IRS enforcement. Navigating the changing IRS landscape. May 2013

Transcription

1 IRS enforcement Navigating the changing IRS landscape May 2013

2 Disclaimer Ernst & Young refers to the global organization of 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 located in the US. This presentation is 2013 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 and its member firms expressly disclaim any liability in connection with use of this presentation or its contents by any third party. The views expressed by panelists in this session are not necessarily those of Ernst & Young. Page 1

3 Circular 230 disclaimer Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. 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 Pat Chaback Ned ConnelIy Richard Fultz Tov Haueisen Frank Ng Page 3

5 IRS update: changing environment of IRS enforcement

6 FY 2012 IRS enforcement results IRS enforcement revenue collected was $50.2b, down from $55.2b in FY 2011 The large corporate audit coverage rate was 17.78%, up from 17.64% in FY Partnership audit coverage was 0.47%, up from 0.40% in FY The IRS increased examination across all categories of business returns by more than 12% in FY The largest increases were audits of flow-through entities partnerships and Subchapter S corporations. There was a reduction in the IRS budget of $305m in Page 5

7 Enforcement shift to examining mid-market companies The difference in the number of companies examined from FY 2011 to 2012 (by asset class): $10m $50m dropped by almost 3% But, for mid-market companies: $50m $100m increased by about 2% $100m $250m increased by over 6% And for higher asset companies $250m and higher increased by about 2% Page 6

8 Large Business & International (LB&I) division realignment Effective 1 October 2012, LB&I realigned its industry groups with contiguous geographical boundaries. The field specialists (engineers, financial products specialists, computer audit specialists) were realigned into one of the industry groups. Employment tax specialists became part of the small business/ self-employed division. IRS is seeking to gain greater operating efficiencies. This may result in new executives and managers responsible for your audits. Two distinct management lines were created domestic and international. Page 7

9 LB&I organizational chart Page 8

10 LB&I domestic realignment map AK OR CA WA NV Communications, technology, media ID AZ UT MT WY NM CO NE KS Retailers, food, transportation and health care ND SD MN IA MO AR WI IL MI IN KY Financial services NY Manhattan PA OH WV VA NC SC ME VT NH MA RI DE NJ DC MD HI OK Natural resources construction MS AL GA Heavy manufacturing and pharmaceuticals TX LA FL Page 9

11 LB&I Transfer Pricing practice Nanette Hamilton Executive Assistant, Technical Sam Maruca Director, Transfer Pricing Operations Carla Langland Executive Assistant, Operations (acting) John Kaffenberg IPN Manager Howard Berger Senior Tax Advisor Transfer Pricing practice Dick McAlonan Director, APMA Bill Morgan Senior Economic Advisor Eli Hoory Special Projects Deputy Nancy Bronson Territory Tax Manager (West) Tom Ralph Territory Tax Manager (Central) Matt Hartman Territory Tax Manager (East) Bob Cole Special Projects Deputy Stan Perry Special Projects Deputy Page 10

12 LB&I: FY 13 strategic areas of focus Execute a professional examination on behalf of the US Government Revise and rename the quality exam process Consider changes to the Coordinated Industry Case (CIC) program Consider a process that better leverages the knowledge of specialists Continually improve and innovate LB&I programs and processes Page 11

13 LB&I focus guide: continually improve LB&I programs and processes Champion continuous process improvement at all levels within LB&I to increase efficiency and effectiveness, better leverage limited resources, and eliminate unnecessary steps Page 12

14 LB&I focus guide: consider changes to the CIC program Consider moving away from the historic designation of cases as CIC or Industry Case (IC) based on the size and corporate structure of the taxpayer, and focus instead on the nature and complexity of the issues presented Select and audit issues that will have the broadest impact on compliance regardless of entity type or size Consider moving toward grades not based on case assignments but instead based on expertise, work advising and training on complex and difficult issues CIC IC Issuebased Page 13

15 TY 2011 schedule UTP statistics as of December ,783 taxpayers filed Schedule UTP for TY 2011, up from 1,761 at the same time in TY IC taxpayers account for 83% of returns filed with Schedule UTP. 4,120 tax positions were disclosed in CIC taxpayers averaged 3.8 uncertain tax positions per Schedule UTP. IC taxpayers averaged 2 uncertain tax positions per Schedule UTP. 47% of all Schedule UTP returns filed included only one uncertain tax position. Page 14

16 Increasing Compliance Assurance Process (CAP) taxpayer participation 2005: first CAP year 17 taxpayers in CAP 2012: last CAP year 161 taxpayers in CAP 10 taxpayers in Compliance Maintenance Pre-CAP not published 2013: current CAP year 169 taxpayers in CAP Of which, 153 return participants from 2012 CAP year 16 taxpayers in Compliance Maintenance 19 taxpayers in Pre-CAP as of January 2013 Page 15

