolution Kathy Robbins Structured financial transactions under Notices , Issue-based exams 2. Soft letters to material advisor 3. Practitioner outreach Gloria Sullivan Page 6

7 LB&I campaigns issues Campaign Description Treatment stream Exec champ Land Developers CCM Developer improperly deferring gain until projects complete 1. Practice unit 2. Soft letters 3. Issue-based exams Peter Puzakuilcs TEFRA Linkage Revise linkage strategies Internal guidance on linkage Cliff Scherwinski S Corp losses claimed in excess of basis Repatriation S Corp SHs claim losses and deduction in excess of stock or debt basis Repatriation strategies resulting in tax-free repatriation mid-market 1. Issue-based exams 2. Soft letters/self-correction 3. Outreach 4. New basis form 1. Improved issue selection 2. Issue-based exams Form 1120F Non-Filer Use external data to identify 1120F non-filers 1. Soft letters 2. Issue-based exams Inbound Foreign Distributors Inbound transfer pricing 1. Training 2. Issue-based exams Holly Paz John Hinding John Hinding Sharon Porter Page 7

8 NEW LB&I campaigns issues Campaign Description Treatment stream Exec champ Swiss bank program campaign Foreign earned income exclusion campaign Verification of Form 1042-S credit claimed on Form 1040NR Under the US Department of Justice Swiss Bank Program, verify compliance by identified US persons with beneficial ownership of foreign financial accounts. Individuals who did not meet the requirements to qualify for the foreign earned income exclusion and/or the foreign housing exclusion or deduction. Before a refund is issued or credit is allowed, verify the withholding credits reported on the Form 1042-S. Variety, including exams Variety, including exams Variety, including exams John Cardone John Cardone John Cardone Individual foreign tax credit (Form 1116) Individuals who incorrectly compute the foreign tax credit limitation on Form Variety, including exams Paul Curtis International (corporate) Form 1120-F Chapter 3 and Chapter 4 withholding campaign Corporate direct (Section 901) foreign tax credit (FTC) Section 956 avoidance Verify withholding at source for Form 1120-Fs that claim refunds, before the claim for refund or credit is allowed. Domestic corporate taxpayers that are in an excess limitation position for credits for foreign taxes paid or accrued in lieu of a deduction. A Controlled Foreign Corporation (CFC) that makes a loan to its US parent, but does not include a Section 956 amount in income. Variety, including exams 1. Issue-based exams 2. Future FTC campaigns may address indirect credits & IRC 904(a) FTC limitation issues Issue-based exams John Cardone John Hinding John Hinding Page 8

9 NEW LB&I campaigns issues Campaign Description Treatment stream Exec champ Agricultural chemicals security credit campaign Deferral of cancellation of indebtedness (COD) income campaign For the section 45O agricultural chemicals security credit, verify that there are qualified expenses and eligible taxpayers, and that facilities are properly defined. Verify that taxpayers who properly deferred COD income in 2009/2010 properly report it in subsequent years beginning in Issue-based exams Issue-based exams with the use of soft letters under consideration. Judith McNamara Delon Harris Energy efficient commercial building property campaign Verify compliance with the requirements of the Section 179D energy efficient commercial building deduction. Issue-based exams Scott Ballint Economic development incentives campaign Taxpayers that improperly treat government incentives (e.g., tax credits, grants) as nonshareholder capital contributions, exclude them from gross income and claim a tax deduction without offsetting it by the tax credit received. Issue-based exams Paul Curtis Page 9

10 LB&I campaigns scope Campaigns are a return selection tool. Not all LB&I activity will be in the form of campaigns. An audit can start solely as a campaign and then move into a more comprehensive audit. A campaign issue can be included in a CIC audit. Different campaign treatment streams can be used in that audit. Campaign issues can also be applied to Compliance Assurance Process (CAP) taxpayers. Mid-market taxpayer is defined as any taxpayer not under CIC audit. Page 10

