Evolving IRS Programs to Accelerate Issue Resolution. Douglas O Donnell Assistant Deputy Commissioner, International October 16, 2012

Transcription

1 Evolving IRS Programs to Accelerate Issue Resolution Douglas O Donnell Assistant Deputy Commissioner, International October 16, 2012

2 Scope and Content Historical Perspective the Problem Early Solution Advance Pricing Agreements Solution Pre-Filing Agreements Solution Fast Track Activities Solution Compliance Assurance Process (CAP) Solutions Ongoing Activities 2

3 Historical Perspective

4 Historical Perspective Audit process started late and took too long the archaeological dig In the 1990 s, IRS examined 1,700 largest companies via Coordinated Exam Program (CEP) CEP teams began audits 5 to 6 years after return filing Audits took 2 to 3 years to complete Audits of a tax year could be 10 years old If litigation was required, the audit could take 12 or more years Government Accountability Office reported that, as of 1992, audits from 1961 were still open 4

5 Historical Perspective Congress voiced citizen dissatisfaction with IRS Result 1998 restructuring to modernize and improve taxpayer services IRS budget cuts reduced number of auditors Taxpayers increasing use of aggressive tax planning in late 1990s and early 2000s Period of increased risk with reduced enforcement activity 5

6 Historical Perspective IRS faced with Long-standing processes leading to lengthy audits Taxpayer demands Congressional demands Actions were/are required to address taxpayer compliance issues sooner 6

7 Existing Program Advance Pricing Agreements

8 Advance Pricing Agreement Advance Pricing Agreements (APA) introduced in 1991 Taxpayer and IRS work together to agree on appropriate transfer pricing method If taxpayer used method in return preparation, IRS will not make transfer pricing adjustment for transactions covered Unilateral Agreement between taxpayer and IRS Bilateral Taxpayer and IRS agree, then IRS and foreign country agree 8

9 Evolving Programs Pre-Filing Agreements

10 Pre-Filing Agreement Large Business & International (LB&I) solicited input from taxpayers and representatives Taxpayers wanted certainty on large issues LB&I and taxpayers jointly developed a solution Agree to treatment before a return is filed 10

11 Pre-Filing Agreement IRS and taxpayer cooperate to resolve treatment of issue before return due Reach agreement on factual issues and apply settled legal principles to those facts Does not determine current interpretation of rules if interpretation not well settled Program applies to past, current, future years (maximum of 4) User fee applies 11

12 Evolving Programs Fast Track Appeals Activities

13 Fast-Track Settlement Collaborative process among taxpayer, LB&I, and Appeals used during exam Appeals officer helps resolve factual and legal issues Agreement settles issue before audit complete No cost Reduces cycle time by about 2 months Avoids extensive Appeals time 13

14 Evolving Programs Compliance Assurance Process (CAP)

15 CAP - Program Pre-Filing Agreement was Step 1 Resolved limited number of issues Financial accounting landscape changed, providing opportunity (Enron, WorldCom) Set expectation to resolve multiple or all issues before the return is filed LB&I was not alone other Tax Administrations (Netherlands and Ireland) were searching for accelerated processes 15

16 CAP - Program Pilot in 2005 with 17 taxpayers Real-time issue resolution - the ultimate prefiling agreement Taxpayer applies annually and signs Memorandum of Understanding good for 1 tax year Requires transparency and cooperation on both sides enhanced financial accounting resulted in greater reporting transparency 16

17 CAP - Program IRS and taxpayer agree on materiality threshold Taxpayer to disclose all completed transactions with material effect, including proposed reporting position and all steps having material effect on tax liability Taxpayer to disclose other items with material effect on federal income tax liability and proposed reporting position 17

18 CAP - Effectiveness Goals are no post-filing audit adjustments and reduced cycle time For IRS, taxpayers more transparent and cooperative For taxpayers, able to resolve issues more timely, with certainty, using fewer resources 18

19 CAP - Effectiveness For filing year 2009, overall post-filing cycle time was almost 8 months for taxpayers in the CAP program and almost 50 months for other taxpayers In 2010 surveys to measure performance, 62% of examiners and 87% of IRS managers indicated that the CAP program effectively addressed tax compliance Over 28% of examiners and over 40% of managers indicated the taxpayer was extremely transparent, with another 58% of examiners and 52% of managers indicating the taxpayer was somewhat transparent 19

20 CAP - Effectiveness Over 70% of examiners and over 88% of managers rated the taxpayers as cooperative or very cooperative 92% of the 86 participating CAP taxpayers who responded were very satisfied or somewhat satisfied with the process 62% of taxpayers indicated CAP increased tax certainty a lot, with another 33% indicating that it increased tax certainty somewhat Caveat - It is difficult to design objective measures with respect to tax liabilities to assess CAP program effectiveness 20

21 Evolving Programs Ongoing Activities

22 Ongoing Activities - Joint Audits CAP advanced certainty Challenges remain with cross-border activities Search for solutions FTA took up the challenge One solution is to collaborate with treaty partners Joint audits of income tax issues underway; VAT issues are worked jointly in EU 22

23 Ongoing Activities - Joint Audits Single audit team of exam teams from two or more countries to examine cross-border business transactions May be time-saving and less resource-intensive, while resolving issues quicker Requires collaboration by exam teams, transparency from taxpayer, commitment from all stakeholders, support from tax administrations 23

24 Ongoing Activities - Joint Audits Limited LB&I experience 6 month transfer price audit Transparent taxpayer affiliates and tax administrations Result solved current year before return was due and for the next 5 years (BAPA) Possibility prompt resolution; certainty; demonstrates competence Possibility for abuses there is the opportunity to jointly develop facts and better combat aggressive tax planning 24

25 Conclusion

26 Conclusion Increased complexity Increased demand for service Difficult budgets result in static workforce numbers Search for options Coordinated efforts where years and concerns intersect We continue to look for new options Thank you 26