Like-Kind Exchange and Fixed Asset Conference

Transcription

1 Like-Kind Exchange and Fixed Asset Conference IRS Audit Readiness and Exam Experience

2 The views expressed in this presentation should not be relied on as accounting, auditing or tax advice. The outcome of any independent situation depends on the specific facts and circumstances in which the issue arises and on the interpretation of US GAAP, IFRS and other relevant literature in effect at the time. This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Page 2

3 The purpose of our session is to engage in open discussion of: Experience with the Exam activity regarding LKE Based on that experience, how can you best prepare for an audit To address these topics, we assembled the following panel: John Boncuore, Porsche Business Services Linas Udrys, Toyota Financial Services Al Hagen, Caterpillar Dave Fowler, Partner, Bill Laverty, IRS Service Team 3

4 LKE Exam Activity General experiences with exam teams IRS information document requests (IDRs) IRS published guidance IRS Audit Readiness Know the requirements Understand your transactions Consider both Form and Substance Perform periodic reviews 4

5 LKE Exam Activity General Experience Audits tend to vary widely in: Scope Expertise of agent Extent of assistance from Tech Advisors Extent of assistance from IRS Counsel Adherence to Quality Exam Process (formerly Joint Audit Planning Process) 5

6 LKE Exam Activity General Experience Generally, taxpayers will be audited in one of three ways, which will affect the scope and process of the LKE item: IC Exam CIC Exam CAP Formal Audit Planning Not Required Yes Yes Formal Opening Mtg Not Required Yes Yes Exam Plan Streamlined Full Streamlined Risk analysis required Yes Yes Yes Require to share Risk Analysis Yes Yes Yes Cycle Time Goal 9 Months 18 months 12 months Although many items not required in IC examinations, they are encouraged where practical Page 6

7 LKE Exam Activity General Experience Our general experience shows: Agents are typically not prepared initially to deal with an LKE program Agents often are unfamiliar with the business As a result, agents must be educated around: - Rev. Proc , its history and purpose - The role of the QI - The mechanics of multi-asset transactions - How software enables information tracking and analysis 7

8 LKE Exam Activity General Experience Specialist involvement - Use of specialists should be discussed early on - It is part of Quality Examination process - preferably in conjunction with Risk Analysis Experience seems to be that technical assistance is limited to two issues: - Related party transactions - Alleged dual use property - The leading Tech Advisor for these is Stan Banter - In addition, Reid Huey of IRS Counsel is involved 8

9 LKE Exam Activity IDR Experience The Quality Exam process provides for agents to acquire information by using Information Document Requests ( IDR or Form 4564) The Quality Exam process calls for agents to discuss the request for information before issuing the IDR, unfortunately, more often than not, they do not The purpose of first discussing the request is to: - insure the IDR is consistent with the Risk Analysis - is the best and/or most efficient way to obtain the information - provides a reasonable response date based on information requested and circumstances 9

10 LKE Exam Activity IDR Experience Some Areas of Focus Confusion surrounding revisions to data Matching compliance Depreciation calculations Treatment of debt associated with transactions Equipment Dealers - Substance of rental business/rental activity - Substance of rental subsidiary/related party transactions 10

11 LKE Exam Activity IDR Experience Treatment of debt associated with transactions Demonstrated obligation Demonstrated transfer subject to debt Demonstrated payment of debt 11

12 LKE Exam Activity IDR Experience Confusion surrounding revisions to data Capitalized cost changes- subvention, dealer markup Adjustments to placed-in-service dates OID adjustments Treatment of attachments Matching compliance dates, asset types Depreciation calculations SITS Gap In Service/Straddle calculations Assets bought, sold and matched in the same tax year 12

13 LKE Exam Activity IDR Experience The following slides contain some examples of actual requests from agents The examples are almost verbatim, and do not represent the entire IDR, instead are intended to give some sense of the agent s thinking and what you might see if audited They are intended to promote discussion, so feel free to comment or ask questions 13

14 LKE Exam Activity Sample Questions in IDRs 1. Please provide a schedule of all assets with the appropriate column headings: A. Description B. House # C. Date Acquired D. Date Sold E. Gross Sales Price F. Depreciation Allowed or allowed upon acquisition G. Cost or other Basis H. Improvements and expenses of sale I. Gain or (loss) 2. Please provide detailed back-up to support all items reported on the Form Any concerns with these requests? 14