11 LB&I campaigns soft letters The following campaigns list soft letters as a treatment stream: IRC Section 48C Credit Land Developers CCM S Corp Losses Claimed in Excess of Basis Form 1120F Non-Filer A soft letter is not an examination. A taxpayer is not required to respond to a soft letter. If a taxpayer does not respond, IRS may start exam or take other appropriate action. Page 11

12 Large Business & International Examination Process, Publication 5125 Page 12 Presentation title

13 LB&I shift in audit approach 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. Aligns to the introduction of new exam and campaign process that alters how issues and taxpayers are identified for audit. Recent LB&I organizational changes seeks to improve alignment of resources to execute new examination process given new budget and resource realities. Future of the Compliance assurance process ( CAP ) has yet to be determined Page 13

14 LB&I Commissioner Transfer Pricing Instructions On January 12, 2018, LB&I Commissioner issued five set of instructions for examiners regarding the handling of transfer pricing cases Interim Instructions on Issuance of Mandatory Transfer Pricing Information Document Request (IDR) in LB&I Examinations Instructions for Examiners on Transfer Pricing Issue Examination Scope - Appropriate Application of IRC 6662(e) Penalties Instructions for Examiners on Transfer Pricing Issue Selection- Reasonably Anticipated Benefits in Cost Sharing Arrangements Instructions for Examiners on Transfer Pricing Issue Selection- Cost- Sharing Arrangement Stock Based Compensation Instructions for LB&I on Transfer Pricing Selection and Scope of Analysis - Best Method Selection Page 14

15 LB&I examination process ( LEP ) Publication 5125 (February 2016) Replaces the Quality Exam Process and incorporates by reference Information Document Request ( IDR ) Directive Appeals Judicial Approach and Culture ( AJAC ) Transfer Pricing Roadmap Updates to Internal Revenue Manual ( IRM ) 4.46 sections 1 6 issued in March 2016 Process in effect for examinations starting as of May 1, 2016 Articulates expectations for LB&I exam teams and taxpayers or their representatives: Business- and-international-examination-process Page 15

16 LB&I examination process ( LEP ) Publication 5125 (Cont.) Sets clear expectations for LB&I examiners, taxpayers and representatives Provides a Pro-Forma information document request ( IDR ) for Acknowledgment of Facts ( AOF ) on unagreed Issues Provides rules for informal claims for refund Must be provided to the exam team within 30 days of the opening conference Requires discussion of an exit strategy 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 16

17 LB&I examination process ( LEP ) Publication 5125 (Cont.) Three stages to the Examination Process: 1. Planning Communication Issue Team Concept Examination Plan 2. Execution Issue Development Process Written Acknowledgement of Facts 3. Resolution Issue Resolution and Exit Strategy Page 17 17

18 Acknowledgement of Facts IDR Page 18 Presentation title

19 Acknowledgement Of Facts IDR (IRM ) 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 issue team should collaborate with the taxpayer to develop all facts before issuing a NOPA. The issue team is expected to conduct on-going interactive discussions throughout the execution phase to resolve any factual disputes and discuss tax positions on issues examined. Page 19

20 Acknowledgement Of Facts IDR (IRM ) 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. The 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 at the examination level. 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. Page 20

21 Preparation of Form 886-A (IRM ) If the taxpayer does not agree with LB&I s tax determination and the issue is likely to go to Appeals, the issue team will prepare and provide to the taxpayer a Form 886-A containing all facts and will solicit the taxpayer s written acknowledgment of the facts. To obtain an acknowledgment of the facts, a comprehensive Facts section of the Form 886-A must document all relevant facts both in favor of the taxpayer and the government. Page 21

22 Preparation of Form 886-A (IRM ) The extent of development of the other sections of the Form 886-A may vary depending on the complexity of the tax issue. Without an understanding of LB&I s tax position and the law applied, the taxpayer may not have the context needed to ascertain whether all of the relevant facts have been identified for the tax issue. Therefore, judgment is left to the issue team to determine the extent of detail necessary in each section of the Form 886-A. Page 22