17 CAP phases Pre-CAP phase The IRS and the taxpayer develop a plan to eliminate open years within a set time frame. They work in a cooperative and transparent post-file environment. The ultimate goal is meeting the selection criteria and progressing to the CAP phase. CAP phase The taxpayer and the audit team work in real time environment to identify and resolve issues prior to filing (same as current CAP process). The taxpayer works with the audit team by identifying transactions and providing information to resolve material issues. The taxpayer receives full acceptance if all material issues are disclosed and the tax return filing is consistent with agreed tax treatment. Compliance maintenance phase The IRS will adjust the level of review work and time applied. The level of review will be adjusted based on TPs unique experience in CAP and history of compliance and risk. Material transactions and issues are periodically disclosed. Page 16

18 Is CAP right for you? Annually, taxpayers can apply for acceptance into the CAP phase between 1 September and 31 October. Taxpayers can apply for pre-cap at any time. For CAP, if currently under examination, the taxpayer must not have more than one filed return that has not been closed in examination and one unfiled return for the year that has most recently ended (the return for which is not yet due). IRS invites CAP taxpayers into the CAP Maintenance phase. Page 17

19 LB&I focus guide: execute a professional examination Transparency with taxpayers in all aspects of an examination Issue information documentation requests (IDRs) that are issue-focused Issue IDRs with clear, agreed-upon time frames for response Use available audit tools, including international practice groups (IPGs) and international practice networks (IPNs) Use available resolution tools to resolve issues as early in the process Send well-developed cases to appeals Refer all cases to LB&I where new facts or arguments are presented in appeals Page 18

20 LB&I focus guide: revise and rename the quality exam process Revise and standardize the road map for a professionally executed LB&I examination that is efficient, effective and transparent IDR process Page 19

21 Quality examination process (QEP) Introduced to improve efficiency of audit process to improve taxpayer engagement and maximize the effectiveness of the IRS relationships with taxpayers Required on all new IRS audits started after June 2010 Components of QEP: Plan the audit, improve communications Execute the audit plan, streamline the process Resolve issues, identify resolution opportunities Opportunity for taxpayers to take proactive actions in the management of an IRS audit and planning New emphasis on earlier resolution of tax issues and use of alternative dispute resolution options Page 20

22 Anticipated IDR process changes Current process 150 days Delinquent IDRs: Conferences and follow-up with taxpayer required at 15, 30, 45 days from the original response date 90 days delinquent a joint IDR status meeting required with Territory Manager, IRS Counsel, Team Manager and senior corporate officers of the taxpayer Discussion of whether a summons or 982 formal document request issued Pre-summons letter issued Anticipated process changes: Issue-focused IDR Discussions on each IDR and agreement on response date between examiner and taxpayer IDR swiftly enforced if agreed-upon response date is not met Page 21

23 IRS promoting alternative dispute resolution (ADR) options Before the return is filed Pre-return filing: Compliance assurance process Pre-filing agreement Industry issue resolution Private letter ruling Advance pricing agreements ADR Provides value through: Lower admin costs Speedier resolution More favorable Settlements Under exam Audit process (post-filing): Limited issue-focused exam Accelerated issue resolution Early referral appeals Fast-track settlement Competent Authority Process Rapid Appeals Process (in Appeals) Appeals Post-appeals process: Mediation Arbitration Page 22

24 Pre-filing agreement (PFA) (Rev. Proc ) Enables taxpayers and the IRS to resolve, before the filing of a return, the treatment of an issue otherwise likely to be disputed in post-filing examinations If successful, results in a closing agreement: An agreed-upon methodology may be used for up to four subsequent years Provides full resolution of issue earlier than traditional return filing and examination Benefits taxpayer and IRS by improving the quality of tax compliance while reducing its costs, burdens and delays Affords heightened certainty for financial statement Page 23

25 PFA issues in FY 2012 Page 24

26 Resolution approaches: fast-track settlement (FTS) (Rev. proc ) FTS uses mediation techniques to help IRS and the taxpayer settle an issue in a 120-day time frame: It gives LB&I personnel and LB&I taxpayers an opportunity to mediate their disputes with an appeals official acting as a neutral party. If any issues remain unresolved at the conclusion of the FTS process, the taxpayer retains all applicable appeal rights. Once an agreement is reached through FTS and the session report is signed, the settlement cannot be modified. 83% of cases accepted into the program resulted in agreement. Page 25

27 LB&I focus guide: consider a process that better leverages specialists Consider having examiners, with the advice of specialists, examine issues currently being examined exclusively by specialists Specialists IRS examiner Page 26