15 LKE Exam Activity Sample Questions in IDRs A. Provide the Book Income to Tax Income Reconciliation detail, for the year xxxx. B. Provide the detailed report to support the amounts reported on the Form 8824 & Form 4797 for the year ended xxxx. C. Provide the LKE Program detailed report matching the relinquished property to the replacement property for the year ended xxxx. Any concerns with these requests? 15

16 LKE Exam Activity Sample Questions in IDRs Based on the response to [prior IDR] many of the relinquished property '"parent" assets have had the addition of a "child" asset. For example: In addition, many of the replacement property assets have child assets, which have not been identified as such on the spreadsheet. For example: Furthermore, on many exchanges, more than one relinquished property is exchanged for only one replacement property. For example:... For these reasons the extraction of the following information is not possible without further sorting. Please provide the following for both tax years xxxx and xxxy: A. Total number of Relinquished Properties - Parent Asset B. Total number of Relinquished Properties -Child Asset C. Total number of Relinquished Properties -All Assets (both parent & child) D. Total amount (summation of all) Replacement Property Cost E. Total amount (summation of dl) Replacement Property FMV F. Total number of Replacement Properties - Parent Asset G. Total number of Replacement Properties - Child Asset H. Total number of Replacement Properties -All Assets (both parent & child) Any concerns with these requests? 16

17 LKE Exam Activity Sample Questions in IDRs Provide the following for the sample assets shown below: Source documents verifying cost (purchase price from manufacturer) Accumulated tax depreciation on asset Tax basis (Acq Cost Accumulated Depreciation) First rental or lease agreement showing placed in service date Last rental or lease agreement immediately prior to sale Sale contract to customer Asset List (contained 17 assets) Any concerns with these requests? 17

18 LKE Exam Activity Sample Questions in IDRs 1. Provide the supporting detail/report for the numbers reported on the Form 8824, Like-Kind Exchanges, for year under audit (xxxx). 2. What was the name and address of the Qualified Intermediary that was used during FY xxxx? 3. Provide copy of all agreements including the Master Exchange Agreement between the Qualified Intermediary and [TAXPAYER] that covered FY xxxx LKE transactions. 4. List out the steps (including GL accounts affected) from beginning to end for one of the actual LKE transactions conducted by [TAXPAYER] in FY xxxx. 5. How much of a fee was paid in 200x to PricewaterhouseCoopers to implement the LKE at [Taxpayer]? Any concerns with these requests? 18

19 LKE Exam Activity Sample Questions in IDRs 2. This question applies to the assets noted with an asterisk * on Attachment A. How is your system able to track the multiple assets that have been assigned the same asset number? Please use asset number # as an example in your explanation. 5. Please provide copies of your checking bank statements for November and December of 200x for the account used by [Taxpayer]. 6. Please provide copies of your trust account statements (collection, exchange, & disbursement accounts noted in Master Exchange Agreement) for November and December of 200x. How are the customer payments for relinquished property sales being separated from regular (non-lke) sales? Any concerns with these requests? 19

20 LKE Exam Activity Selected Rights Reasonable requests for information Right to Risk Analysis Right to explanation of adjustments Rules of Engagement Right to administrative Appeal Right to Judicial Review Privacy Representation Notice of 3 rd Party Contact FOIA May refuse to extend statute of limitations May request a restricted extension of statute Can make deposit to stop running of interest 20

21 LKE Exam Activity Administrative Appeal Administrative Appeals Options Fast Track Settlement process Regular Appeals Process Post Appeals Mediation IRS Appeals Experience: Three cases so far, that we know of, in various stages of consideration Litigation Importance of choice of forum Importance of test case 21

22 Exam Readiness - Periodic reviews of your LKE program activities Periodic reviews of your LKE program activities Notification Cash management Tax reporting Systems review Overall program and operations LKE Program checklist 22

23 IRS Audit Readiness and Exam Experience Questions? 2010 PricewaterhouseCoopers LLP (US). All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.