23 Issuing the Form 886-A with a Pro-Forma IDR (IRM ) Use a pro-forma IDR (see Exhibit ) along with the Form 886-A to solicit a written acknowledgment of the facts (AOF). The contents of the pro-forma IDR and contents of the Form 886-A will be discussed with the taxpayer. The discussion will also establish a reasonable time for the taxpayer to respond. Explain to the taxpayer that the pro-forma IDR will not be followed by a summons and that their response to the IDR does not indicate agreement to the issue or any proposed adjustments. Page 23

24 Issuing the Form 886-A with a Pro-Forma IDR (IRM ) The purpose of the pro-forma IDR is to acknowledge that all relevant facts have been identified and provides the taxpayer the opportunity to submit additional relevant facts and supporting documentation or to identify disputed facts. The taxpayer should review the Form 886-A and respond to the points below in writing within an agreed upon date. Taxpayer agrees to the facts as written. Taxpayer provides additional relevant facts and supporting documentation. Taxpayer identifies disputed facts and provides clarification and/or supporting documentation Page 24

25 Issuing the Form 886-A with a Pro-Forma IDR (IRM ) If the response is not received by the agreed response date, do not follow the IDR enforcement process. The issue manager should inquire about the reasons for the delay and determine if the taxpayer intends to respond. The taxpayer s response or lack of response to the IDR will be included in the Form 886-A when the NOPA is issued. To identify this IDR as one that will not be followed by a summons, it is recommended to use the alpha indicator prefix, AOF, in IMS to identify an IDR issued for the purposes of obtaining an acknowledgement of the facts. Page 25

26 Incorporate Response in the Form 886-A Issued with the NOPA (IRM ) A statement indicating the taxpayer's response to the IDR must be included in the opening of the Facts section. The issue team will determine the appropriate method to take when preparing the Form 886-A to ensure that all of the relevant facts have been incorporated and considered. In addition, an explanation of whether the issue team agrees or disagrees with the additional or disputed facts provided by the taxpayer must be included. Page 26

27 Incorporate Response in the Form 886-A Issued with the NOPA (IRM ) The issue team will identify the additional or disputed facts provided by the taxpayer in a sub-section of the Facts section in the Form 886-A or, if voluminous, include the taxpayer s response as an attachment to the Form 886-A. It is impossible to capture every scenario you may encounter, however, some examples are provided for options to use in documenting the response. Page 27

28 Incorporate Response in the Form 886-A Issued with the NOPA (IRM ) Example 1: Taxpayer Agrees with the Facts -"The taxpayer was issued IDR AOF# on January 1, 20xx to acknowledge all relevant facts have been provided. The taxpayer agreed with the facts as written." Example 2: Taxpayer Provided Additional Facts -"The taxpayer was issued IDR AOF# on January 1, 20xx to acknowledge all relevant facts have been provided. The taxpayer provided additional facts, which LB&I has taken into consideration. The tax determination was modified to reflect the additional facts provided, however the issue remains unagreed. The additional facts provided by the taxpayer are detailed in the Facts section. " OR "...are included as an attachment." Page 28

29 Incorporate Response in the Form 886-A Issued with the NOPA (IRM ) Example 3:Taxpayer Identifies Disputed Facts - "The taxpayer was issued the IDR AOF# on January 1, 20xx to acknowledge all relevant facts have been provided. The taxpayer identified disputed facts. The disputed facts have been included in a sub-section at the end of the Facts section." OR " have been included as an attachment to the Form 886- A. " Example 4:Taxpayer Did Not Respond to the Pro-Forma IDR - "The taxpayer was provided the IDR AOF# on January 1, 20xx to acknowledge all relevant facts have been provided. The taxpayer did not respond to the IDR by the agreed upon response date. A follow up discussion between the taxpayer and the issue manager was held on January 15, 20XX. During the discussion the taxpayer stated that " Page 29