28 Formation of issue practice groups (IPGs) and international practice networks (IPNs) On 17 August 2012, the IRS announced the termination of the tiered issue process. It created IPGs for domestic issues and IPNs for international issues. All prior industry director directives (IDDs) relevant to the tier issues are withdrawn and should not be followed by examiners: Some IDDs are still in effect according to informal IRS communications. IPGs are led by IPG coordinator with one or more full-time subject matter experts (SME), part-time SMEs who spend less than 25% of their time as Collateral SMEs and an IPG analyst. IPNs will be centrally managed by dedicated full-time international issue coordinators. Establishment of internal knowledge sharing network. Page 27

29 Domestic IPG: more to come Partnerships and TEFRA RICs, REITs and REMICs S-Corporations and cooperatives Non-life insurance Compensation and benefits Penalties Deductable and capital expenditures Corporate distribution and adjustments Corporate income and losses Business credits Energy credits Life insurance Financial instruments Inventory and 263A Methods of accounting and timing Page 28

30 New IPNs Income shifting Income shifting International business compliance inbound Deferral planning Inbound financing FTC management Repatriation/ withholding Repatriation International business compliance outbound Jurisdiction to tax International individual compliance inbound Jurisdiction to tax Offshore arrangements US activities Foreign tax credits Pass-thru entities US investments Foreign corporations International individual compliance outbound IPNs will focus on international issues and will replace the tiered issue process. The IPNs will report to Mike Danilack, Deputy Commissioner LB&I (International). Page 29

31 International enforcement priorities Continued emphasis on offshore back account compliance Increase audit coverage of international and cross border issues, particularly in the transfer pricing area Chapter 3 withholding agents (Form 1042) Foreign-controlled corporations Form 1120F filers and non-filers International partnerships (1446) FIRPTA withholding agents Page 30

32 States with bright-line or economic nexus standards WA Sales > $250k MTC Sales > $500k States adopting bright-line nexus Economic nexus by statute Economic nexus by case law (intangible holding company) Special cases NY (and NYC) Sales > $1,000 (credit card banks only) OR WA ID MT WY ND SD MN WI MI MI Sales > $350k OH Sales > $500k NY VT ME NH CA Sales > $509.5k CA NV UT CO NE KS IA MO IL IN KY OH WV PA VA CT NJ DE MA RI MD AK HI AZ NM TX OK AR LA MS TN AL GA SC FL NC Caution: Other states have, through audit or questionnaires, asserted economic nexus. Page 31

33 Summary of recent nexus decisions Case Tax type State Court/Trib. Winner Reversed? Barnesandnoble.com Sales and use tax New Mexico NM appeals State Yes ConAgra Brands Income West Virginia WV supreme Taxpayer Yes Jack Daniels Properties Income Iowa IA Div. Admin Hrng. State Scioto Insurance Income Oklahoma OK supreme Taxpayer Yes Washington Mutual Bank Oregon DE bankruptcy Taxpayer N/A J. McIntyre Machinery, Ltd. [Not a tax case] N/A New Jersey U.S. supreme Defendant Yes Page 32

34 Alternative apportionment UDIPTA Rule 18 Determining when Rule 18 relief is appropriate Common Rule 18 situations: A Corporation does business in a state but does not apportion any income to that state The factors in the standard formula are mismatched to the time when the income is generated The single distortive factor Misclassification of a business segment Proving the reasonableness of an alternative apportionment methodology Page 33

35 Managing state tax risk to create value Strategies Tactics Insight Audit trends Legislative trends Insight Judicial trends Industry issues Hindsight Root cause analysis Proactive approach Hindsight Refunds/look-backs Leverage to future Foresight Technical proficiency Controversy and risk management thinking Foresight Leverage past to benefit future Learn from history Governmental relationships Essential to success Transparence and integrity Technical proficiency Calculated creativity Governmental relationships Quantitative and qualitative skills Proactive approach Anticipate issues Leverage knowledge Page 34

36 Every tax issue is multidimensional Understanding the taxing agencies views, goals and objectives is essential to the formulation of negotiation strategies that will ultimately result in favorable settlement alternatives acceptable to both parties. Because taxes are legislative creations, every tax issue possesses a potential political dimension to consider. The financial reporting impact of a tax issue is a critical component of the overall objective of managing tax risk. Vigorously delving into the quantitative side of a tax issue spawns additional support for existing positions and leads to new arguments. Financial reporting and quantitative Political and governmental Tax issue Business and reputation It is pointless to undertake a tax issue without a thorough understanding of the relevant business operations and objectives. Business reputation is invaluable and irreplaceable and, therefore, must be preserved. Page 35

37 Questions and answers

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