30 IRSAC Report Recommendations on AOF IDR Require a clear description of the legal issue. It may not be possible to know what facts are relevant without a clear exposition of the legal issues involved. In the proffered AOF, the examination team should explain what the legal issue is before setting forth the relevant facts. Ensure the AOF posits facts and not legal arguments. Some examination teams use the AOF as an advocacy piece to get the taxpayer to accept their legal theory. The AOF should be limited to facts. Page 30

31 IRSAC Report Recommendations on AOF IDR Include all relevant facts. The AOF should include not only the facts relied upon by the examination team, but also those considered relevant by the taxpayer. We understand that the process allows the taxpayer to present additional facts for inclusion or to separately state disputed facts, but not all taxpayers understand they have those options. Provide training. This is a complex area and examination teams may need additional ongoing training to better understand the process and the intended goals. Taxpayers may also benefit from better information on the process, including, if appropriate, access to training materials. Page 31

32 Pro forma IDR: IRM Exhibit Page 32

33 Sample Language on Recently Received AOF IDR The purpose of this 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 and to secure the Taxpayer s Position. 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. While the interpretation of the law or the amount of the proposed adjustment may be unagreed, all relevant facts should be included in the Form 886-A. Page 33

34 Sample Language on Recently Received AOF IDR 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. Please review the attached Form 886-A and respond accordingly in writing to the LB&I issue team by the agreed upon date. 1. Taxpayer agrees to the facts as written. 2. Taxpayer provides additional relevant facts and supporting documentation. 3. Taxpayer identifies disputed fact and provides clarification and/or supporting documentation. 4. Taxpayer provides its position. Within 2 weeks of receiving a response, taxpayer will be notified if response is incomplete. Page 34

35 Strategy Considerations in Responding to AOF IDR Whether to respond? When to respond? How to respond? Why respond? Page 35

36 Changes to IRS Appeals Consideration Page 36

37 Appeals Judicial Approach and Culture ( AJAC ) AJAC is generally effective for cases received in IRS Appeals on or after September 2, 2014 Appeals will not raise new issues. If taxpayer raises a new issue, the case will be released to Exam for examination of the issue. If taxpayer provides new information related to an issue in Appeals, the case will be returned to Exam for review of the new information. If taxpayer raises a new theory or argument related to an issue in Appeals, the new theory or argument will be shared with Exam for review within a specified time frame. Appeals will attempt to settle an issue on factual hazards where the issue submitted by Exam was not fully developed. There must be one year remaining on the statute of limitations prior to the case being accepted by Appeals. Page 37

38 Participation in Appeals Conferences IRM Section was revised in October 2016 and states: Appeals has the discretion to invite Counsel and/or Compliance to the Appeal s conference. The prohibition against ex parte communications must not be violated. Appeals may also request that other experts attend conferences. Taxpayers have raised a number of concerns about this policy Page 38

39 Participation in Appeals Conferences - Pilot Appeals has undertaken a pilot to test attendance by Compliance in large cases Pilot applies to all cases of participating Appeals Team Case Leaders ( ATCLs ) Approximately one-third of ATCLs are participating in pilot Pilot is scheduled to run for 2 years Participating ATCL s will invite Compliance and Counsel to participate in all cases assigned to that ATCL. Taxpayer cannot opt out of the pilot Page 39

40 Settlements Contrary to National Office Advice Manual Section sets out procedures Appeals must follow when recommending partial or full concessions adverse to a revenue ruling, a TAM issued to the taxpayer under consideration, or other guidance that falls within the meaning of a "letter ruling. Appeals will not partially or fully concede an issue where Chief Counsel has issued a decision on the issue that is subject to an abuse of discretion standard when reviewed by a court (for example, the denial of non-automatic change of accounting method requests). Page 40

41 Settlements Contrary to National Office Advice (Cont.) When full concession of other letter ruling issues are recommended, Appeals must request and consider the views of the Associate Chief Counsel. Appeals must also coordinate consideration of issues listed in Chief Counsel Directives Manual (CCDM) Exhibit with the Associate Chief Counsel office. List includes cases of first impression, positions inconsistent with published guidance and positions inconsistent with Chief Counsel Advice issued in the case. Page 41

42 Questions? Page 42